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Asset Allocation Modeling
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Asset allocation is the most important decision institutional investors will make. LCG works with clients to develop a customized, strategic investment structure to meet their unique goals and objectives. Utilizing key data (i.e. actuarial assumptions, spending rates, etc.), we have proprietary, internally-developed and maintained asset allocation modeling software that approaches this critical investment issue from two directions:
  • Historical / Actual Market Environments Stress Test Model - One method LCG uses incorporates evaluation of actual historical periods. One benefit of this model is that no subjective assumptions (i.e. return, risk, and correlation) are required. Instead, real-life scenarios based on actual economic, inflation and interest-rate environments are evaluated and used for "stress-testing" the fund. It allows much more rigorous evaluation of different investment style mixes, for which we have data going back to 1970.

  • Efficient Frontier Mean-Variance Model - The second method LCG uses incorporates historical data as a proxy of what to expect in the future. Using historical risk premia of various asset classes (analyzing data as far back as 1926), we develop initial estimates of future return, risk, and correlation. We also incorporate the current market environment to potentially adjust risk premia. Our senior-level consultants establish base case rates, risks, and correlations. We use these assumptions in an Efficient Frontier Mean-Variance Model to narrow down the range of asset mixes and style combinations and from there stress test them in various economic environments.

Combining the asset allocation model results with our senior consultants' depth of experience, we work with clients to determine the appropriate asset mix based on their objectives, constraints, risk tolerance, and other factors.