Disclaimer and Assumptions
The financial model enclosed herewith does not constitute an offering and is meant only to provide a broad overview for discussion purposes. This model was prepared by, and reflects the research, analysis and opinions of the asset allocation team of Active Allocator, Inc. The model, the information and analysis embedded in the model and the asset allocations described herein are subject to change at any time.
If and when an investment opportunity is structured for a product within an alternative asset class described herein, you must obtain and carefully read the related Offering Memorandum, which will contain the information needed to evaluate the potential investment and provide important disclosures regarding risks, fees and expenses.
Active Allocator, Inc. is not acting as your advisor or agent. This model is being given to you based on the understanding that you are not relying solely on for any advice or recommendation of any sort and that you have sufficient knowledge, experience and professional advice to make your own evaluation of the merits and risks of any transaction. This model should be seen only as an analysis that is illustrative of the potential impact of including specific single manager s in a portfolio of broadly diversified asset classes. Further, the illustrative portfolios are intended to be used a strategic-generally longer than a five year-investment horizon.
The model does not favor certain securities, asset classes, or managers over others. The results of this optimization depend heavily upon our estimates of expected returns, volatilities and correlations. To the extent that future events vary from our estimates, the recommended portfolios may be sub-optimal. Results of the model may vary with each use and over time.
While some information used in this model has been obtained from various published and unpublished sources considered to be reliable, neither Active Allocator, Inc. nor any of its affiliates guarantee its accuracy or completeness and accepts no liability for any direct or consequential losses arising from its use. All such information and any conclusions reached based on the model shall be subject to independent verification by you. The model is confidential and proprietary and is not to be reproduced or distributed except with the permission of Active Allocator, Inc.
The model does not account for taxation. does not offer tax advice and urges you to consult a tax advisor for specific advice about the tax implications of an investment portfolio. The model does not consider all investment opportunities available to investors (other investments not considered may have characteristics similar or superior to those analyzed by the model).
Partial List of Assumptions:
- Assumption — This model (including the constraints and these assumptions) is suggestive and may not be appropriate for all.
- Assumption — The model outputs are intended to be merely guidelines for asset allocation and should be used to facilitate yours’ and your Financial Advisor’s judgment and not as a substitute for the exercise of that judgment.
- Assumption — Your asset allocation guidelines are highly dependent on the financial assumptions that are made. For purposes of developing these guidelines, we have used the pre-tax forecasts for returns, historical risks and correlations with assumptions.
- Assumption — For purposes of deriving correlations among the various asset classes, we used between 10 and 20 years of data based on our assessment of a range of factors for each asset class, including but not limited to data availability, stability of parameters and length of the investment cycle.
- Assumption — The model relies on index data for many asset classes. Indices are unmanaged, and investors cannot invest directly in an index. A variety of factors may cause an index to be an inaccurate benchmark for an asset class or particular investment within an asset class. In certain cases, the data has been adjusted for certain structural biases in the indices, such as serial correlation and reporting biases. In addition, adjustments for fees have also been made based on approximations. Actual fees will vary for particular investments. A number of other estimates have also been made.
- Assumption — The guidelines are intended for use as a strategic (as opposed to tactical) allocation and should be evaluated over a minimum 5 year timeframe.
- Assumption — We generally assume that there is an ongoing ability to rebalance positions, for traditional investments including for liquid alternatives emulating 'hedged exposures’, except for managed futures (generally monthly ability to rebalance); hedge funds (generally quarterly ability to rebalance); and private equity and real estate (generally no ability to rebalance). Regardless of these constraints on the model, you should regularly rebalance your overall portfolio when possible.
- Assumption — You should review and assess the constraints imposed on the asset allocation guidelines proposed for you.
Assumption — The model assumes that you hold a sufficiently diversified set of investments within each asset class so as to correlate closely enough to the index chosen for the asset class in order to effectively implement the asset allocation guidelines. Although the determination of whether the investments in an asset class are “sufficiently diversified” will be a function of all of the facts and circumstances surrounding your specific investments, investors should strive to ensure that:
a) Investments in a given asset class represent the sub-asset classes, or strategies, contained in that asset class. This can include but is not limited to diversification across geographies, trading strategies, sectors, and, in the case of real estate and private equity, vintage years. In addition, for real estate, investors should consider diversification across major property types, such as retail, multi-family, office and industrial. The model uses multiple underlying types of fixed income to characterize structured credit strategies: municipals, mortgages, bank loans and preferred. Investors who invest in this asset class should also consider diversification across these collateral types and explore corporate lending.
b) Investments in a given asset class are spread across enough managers such that no one manager dominates the overall risk of that asset class. The number of managers to be sufficiently diversified depends on the size of the managers, as well as on how closely the managers resemble one another and how closely they resemble the index for their asset class. The model assumes that traditional asset classes are represented by passive investments in representative indices, which provide inherent diversification. At any time, there is no certainty that products sufficiently diverse to meet these standards will be available. Even when they are, actual performance of the products may vary significantly from the index, thus diminishing the effectiveness of the allocation.
- Assumption — Other than the constraints that you have provided, the model does not take into account specific aspects of your financial situation, such as your preference for liquidity, cash flow requirements or costs of rebalancing your portfolio.
- Assumption — The model only considers the types of investments listed in the tables in developing your asset allocation guidelines.
- Assumption — We assume that real estate allocations are immediately fully invested, although unlike in Non Traded REITs these investments are typically staged over an extended period of several (typically three) years.
