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Article

Expanded Role of Strategic Asset Allocation:
Value Added and Implications

S. Ramu Thiagarajan, Jiho Han and Inna Okounkova
The Journal of Investing Fall 2012, 21 (3) 12-23; DOI: https://doi.org/10.3905/joi.2012.21.3.012
S. Ramu Thiagarajan
is a director and global head of fixed income quantitative research at AllianceBernstein in New York, NY.
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  • For correspondence: ramu.thiagarajan@alliancebernstein.com
Jiho Han
is a portfolio manager at Samsung Securities in Seoul, Korea.
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  • For correspondence: jiho82.han@samsung.com
Inna Okounkova
is head of strategic asset allocation portfolio management at QS Investors in New York, NY.
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  • For correspondence: Inna.okounkova@qsinvestors.com
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Abstract

The concept of strategic asset allocation (SAA) has significantly changed over the years. Portfolio managers, consultants, and strategists in charge of SAA use a wider variety of asset classes than just stocks, bonds, and cash (to manage style tilts and control currency exposures) and are dynamic in their choices. This article expands the traditional SAA framework to accommodate seven different and popular sources of additional exposures. By expanding the concept of asset allocation from traditional assets to accommodate additional factors tilts using a Brinson-type analysis, the authors show that expanded SAA explains nearly 90% of the variation in active returns, absorbing some of the value added by active management. Analysis of moderate versus conservatively managed funds shows that the ability to add value from active management is partially dependent on the risk budget provided to the active manager. Importantly, this article shows that the majority of excess return in active management comes from the risk premium due to exposure to additional risk factors that can frequently be absorbed within the expanded SAA framework. This implies that it is important to view strategic asset allocation under the expanded framework as it is more reflective of practice and allows better assessment of the role of active management.

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The Journal of Investing: 21 (3)
The Journal of Investing
Vol. 21, Issue 3
Fall 2012
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Expanded Role of Strategic Asset Allocation:
Value Added and Implications
S. Ramu Thiagarajan, Jiho Han, Inna Okounkova
The Journal of Investing Aug 2012, 21 (3) 12-23; DOI: 10.3905/joi.2012.21.3.012

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Expanded Role of Strategic Asset Allocation:
Value Added and Implications
S. Ramu Thiagarajan, Jiho Han, Inna Okounkova
The Journal of Investing Aug 2012, 21 (3) 12-23; DOI: 10.3905/joi.2012.21.3.012
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  • Article
    • Abstract
    • LITERATURE OVERVIEW
    • EXPANDING SAA
    • BRINSON’S METHODOLOGY
    • SOURCES OF RETURNS UNDER EXPANDED SAA
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
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