Strategic Asset Allocation
In general, the process begins with the collation of views and strategic direction at the Board level. Typically, the broad view and set of beliefs are then articulated as the investment objective of the funds. This is subsequently cascaded down to the investment process in the form of the overall Investment Objective and Philosophy of KWAP. These objectives combined with the risk tolerance fund become the major motivation behind the investment goal and asset allocation process of the funds. Notwithstanding this, a statutory body, an important pre-requisite is the ultimate buying-in from the major stakeholders
The mechanics behind the SAA regime at KWAP is based on the Markowitz’s Mean Variance Optimization technique and the CAPM Efficient Frontier. However, the thinking that goes into the process allows for some element of subjectivity, therefore making it moderately flexible. It is important to emphasize that such optimization processes are complemented by subjective and qualitative overlays and decision factors.
The optimization process involves many iterations and processes which eventually culminate in the end-state SAA which best reflects the prevailing long term views. The underlying assumptions incorporated into the optimization involve the outlook and risk return projections for each asset class as well as their corellations. These assumptions, also known as Capital Market Assumptions, provide the quantitative platform for the optimization.