- Assumption — Probabilities are calculated using a normal distribution, i.e., a symmetric, bell-shaped distribution, which should be viewed as an approximation only, and not as a precise reflection of the true structure of possible outcomes. Probabilities of achieving multi-year returns are based on a log-normal distribution. These probabilities assume that the portfolio is being continuously rebalanced and that there are no withdrawals. These assumptions are approximations only, and therefore the probabilities should be treated as estimates. Actual probabilities may vary based on the appropriateness of these assumptions. In the optimization we have used mean, variance, skewness, kurtosis, maximum draw down and tested against MVAR.
- Assumption — You should review the classification of your current portfolio to ensure you are in agreement. Differences in categorization can have a material effect on the asset allocation. Active Allocator, Inc. makes no representations concerning the characterization of the current portfolio or its valuation.
- Assumption — We have not made assumptions about indicative fee levels which may vary depending on a range of factors including specific product selections, time periods, size of investments and performance.
INDICES FOR STRATEGIC ASSET ALLOCATION ASSUMPTIONS
All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses.
The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip U.S. stocks.
The MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets.
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the US & Canada.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index designed to measure equity market performance in the global emerging markets.
The MSCI Europe Index is a free float-adjusted market capitalization index designed to measure developed market equity performance in Europe.
The MSCI Pacific Index is a free float-adjusted market capitalization index designed to measure equity market performance in the Pacific region.
The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000.
The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index.
The Russell 2000 Growth Index® measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization.
The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index.
The Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index.
The Russell Midcap Value Index measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value index.
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market.
The Barclays 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon US Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible.
The Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market. The index represents the union of the US High Yield, the Pan-European High Yield, and Emerging Markets (EM) Hard Currency High Yield Indices. The high yield and emerging markets sub-components are mutually exclusive. Until January 1, 2011, the index also included CMBS high yield securities.
The Barclays Municipal Index: consists of a broad selection of investment- grade general obligation and revenue bonds of maturities ranging from one year to 30 years. It is an unmanaged index representative of the tax-exempt bond market.
The Barclays US Dollar Floating Rate Note (FRN) Index provides a measure of the U.S. dollar denominated floating rate note market.
The Barclays US Corporate Investment Grade Index is an unmanaged index consisting of publicly issued US Corporate and specified foreign debentures and secured notes that are rated investment grade (Baa3/BBB or higher) by at least two ratings agencies, have at least one year to final maturity and have at least $250 million par amount outstanding. To qualify, bonds must be SEC-registered.
The Barclays US High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
The Barclays US Mortgage Backed Securities Index is an unmanaged index that measures the performance of investment grade fixed-rate mortgage backed pass-through securities of GNMA, FNMA and FHLMC.
The Barclays US TIPS Index consists of Inflation-Protection securities issued by the U.S. Treasury.
The J.P. Morgan Emerging Market Bond Global Index (EMBI) includes U.S. dollar denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi-sovereign entities.
The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market.
The J.P. Morgan Corporate Emerging Markets Bond Index Broad Diversified (CEMBI Broad Diversified) is an expansion of the J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI). The CEMBI is a market capitalization weighted index consisting of U.S. dollar denominated emerging market corporate bonds.
The J.P. Morgan Emerging Markets Bond Index Global Diversified (EMBI Global Diversified) tracks total returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds. The index limits the exposure of some of the larger countries.
The J.P. Morgan GBI EM Global Diversified tracks the performance of local currency debt issued by emerging market governments, whose debt is accessible by most of the international investor base.
The U.S. Treasury Index is a component of the U.S. Government index.
The Alerian MLP Index is a composite of 50 most prominent energy Master Limited Partnerships (MLPs).
The Bloomberg Commodity Index and related sub-indices are composed of futures contracts on physical commodities and represents 22 separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc.
The Cambridge Associates U.S. Global Buyout and Growth Index is based on data compiled from 1,768 global (U.S. & ex – U.S.) buyout and growth equity funds, including fully liquidated partnerships, formed between 1986 and 2013.
The CS/Tremont Hedge Fund Index is compiled by Credit Suisse Tremont Index, LLC. It is an asset-weighted hedge fund index and includes only funds, as opposed to separate accounts. The Index uses the Credit Suisse/Tremont database, which tracks over 4500 funds, and consists only of funds with a minimum of US$50 million under management, a 12-month track record, and audited financial statements. It is calculated and rebalanced on a monthly basis, and shown net of all performance fees and expenses. It is the exclusive property of Credit Suisse Tremont Index, LLC.
The HFRI Monthly Indices (HFRI) are equally weighted performance indexes, utilized by numerous hedge fund managers as a benchmark for their own hedge funds. The HFRI are broken down into 4 main strategies, each with multiple sub strategies. All single-manager HFRI Index constituents are included in the HFRI Fund Weighted Composite, which accounts for over 2200 funds listed on the internal HFR Database.
The NAREIT EQUITY REIT Index is designed to provide the most comprehensive assessment of overall industry performance, and includes all tax-qualified real estate investment trusts (REITs) that are listed on the NYSE, the American Stock Exchange or the NASDAQ National Market List.
The NFI-ODCE, short for NCREIF Fund Index - Open End Diversified Core Equity, is an index of investment returns reporting on both a historical and current basis the results of 33 open-end commingled funds pursuing a core investment strategy, some of which have performance histories dating back to the 1970s. The NFI-ODCE Index is capitalization-weighted and is reported gross of fees. Measurement is time-weighted.