General Research

As we assess the current prospective environment of low expected asset returns and amplified risks, we believe it is important for investors to consider a more dynamic approach to asset allocation.  Such an effort should be undertaken seeking both to manage risks as well as to generate additional return.  In this paper, we lay out a framework for dynamic asset allocation, one we have used at NEPC for a number of years.

We have issued a letter on the current market.

This paper defines the concept of investment philosophy and discusses, with illustrations from Dr. Minahan’s consulting experience, how the concept can be applied to evaluating investment managers.

Currencies are volatile. Most US institutional investors have traditionally ignored this volatility in their portfolios, leaving a meaningful risk exposure unhedged. This practice puts American institutional investors five to ten years behind UK, European, and Canadian investors, who have generally managed foreign-currency risk proactively through hedging (given significantly smaller home country market capitalizations). Despite increasing sophistication, as US institutional investors have embrace alternatives, utilized risk budgeting, and generally raised allocations to foreign investments, currency exposure has largely been ignored, resulting in a meaningful risk allocation without positive return expectations.

A risk budgeting approach can identify sources of risk within a portfolio. When foreign asset classes and their underlying currency exposure are separated, risk budgeting reveals that developed foreign currencies are a volatile exposure within a diversified portfolio, adding risk without any increase in return expectations.

Active Risk Budgeting is an extension of asset allocation risk budgeting, a key underpinning of NEPC’s asset allocation approach.  Active Risk Budgeting allows investors to determine the composition of alpha risk in a portfolio and can reveal opportunities to improve portfolio construction and increase portfolio efficiency.

In this paper, we focus on complementing long-only equity programs with long/short equity.  We discuss how long/short hedge funds seek to achieve a more efficient return, or higher Sharpe ratio, than traditional long-only managers.

Over the last several decades, the debate around active versus passive investment strategies has consumed countless hours of investment professional time, involved endless analyses of troves of historical data, and, ultimately, led to untold gallons of ink spilled in articles and books. For some investors, undo focus on hiring and firing active managers in pursuit of elusive “alpha” has kept them from paying attention to the more important, higher impact components of investment program structure.

Risk Parity is a simple idea: maximize diversification by taking equal risk in each investment.

This paper is an example of NEPC’s approach to opportunistic investing, where we seek to identify occasional major market valuation extremes and recommend actions for clients over a medium-term horizon.

The typical defined contribution program offers twenty to twenty-five investment choices, if target date funds are counted individually. One or two of those choices will be a capital preservation fund, such as a money market fund or a stable value fund. These funds have a primary objective of providing current income while protecting principal. The risk/return profile can be thought of as modest return with very low risk.

This paper discusses what we deem to be the key determinants of Mr. Buffett’s success.  Additionally, we explain why these attributes are not widely emulated within the    investment management industry. 

Investment management is a judgment-rich endeavor.  The major components of managing an investment program – determining objectives, finding and exploiting opportunities, and evaluating the extent to which objectives have been achieved – all involve judgment as much as data.  Judgments in turn are framed by one's system of beliefs about how the investment world works.  Given this, it seems worthwhile to ponder where our beliefs come from, to assess their validity, and to attempt to improve them as opportunities exist to do so.

This paper is geared toward generating a conversation across our client base about mapping fund replacements to the QDIA as a preferred approach.

This paper gives an overview of the final regulation clarifying the types of investments that qualify as a “qualified default investment alternative” (QDIA).