Starting from Scratch: How 28 CIOs Would Build a New Portfolio

It would start with strong governance and a risk-factor model.

(September 26, 2013) -- “How would you allocate your portfolio if you could start from just a blank whiteboard?”

A group of 28 institutional asset owners and 10 managers took on that question recently at a workshop in New York City. It was the same exercise that Yale CIO David Swensen is said to have put to his staff in the 1980s, thereby giving rise to the endowment model.

The participating asset owners approached with the memory of 2008, however, when premiers endowment suffered a collective liquidity crisis as markets collapsed.

CIOs at the New York workshop largely set aside asset class discussions to focus on governance and fund culture, according to a whitepaper on the event by organizer Cathleen Rittereiser. She is CEO of the asset owner education and mentorship group Uncorrelated. 

“The discussion of asset allocation is in many ways secondary to the conversation of effective governance and execution because without effective governance no one will be able to implement a new and exciting model for asset allocation, assuming such a model exists,” said one participant.

Governance related back to the specific concern of liquidity: Rittereiser reported that a number of asset owners lamented their board’s reluctance to keep cash on hand.

Board members were also said to be a roadblock to another feature of asset owners’ ideal portfolios: a risk-factor allocation model. Those who had transitioned away from traditional asset classes encouraged their peers to follow suit, but stressed the need for effective execution.

Board education was one element, but CIOs also felt their new portfolios would demand cutting-edge IT systems to support robust stress testing.

According to the paper, the key question that emerged from the activity was not “What is the optimal asset allocation model?” Rather, CIOs sought to answer, “What is the optimal selection process?”

The group was tasked with a hypothetical $2 billion portfolio and a 7% to 8% annual return objective over 20 years. Participants included investment leaders from the Universities of Illinois, Cincinnati, Iowa, Louisiana State, Pennsylvania State, Utah, and a number of foundations

Read the full review of the workshop here

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