CSM allocates invested capital across multiple asset classes, and seeks to generate returns which are relatively uncorrelated between asset classes. Our portfolio construction follows a university endowment model. We rely on the academic approach of Ibbotson and others, and believe that proper asset allocation is a critical element in optimizing performance. At the individual manager level, we utilize quantitative measures such as Sharpe and Sortino ratios to gauge relative performance. We establish target asset allocations at least once a year and may shift allocations on a tactical basis during the course of the year, particularly in times of high volatility such as today, as asset classes become relatively more or less attractive based on macro factors. Our intention is for our clients to be fully invested, and as such we do not attempt to ‘time’ the market. Our view is that successfully predicting market highs and lows is difficult or impossible to achieve, and involves substantial transaction costs, including taxes, which materially reduce overall returns.
For a typical investment portfolio, we initially determine an allocation between public equities and alternative investments, which are usually private and less liquid than public equities. Funds allocated to public equities are further divided between US equities, developed Europe/Japan equities, and Emerging Markets. Relative weightings for each of these fundamental categories are determined based on a risk/return analysis which considers relative valuation, interest rates, expectations for economic growth and corporate earnings, commodity prices, currency risk, and other factors including the risk appetite and time horizon of our client.
Within each category of the public equity markets, we determine a mix between active management, where we select portfolio managers who buy and sell individual stocks, and passive management, where funds are invested in an index reflecting performance of the market segment as a whole. We balance exposure between large capitalization equities and small to mid-capitalization equities. Finally, a certain amount of funds are allocated to all-capitalization, all-world managers.
Alternative investments include hedge funds with differentiated strategies targeting a variety of asset classes which are held for our clients in a fund of hedge funds structure. In addition we make selective allocations to private equity funds, oil and gas/natural resource partnerships, commodities/futures funds, and tangible assets such as real estate, timber, and physical commodities. Returns from alternative investments are expected to show low correlation to public equities, and lower volatility. Historically, alternative investments have outperformed fixed income securities such as US treasuries and investment grade bonds, which are exposed to inflation risk and erode purchasing power over time.
