Family Ties

Abstract

After the market turmoil of the last two years, many institutional investors are revisiting the way they approach asset allocation. For decades, the traditional breakdown of asset classes has been along the lines of equities, fixed income, alternatives, etc., sometimes with domestic versus foreign flavors. The main point we highlight in this Research Bulletin is that many asset classes share the same underlying drivers. While this notion is a familiar one, the insights gained by analyzing common drivers of risk and return across asset classes are not always applied to decisions about asset allocation. For example, private equity investments share key fundamental drivers with public equities yet are often perceived as a separate and distinct asset class. Or in the case of corporate bonds, the credit worthiness of the bonds depends on the financial health of the issuing corporation, which in turn is linked to the performance of the company’s equity securities. These types of underlying linkages can be addressed by factor-based models and can be used in factor-based asset allocation schemes.