MEFAA Asset Allocation Strategies: Using Strategic Asset Allocation to Enhance Investment Returns and to Reduce Risk

Abstract

Major institutional investment managers, such as, hedge funds and large university endowments, have based their investment portfolios upon tactical asset allocation among multiple asset classes with low correlation with the goal of achieving superior risk-adjusted returns. Until recently, this strategy has been extremely successful achieving compound annual returns over time of 10-15% with lower levels of volatility and superior risk-adjusted returns.However, during the current financial crisis, many of these asset classes experienced high degrees of correlation as they all decreased in value. It appears that in a global financial crisis, any asset classes that contain any form of market risk are quite linked. In addition, many alternative asset classes, such as, hedge funds and private equity not only decreased in value but also were illiquid in nature. This has impeded asset class re-allocation efforts.The Channel Capital Research Institute offers a new strategic asset allocation framework called Monetary Environmental Flow Analysis™ (MEFA™) which can offer downside protection in such environments using only Exchange Traded Funds (ETFs) and other extremely liquid investment vehicles. It utilizes basic tenets of asset allocation. However, it recognizes that many asset classes can be highly correlated in a downturn and offers the ability to allocate to riskless asset classes depending upon one’s goals and objectives. MEFA™ strategies offer the ability to create a customized framework for creating a portfolio based upon the specific risk-return tradeoff desired by the specific investor. The results over time are long-term returns comparable to equities but with lower drawdowns in financial crisis environments. These strategies are tested over the period 1996-2014.