NEPC uses some of the most sophisticated asset modeling capabilities in the industry to customize each program's asset allocation to the specific needs of that client. This requires a careful analysis of the client's cash flow projections, risk aversions, rate of return requirements, and any unique policy or regulatory considerations.
Once a client's objectives and constraints are identified, we simulate various combinations of diverse asset classes and investment strategies to determine which meet the client's return objectives at minimum risk levels. Our modeling process is flexible and allows us to measure the impact of any changes (i.e. constraints, return/risk forecasts) on the objectives of the investment program.
Step 1. Getting Started: We work with the client and outside professionals to collect the pertinent actuarial or spending data to conduct the study and begin our modeling process by replicating the fund's liability and/or cash flow needs.
Step 2. Asset Allocation: In developing each client's asset allocation strategy, our model is designed to accommodate all investment parameters or restrictions, including, maximum or minimum commitments to any asset class or groups of assets, weightings, client risk tolerances, target returns, and permissible asset classes for investment.
For each asset class, we annually develop projections of returns based on a blend of historical data; adjustments based on our experience and our estimation of the applicability of the past to the future, and our assessment of current market conditions. Our forecast includes return, risk, yield and correlation assumptions for each asset class. The model is then used to determine the optimal combination of asset classes that offers the highest level of return at the lowest level of risk.
Step 3. Integration of Asset Experience with Liability/Cash Flow Projections: The integrated asset allocation model combines the optimal asset structures with liability or spending policy projections to forecast the financial status of the fund. Projections include estimates of spending and contributions over the next ten years. We give each client the tools necessary to determine the appropriate asset allocation relative to the specific cash flow projections of the specific plan, not the average allocation of the average investment program.
Step 4. Presentation of Results: We provide a detailed final report on our findings and proposed investment policy. The report includes our inputs and assumptions, projections of fund spending and contributions, asset class returns, risk, yield and correlation assumptions, and optimal combinations of asset classes. We also recommend the appropriate investment policy and structure.
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