The case for DAA
The case for DAA, episode 1001.
Pairwise correlations amongst asset classes change over time, depending on the operating environment (regime changes, things like FAIT, NGDP targeting, or just good old fashioned overdoing it via a more dovish central bank reaction function), which impacts the optimal stock-bond ratio.
That’s a problem that only gets larger as more asset classes are added to the mix, and simply relying on periodic portfolio rebalancing will probably not prove sufficient to compensate for these changes, as per the graph below.
Our UW to fixed income has added alpha, and as yields rise we nibble away at the underweight.
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