Strategic Asset Allocation (SAA)

SAA: The Foundation of a Portfolio

Strategic Asset Allocation (SAA) is the long-term “master plan” for allocating capital among asset classes. Research shows that over 90% of portfolio return variation is determined specifically by SAA, not by the selection of individual securities or market timing.

Key Principles of SAA

Long-term horizon — SAA is set for 3-10 years
Based on expected returns — Capital Market Assumptions (CMAs)
Consideration of risk tolerance — compliance with the IPS
Neutral weights with ranges — flexibility for TAA
Rare changes — only with fundamental shifts in conditions

SAA Development Process

Definition of the investment universe — which asset classes are available to the investor?
Capital Market Assumptions — forecasting returns, volatility, correlations for 10+ years
Optimization — searching for the efficient portfolio (Mean-Variance, Risk Parity, Black-Litterman)
Application of constraints — liquidity, ESG, concentration, leverage
Stress testing — how will the portfolio withstand crises?
IC approval — formal endorsement

Example of SAA for a Balanced Portfolio ($100 mln)

Asset Class	Neutral Weight	Range	Expected Return	Volatility
Developed Market Equities (DM)	30%	25-35%	7%	16%
Emerging Market Equities (EM)	10%	5-15%	9%	22%
Government Bonds DM	20%	15-25%	3%	5%
IG Corporates	15%	10-20%	4%	6%
High Yield	5%	0-10%	6%	10%
Real Assets (REIT, Infra)	10%	5-15%	6%	14%
Alternatives (HF, PE)	5%	0-10%	8%	12%
Commodities/Gold	3%	0-7%	4%	15%
Cash	2%	0-10%	2%	0.5%

Expected portfolio return: ~5.5% | Volatility: ~9%

SAA Optimization Methods

Method	Description	Advantages	Disadvantages
Mean-Variance (Markowitz)	Maximizing Sharpe Ratio	Theoretically optimal	Sensitive to input data
Risk Parity	Equal risk contribution	Robust, not dependent on return forecasts	Requires leverage for acceptable returns
Black-Litterman	Combination of market equilibrium and views	More stable weights	Implementation complexity
Factor-Based	Allocation by risk factors	Better diversification	Requires in-depth factor understanding

When to Review SAA?

Scheduled review — every 1-3 years
Change in investor circumstances — horizon, liquidity, risk tolerance
Structural changes in markets — new asset classes, changes in correlations
Significant change in CMAs — revision of long-term forecasts

Important: SAA does NOT change due to short-term market fluctuations!