The first step in constructing a well-diversified portfolio is to establish a base Strategic Asset Allocation (SAA). The SAA provides a recommended asset mix that balances an expected return at an expected level of risk. The SAA provides the “bogey” portfolio that can then be tactically shifted based on shorter-term trends and the market outlook. Building a range of SAA portfolios necessitates formulating long-term assumptions about asset class returns, risk, and correlation characteristics as well as key economic and capital market variables. RBC Global Asset Management’s (RBC GAM) process for handling this complex task is described here.
Multi-model comprehensive approach
RBC GAM employs multiple independent forecasting models from different investment teams within RBC GAM. This approach allows for coverage of more asset classes and helps mitigate some of the risk of bias inherent in a single forecasting model. This provides a multi-faceted view across a wide range of asset classes.
The results from the models are collected, reviewed and discussed by the RBC GAM Longterm Expected Returns Committee to arrive at the expected return assumptions. This committee also examines new asset classes to assess their long-term effectiveness at generating returns, modelling capability and inclusion in the portfolio construction process.
Each model operates independently but shares a common approach of employing forward-looking parameters in the context of historical results and empirical relationships to provide a long-term view on asset classes. The underlying core assumptions, starting points and calculations differ by model. A secondary, yet important, benefit of this approach is that it also recognizes that certain models may be better at forecasting specific asset classes than others, allowing for a broader coverage universe.
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