In this CIO Special, we look at what we mean by “robustness” in the context of Strategic Asset Allocation (SAA).
Portfolios need to show robustness as market conditions – and the relationships between asset classes – change. Classical investment approaches try to rationalise this complex world by making a range of simplifications or “rules of thumb”. These can unfortunately make portfolio performance very fragile if the underlying assumptions around future asset class behaviour prove to be wrong.
Our approach to SAA, in contrast, acknowledges that we are living in an uncertain world and focuses on making portfolios robust to changes in these underlying assumptions. Some asset class relationships can be predicted more consistently than others, and we need to avoid concentrations of risks where outcomes are particularly uncertain. Understanding uncertainty is key to robustness.
In addition, we look at:
- How robustness is different from risk management
- The key features we use to increase robustness
- What is the price of robustness