diversifying away equity exposure

1© 2017 Windham Capital Management, LLC. All rights reserved.

Confidential. Not for redistribution.

2017 1

Controlling Risk

Effective Strategies for

Diversification

Andrew B. WeismanWindham Capital Management, LLC

Managing Partner & Head of Liquid Alternative Strategies


JPMORGAN’S “TYPICAL PENSION ALLOCATION”

Merthaler, Karl and Zhang, Helen. “Public Pension Funds: Asset Allocation Strategies,” JPMorgan Investment Analytics and Consulting, June 2010.

Asset Class Sub-Asset Class Proxy Allocation

Equities 52%

International Total International Stock Index

Emerging Markets Emerging Markets Stock Index

Domestic Large Cap Total Stock Market Index

Domestic Small Cap Small Cap Index

Domestic Small Cap Value Small Cap Value Index

Domestic Large Cap Value Value Index

Fixed Income 28%

Cash Cash

Short Term Bonds Short Term Bond Index

Intermediate Term Bonds Total Bond Market Index

TIPS Bonds TIPS Index

Real Estate 5%

REITs REIT Index

Alternatives 14%

Hedge Funds HFRI Global Hedge Fund Index

Within each asset class the allocations are equally divided The sub-asset classes were proxied with Index ETFs

This is a hypothetical representative portfolio used for illustrative purposes only.


LOTS OF STUFF; BASICALLY JUST ONE RISK


SIGNIFICANT MONETARY STIMULUS

$-

$500,000,000,000.00

$1,000,000,000,000.00

$1,500,000,000,000.00

$2,000,000,000,000.00

$2,500,000,000,000.00

$3,000,000,000,000.00

$3,500,000,000,000.00

$4,000,000,000,000.00

$4,500,000,000,000.00

Federal Reserve System Open Market Account


POTENTIALLY UNPRECEDENTED FISCAL STIMULUS

• Proposed $10 Trillion Stimulus Plan

• Current National Indebtedness is Approaching $20 Trillion

• $1 Trillion increase to Infrastructure

• $1 Trillion increase to defense

• Tax Reductions for Small and Large Businesses, Estimated

at $2 to $4 Trillion

Source: Washington Post


STOCKS VERSUS BONDS: IS IT REALLY A BALANCE?

Ten Year Note Yield

Corr

elat

ion v

s. S

&P

0.0% 2.0% 12.0%10.0%8.0%6.0%4.0%

0.0

-0.4

-0.6

0.8

0.6

0.4

0.2

-0.2

-0.8

Analysis based on 2−year rolling correlations using

monthly S&P 500

returns (excluding dividends) and 10 year T−Bond yields

from May 1953 to

June 2014.


TARGET FED FUNDS RATE


EFFECTIVE FED FUNDS RATE

Source: Board of Governors of the Federal Reserve

0

1

2

3

4

5

6

71

/1/2

00

0

9/1

/20

00

5/1

/20

01

1/1

/20

02

9/1

/20

02

5/1

/20

03

1/1

/20

04

9/1

/20

04

5/1

/20

05

1/1

/20

06

9/1

/20

06

5/1

/20

07

1/1

/20

08

9/1

/20

08

5/1

/20

09

1/1

/20

10

9/1

/20

10

5/1

/20

11

1/1

/20

12

9/1

/20

12

5/1

/20

13

1/1

/20

14

9/1

/20

14

5/1

/20

15

1/1

/20

16

9/1

/20

16

Effective Fed Funds Rate


ENDOWMENT CASE STUDY

PERFORMANCE OF AN ACTUAL ENDOWMENT:(12, 1995 – 10, 2012)


WHAT RISKS DID WE TAKE?


WHAT DID THE RISKS/RETURNS LOOK LIKE OVER TIME?


