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"TAMRIS" - Setting standards

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process should not be confused with simple compound interest/capital withdrawal modelling exercises or indeed the complex asset liability modelling carried out on behalf of institutional pension funds.

Indeed, there are a number of naïve “year of cover” models in the market place, but these lack a construction, planning and management methodology and are more often than not separated form the necessary asset management expertise.

In fact, year of cover models with regular annual withdrawals from equities, irrespective of market conditions expose investors to the same risk profile as a 100% equity portfolio. Such solutions are dangerous and are a symptom of the separation of asset and liability management over long time horizons.

Why investment expertise is only needed to manage the short end of the portfolio problem and why the longer end of the portfolio problem can be managed by those without does not make sense. It is a portfolio construction, planning and management and hence investment problem.

The process should also not be confused with simple rebalancing methodologies which have no liability relationship and which use inefficient return management techniques. Note the 50%/50% solution which sells equities as the market rises and buys equities as the market falls; at all times bringing the balance back to the 50%/50% split. This exposes the client to the risk of return contamination.

There is also no magic long term split that applies to all clients over time. Many of these naïve solutions have developed because of the grey area that exists between the portfolio solution/portfolio problem and the long term portfolio problem. Text Box:  

Within liability space, an efficient portfolio is one which can distribute capital for the smallest amount of liquidity risk while optimising asset class risk and return over time.