CASE STUDY

Strategic Asset Allocation Review

French Pension Fund | Q1 2022

Engagement at a glance

Client Country/Type: French Pension Fund
Year: Q1 2022
Asset Class, Geography: Full global multi-asset investment portfolio
Portfolio Size: EUR 64 billion
Service Provided: Strategic Asset Allocation
Objective: 1% p.a. real return over 15-year horizon

 

Client-specific concerns

This French pension fund sought to assess the suitability of the current SAA relative to the objective of delivering a 1% real return over a 15-year horizon. Imminent internal deadlines required an accelerated three-week timeframe for the project. The investor was actively considering a number of key questions including: whether to add illiquid asset classes; whether to increase the overall equity allocation and change its composition (remove low volatility strategy, broaden geographic reach); whether to take more risk in the fixed income allocation (maturities, credit ratings and geographical exposure); whether to use overlays (e.g. repo).

Efficient Frontier

Outcome

      • Giving clarity on current asset allocation: The investor received insights on the likelihood of certain return outcomes would be achieved, generated using a probability-based analysis rather than relying on plain ‘expected return’ figures, in order to support better understanding of portfolio behaviour. Having examined the expected risk and return characteristics of the current SAA, the team estimated that it would deliver an expected 15-year real return of 0.3% per annum—considerably short of the 1% target.

      • Navigating the investor’s potential constraints: Some changes that the client had requested for evaluation would require significant alterations and create additional resource and governance burdens. For example, adding private markets can be relatively governance-intensive. The team therefore proposed not one but three different SAAs, ranging from ‘minimum change’ to ‘extensive change’.

      • Improving estimated outcomes: Each suggested SAA is expected to meet the 1% long-term real return objective through a prudent increase in risk and greatly improve the portfolio’s expected ability to preserve real capital. With stochastic simulations that consider both economic and financial variables in a single framework, the client gained a better understanding of how inflation is expected to vary over time and how this might impact the portfolio’s real-purchasing power in high, medium and low inflationary scenarios.

      • Supporting change: The client ultimately opted for a combination of the suggestions, increasing their equity allocation by 5% and giving the go-ahead to explore private markets in more depth.

 

Our specialist says

  • Suggestions based on forward-looking scenarios are (in our view) more insightful and provide a more independent perspective than the typical ‘house view’ type approach. Economic variables such as inflation are dynamic in practice rather than static and this should be reflected in any strategic asset allocation analysis.

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