Asset allocation policy is the determinant for over ninety percent of a portfolio's outcome. This means that making the right decision within an asset class when that asset class is not performing is less meaningful than allocating in the asset class that is outperforming. This is the foundation for Chao & Company’s approach to a “core-satellite” investment approach, where the “core” portfolio component represents the investments that take on market risks of traditional assets (such as stocks, bonds and cash) in order to realize market returns. Investing in passive funds that replicate market indexes and serving as proxies for desired asset class exposures is the most efficient and inexpensive way to build a "beta" (i.e. market) portfolio.
Within the “satellite” portion of the portfolio, allocations are made in alternative assets (such as commodities, currencies, etc.) and alternative investment strategies (such as long-short equities, event driven, absolute return, managed futures, etc.). The satellite portion is used to either add incremental portfolio performance ("alpha") or enhance the benefit of diversification through the introduction of low or no correlation investments against the core portfolio. Depending on the specific client circumstance and investment criteria, the allocation between the beta core and the alpha satellite will change.
Monitoring and Reporting
Vigilance is critical to monitoring portfolios and tactical changes are made based on both secular and cyclical market views. The secular view is the long term view of the market within the next 3 to 5 years where, from an economic standpoint, we estimate the market expected returns and make broad asset allocation decisions. The shorter term cyclical view (1 year to 18 months) looks at the more immediate market events, and we make adjustments to supplement our long term macroeconomic views. Quarterly custodial statements are supplemented with results tracked against the client’s own specific benchmarks identified in the Investment Statement Policy.