A Case for Dynamic Asset Allocation for Long Term Investors

The strategic asset allocation (SAA) decision represents the key driver of results for long term institutional investors. In practice this decision translates into a static portfolio with fixed allocations to narrowly defined asset classes which is not responsive to time varying expected return and risk driven by changes in the economic environment for example. In this context we define dynamic asset allocation (DAA) as the process of implementing time varying expected excess returns (returns over the risk free rate) and/or expected risk with a medium term time horizon. In this paper we assess its applicability for long term institutional investors, review different forms of implementation seen in practice, and discuss key requirements and governance challenges in an institutional context.