Strategic asset allocation: Rethinking our approach

We are harnessing the power of factor-based investing to build, what we believe to be, one of the most robust asset allocation frameworks available to private investors. 

History’s most successful regimes – from economies to ecosystems – are united in their ability to replicate and evolve, without ever repeating themselves. While obvious patterns may occur, true success calls for perpetual adaptation. We believe that the same applies to successful wealth management.

The paradigm by which economies grow shifted in 2008. As fundamental investors, we acknowledge the fact that today’s low-growth environment dampens expected returns for traditional asset classes – this is a landscape in which investors must not only live, but thrive within.

We must therefore look beyond the obvious to provide our clients with access to less traditional sources of return. To achieve this, we have adapted our strategic asset allocations.

While expanding the set of opportunities, we have narrowed our focus – thinking in terms of primary risk premia rather than asset classes. Our aim is to enhance portfolio performance by improving the quality of our estimates and the robustness of our portfolio construction and asset allocation tools.

In this paper, we outline Lombard Odier’s strategy for navigating this new investment environment, and discuss our assumptions for how this new strategic asset allocation will perform.

We begin by highlighting the importance of factors: the underlying drivers of risk and return within an individual asset class. We then discuss the likely macroeconomic scenario of the coming decade and use it to derive factors’ expectations. Finally, we outline how we are harnessing the power of factor-based investing to build, what we believe to be, one of the most robust asset allocation frameworks available to private investors.