Strategic Asset Allocation Development

Client-Specific Concerns

A Saudi family office engaged bfinance to design a Strategic Asset Allocation (SAA) to address their specific challenges and support long-term financial sustainability. The family office manages a substantial, multi-billion SAR portfolio, composed of illiquid domestic assets, including real estate and direct holdings. While this structure has delivered high historic returns, it also exposes the portfolio to significant concentration risks and limits international diversification.

Key objectives included:

• Concentration risk: The majority of the portfolio was allocated to a single asset, which limited diversification across geographies and asset types. This created significant exposure to market and idiosyncratic risks.
  
  
• Home bias: Only 19% of the portfolio was invested internationally, well below the client’s stated target of 50%.
  
  
• Liquidity and spending needs: The portfolio’s illiquidity presented challenges in supporting a sustainable dividend payout, which the family office intended to double annually while maintaining asset base growth.
  
  
• Strategic transition: With a planned redemption from direct holdings, the client required guidance on redeploying capital to achieve a more balanced and efficient portfolio structure.
  
  
• Refinement: The family office also sought recommendations on refining its private markets strategy, optimising management fees, and enhancing operational efficiencies.
  
  

Outcomes:

bfinance’s comprehensive analysis resulted in the development of three Strategic Asset Allocations tailored to the family’s objectives:

• Diversified SAA: Focused more on reducing volatility and improving downside protection through increased allocations to fixed income and diversifying hedge funds.
  
  
• Return-seeking SAA: Designed for higher returns, this strategy retained a significant equity weighting, with greater exposure to both public and private equity.
  
  
• All-asset class SAA: Balanced equity and fixed income allocations, offering a more traditional portfolio structure that mitigates concentration risk while targeting high returns.
  
  

Each strategy was informed by efficient frontier analysis and scenario simulations, offering a comprehensive evaluation of potential risk-return trade-offs. A primary recommendation was to increase diversification by transitioning away from concentrated direct holdings. This involved reallocating capital into globally diversified private equity, such as mid-market buyouts and secondaries, along with consolidated global core funds in real estate and hedge funds employing macro and market-neutral strategies.

Tail risk was identified as a critical factor, with equity exposure being the primary driver of potential portfolio losses. The analysis highlighted the Diversified SAA as the most resilient option, demonstrating the lowest Conditional Value-at-Risk (CVaR) and robust performance during adverse market conditions.

The proposed SAAs provided clarity on the sustainability of long-term spending.The analysis showed that the intended annual payouts were achievable without significantly depleting capital, provided the portfolio transitioned to a more diversified structure. The shift from direct holdings to liquid alternatives and international investments enhanced the portfolio’s ability to sustain dividend payouts and withstand market shocks.

Recommendations for fee optimisation focused on consolidating fragmented real estate allocations to improve efficiency and cost-effectiveness. Additionally, co-investment opportunities were proposed within the private equity portfolio to reduce management fees while maintaining access to high-quality investment opportunities. This holistic approach to strategy design and implementation ensured that the proposed SAAs were both theoretically sound and practically actionable.

Each Strategic Asset Allocation was supported by a detailed implementation plan to address the family office's specific needs. For private equity, the focus was on broadening exposure to mid-market buyouts and secondaries, which would reduce reliance on individual positions and enhance diversification. Hedge fund allocations were restructured to incorporate macro strategies, reducing equity market correlation and improving the portfolio’s overall risk-adjusted returns. Within real estate, the recommendation was to simplify the fragmented core allocations by consolidating them into a single global fund, which would improve cost efficiency and align with the family’s objectives of operational streamlining and enhanced governance. These tailored recommendations ensured that the transition to the proposed SAAs would be both practical and effective, delivering meaningful improvements in diversification, cost structure, and long-term portfolio resilience.