Global Tactical Asset Allocation (GTAA)

In Global Investment Solutions we have engaged in active asset, country and currency allocation decisions in global mandates for 25 years. The types of constraints in those mandates have evolved and our derivatives-based GTAA approach is a recent evolution. Throughout this period, however, we have held fast to our investment philosophy and process, which is distinct from the vast majority of GTAA managers. While our goal is the same as other GTAA managers – to seek to add value while remaining uncorrelated to market risks and other active investment risks over a full market cycle – our path to that performance is substantially different from other GTAA approaches in the following dimensions:

Philosophy of investment value: We believe that the fair value of any asset is determined by the economic fundamentals that determine cash flow for owners. Relative currency values arise from differential inflation and real risk free rates.
Analytical techniques to estimate value: We use top-down discounted cash flow models to establish fair value, not relative values, for the assets they describe. These estimates are neither purely data-driven, nor do we use aggregate consensus analyst security level earnings expectations.
Anticipated capture of investment value: We believe that market prices revert to conditions consistent with economic equilibrium. We do not take a statistically ‘mean-reverting’ approach, or focus on continuing absolute or relative price momentum.
Investment horizon: Our investment horizon is a full ‘investment cycle’ which is typically three to five years. Other GTAA approaches operate within a substantially shorter horizon that influences techniques of analysis.
Method of allocating risk capital: Our equilibrium risk and correlation estimates are combined with confidence-weighted observed price-value discrepancies. Typical ‘optimization’ approaches by other GTAA managers rely on point estimates of expected return, risk and correlation that themselves suffer from substantial estimation error.

Our GTAA evolution

1 Global Securities Portfolio inception December 1981.
2 First UK client in the Dynamic Alpha Strategy July of 2002. The DAS composite inception is November 2003.
3 The GTAA combination is comprised of 35% Market Absolute Return Strategy (MARS), 25% Currency Absolute Return Strategy (CARS) and 40% Absolute Return Bond (ARB) with monthly rebalancing. This combination was selected in order to achieve a 15% risk objective. MARS and CARS performance for the period July 2002-December 31, 2005 is based upon an attribution analysis of a portable alpha product. MARS and CARS performance for the period January 1, 2006 through December 2006 is representative of the GBP performance of two Dublin-based funds converted to USD. Please see the slide “Supplemental GTAA performance disclosures” for a detailed explanation, along with composite information for MARS CARS and ARB in the appendix at the end of this presentation.