How to allocate asset classes in a multi-asset portfolio?
An institutional client needs to meet his pension liabilities, and suggested a multi-asset-class strategy. I'm trying to find ideas to pitch.
My experience is mostly from equity, so the way to go would be to balance some kind of covariance based risk minimization with a 1/n-style diversification, both to avoid concentration risks, as well as dependency on the model. Then possibly buy some puts to reduce downside risks, etc.
I'm really not sure however how/how much to allocate to other classes. Would you use a covariance based approach, and optimize over those? Would you pick a class allocation and stick with it? Follow marco-trends? I guess you can do any of those, but is there a 'standard' approach? Can you even use covariances to diversify bonds against stocks against commodities?
Right now my idea is to start 95% equity/5% cash, and then shift to duration matched bonds to meet the liabilities. That way, I can handle the equity with the options, potentially have some base risks, and take care of the liabilities in advance.