High Level Overview of the SCS Asset Allocation Framework
Target an Appropriate Allocation to Safety Net Assets
Such as cash and high-quality core bonds, which aim to provide the portfolio a margin of safety, along with a reliable source of liquidity (e.g., spending, capital calls, and other expenditures).
Identify the Highest Opportunity Investments
Which tend to be private investments and special situations due to the embedded illiquidity premium.
The goal is to harvest these premiums within the limits of one’s illiquidity tolerance.
Spread Balance Amongst Independent Mix of Liquid Assets
The balance of the risk budget is spread amongst independent return streams across credit, absolute return, and public equity, while providing a secondary source of liquidity.
Target Optimal Position Sizing
Individual managers are sized according to a defined set of criteria such as the relative attractiveness and complementary nature of the potential return profile.
We have adopted and refined our asset allocation framework because we find it to be a practical, time-tested, flexible approach for responsibly managing our clients’ money. You can take comfort in the fact that some of the brightest investment minds and most successful practitioners in the industry have adopted this same framework. In summary:
SCS follows a regime based, multi-factor, and multi-return distribution approach that elevates the central importance of macroeconomic forces as drivers of asset returns. Our primary regime lenses—characterized either by inflation or growth, phases of the business cycle, or level of market stress—allow us to incorporate client risk preferences into portfolios in a natural way.
Our emphasis on finding uncorrelated sources of return, wherever they lie, is a critical element of our portfolio construction process. The most attractive segments of well traversed markets are typically the niche corners where competition is the least intense and index providers cannot easily replicate, which helps create high risk-adjusted returns and low correlation to other assets.
Index and enhanced index strategies through low-cost vehicles should be used in efficient markets with low dispersion where history has shown difficulties of active managers delivering excess returns. Active management can potentially add meaningful value in less efficient markets with high dispersion, which are notably higher in private and alternative markets, even after controlling for factor exposures.
As market conditions evolve, asset class relationships shift along with the underlying risks of a portfolio. We actively stress-test portfolios against various historical scenarios and economic shocks. This requires excellent communication with our managers. It also requires the analytical capability to capture, model, and interpret portfolio exposure; to monitor sources of risk and return in the portfolio; and to minimize unintended sources of risk.