A THOUGHT EXPERIMENT:

THE POWER OF STATISTICAL INDEPENDENCE

0.5 correlation between portfolio assets

0.0 correlation between portfolio assets

Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4 Portfolio 5 Portfolio 6

5 Assets 10 Assets 20 Assets 30 Assets 50 Assets 3 Assets


STATISTICALLY INDEPENDENT RISK FACTORS:

AN INVESTORS BEST FRIEND


REDUCED VOLATILITY ISN’T THE END OF THE STORY

𝒓 ≈ 𝒙 −𝝈2

2

9.30%

9.40%

9.50%

9.60%

9.70%

9.80%

9.90%

Geometric Mean Return

Sin

gle

Ass

et

Po

rtfo

lio 1

Po

rtfo

lio 6

Po

rtfo

lio 2

Po

rtfo

lio 3

Po

rtfo

lio 4

Po

rtfo

lio 5

0.5 Correlation 0.0 CorrelationN(0.1,0.1)


CRITIQUING THE TYPICAL PORTFOLIO

• The largest single allocation typically goes to the most volatile component: the Equity Risk Premium.

• Relying on a negative stock/bond correlation is problematic.

• Other relatively well-known, robust risk factors are typically under-represented.

• Portfolios can have harmful unintended risk factor exposures, such as a short exposure to commodity roll yield.

• These imbalances lead to poor risk-adjusted performance.

• A better balance of risk factors can significantly enhance results over a market cycle.


BIOGRAPHIES

ROBERT BERNSTEIN is a Managing Partner and Head of Business Development at Windham Capital

Management, LLC. He joined Windham in 2012 and is the head of sales and client relationships. Before joining

Windham Capital, Rob served as U.S. Head of Business Development and Managing Director of BNP Paribas

Investment Partners, where he designed and executed a U.S. business strategy for multiple client segments. Prior to

that, he was Head of Business Development and Managing Director at AG Asset Management, LLC. Earlier in his

career, Rob was a Principal and Senior Vice President for Webster Investment Management, LLC, the strategic

investment arm of Gordon Getty’s family office in San Francisco, and Senior Vice President for GE Asset

Management.

ANDREW B. WEISMAN is a Managing Partner of Windham Capital Management and Portfolio Manager for

Windham Liquid Alternatives. Mr. Weisman has more than 25 years of experience as a portfolio manager of

alternative investment strategies. Prior to joining Windham in 2016, Mr. Weisman was the Chief Investment

Officer of Janus Capital’s Liquid Alternative Group from 2012 to 2016. Prior to joining Janus Capital, he was

Chief Executive Officer of WR Managed Accounts, LLC from 2008 to 2012. In 2002 he was awarded the

Bernstein Fabozzi/Jacobs Levy Award for outstanding article published in the Journal of Portfolio Management.

In 2016 he was awarded the Roger F. Murray Prize (First Place) by the Institute for Quantitative Research in

Finance. He is also a Board Member of the International Association for Quantitative Finance and President of

the Society of Columbia Graduates.


UPCOMING WEBINARS

Windham Software Overview

Wednesday, March 15 at 11am

Glide Paths Workshopwith Cel Kulasekaran

Wednesday, April 26th at 11am and 2pm

www.windhamlabs.com/webinars/

http://www.windhamlabs.com/webinars/


CONTACT & DISCLOSURES

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purposes. The Presentation is not intended to provide professional or investment advice, and you are advised to seek independent

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interests or shares in any fund or strategy.

Performance shown is simulated from January, 2000 – May, 2014. The returns presented as “Simulated” performance do not reflect actual

trading and they may not reflect the impact that material economic and other factors might have had on Windham’s decision-making if

Windham were actually managing money. Net performance is calculated by deducting a 1% management fee and trading costs. Simulated

results are derived from the performance of investment models created by Windham and applied to a hypothetical account.

Historical data and other information contained herein is believed to be reliable, but no representation is made as to its accuracy,

completeness, or suitability for any specific purpose. Windham accepts no liability (whether in tort or contract or otherwise) for any loss or

damage arising from any inaccuracies or omissions. Past performance figures, including any projection or forecast, are not necessarily

indicative of future or likely performance of any investment products. No assurance may be given that the strategies’ investment objectives will

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Opinions expressed are current opinions as of the date appearing in this material only. References to market or composite indices,

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Reference to an index does not imply that the Windham portfolio will achieve returns, volatility or other results similar to the index. The

composition of a benchmark index may not reflect the manner in which a Windham portfolio is constructed in relation to expected or achieved

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