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Introducing Adaptive Asset Allocation

Adaptive asset allocation is a relatively unknown yet increasingly popular emerging investment strategy that, at its core, has two basic elements: rebalance more frequently and align the portfolio to reflect current market trends. Historically, the foundation of this discussion began in 1955 with Harry Markowitz and his Portfolio Theory, which became more popularly known as Modern Portfolio Theory (MPT). From these roots, we saw the development of strategic asset allocation, subsequently the development of asset allocation funds, and, ultimately, the creation of target date funds.

Additional work on adaptive asset allocation began in the early 1990s by the Compass Institute and the work of Kevin Coppola. His proprietary approach produced impressive results over an extended period of time and was further refined through Compass Investors under the Horizon brand.  For a detailed explanation of this concept, we suggest reading the November 2009 white paper, "Adaptive Asset Allocation Policies," published by William Sharpe, Professor of Finance, Emeritus, Graduate School of Business, Stanford University, Nobel Prize winner in Economic Sciences in 1990 and cofounder of Financial Engines.

Kevin Coppola writes eloquently about the need for retirement income and the development of adaptive asset allocation as a strategy to help mitigate some of the long-term risk and disappointing future returns.   As a fiduciary, it is prudent to closely examine this approach as a potential strategy for your plan. For further information and to read more details, visit www.compassinvestors.com.

From Advocates to Raving Fans and Beyond

There are an increasingly number of advocates of adaptive asset allocation with one of the most vocal being Adam Butler and Mike Philbrick, Portfolio Managers with Butler/Philbrick/Gordillo & Associates at Macquarie Private Wealth in Toronto, Canada. Their article, "Volatility Management for Better Absolute and Risk Adjusted Performance," presents a strong argument.  Perhaps more fun to read, albeit openly biased, are their blogs as they prostelize about their approach with colorful language to describe current strategies such as "GIGO," or, "garbage in, garbage out."


PSCA does not advocate any one approach, investment strategy or product over any other.  Our role is merely to provide a platform for plan sponsors to explore new trends and developments.   We welcome input, articles, case studies and all opinions on adaptive asset allocation that you wish to share with the plan sponsor community.