A Dynamic Approach to Investing

Author: Kenneth Frier CIO, Atlas Capital Advisors and Gretchen Tai

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This is a follow-up to the previous Family Office Association White Paper: Improving the “Endowment Model” Recipe. In that paper we summarized our investment advice as follows:

• Make asset allocation the number one priority – always understand what is in the portfolio and keep it ideally positioned for current market expectations

• Meaningfully reduce the reliance on equity-like market risks, with more true diversification

• Reduce the reliance on illiquid external investments

Most of those who have provided feedback on the first paper share our concerns about the future of the endowment model. However, they generally wanted us to provide more specifics regarding the alternative approaches we would recommend. The main building blocks of our approach are as follows:

1. Set an asset allocation framework which is adaptive to market conditions. It’s possible, even for an investment operation with limited resources, to improve investment results through better approaches to asset allocation. Here we offer a sample approach of using value and momentum in combination

2. Add diversification through sources of return with low correlation to public equity. To reduce reliance on equities, we believe that investors should seek more relative value long-short positions.

3. Separation of alpha and beta. For large investment organizations, a separation of alpha and beta management can be a source of additional benefit

4. Modify governance structure to support the new asset allocation approach. This approach requires an established framework for how the investment staff may respond to market conditions as they change.

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