Describe how you measure, track or otherwise demonstrate your value on asset allocation activities.
First, we fully evaluate the fund’s current status, which includes interfacing with the client’s staff and professional service providers. In this step, we strive to understand the overall goal of the fund, how it is invested, and what its spending and distribution goals are.
Second, we analyze both assets and liabilities through the lens of a constrained mean variance optimization (MVO). Though imperfect, MVO presents a rough picture of the portfolios that will provide the best return for the funding risk. The inputs we use are generated annually by our own research staff, providing us a solid understanding of the caveats that accompany these inputs.
Third, we seek to further dissect the risk compositions of the portfolios. We perform a risk budgeting analysis to highlight the source and scale of portfolio-level risk, including identification of the portfolios’ true risk exposures by asset class. We conduct MVO based risk analytics, include worst-case return expectations and Value at Risk (VaR) analyses. We stress test our proposed allocations using a variety of relevant scenarios, including both historical and hypothetical. These scenario analyses reveal the best and the worst possible performance the fund could reasonably expect based on history, both in terms of asset levels and liabilities.
Fourth, we view our proposed allocations through the lens of economic regime allocation. In this analysis, we seek to identify how the portfolio will perform (from both an asset and a distribution standpoint) in common economic environments, such as low growth or high inflation. This analysis provides added perspective about the economic risks the fund may be assuming.
We then conduct a thorough liquidity analysis of our proposed portfolios that evaluates the fund’s shorter term spending and distribution needs given a variety of economic and capital market scenarios (e.g., rising interest rates, deflation, recession, etc.).
Finally, it is important that this process be open and iterative. We would expect this process to take at least several months with ongoing and meaningful communication between the Meketa Investment Group and the Board. We would provide full transparency to the Board on how we produce our assumptions and arrive at our recommendations.