Developing an Asset Allocation Strategy

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Developing an Asset Allocation Strategy

• Name
• Date

MacKay Shields LLC is an affiliate of New York
Life Investment Management LLC.
MAVMC-0704
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• A cynic is a man who knows the price of
  everything and the value of nothing
• OSCAR WILDE

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Quiz

• Who has
• Been up to bat 12,364 times
• Had 3,771 hits
• Drove in 2,297 runs
• Played in 3,298 games
• But never hit over 47 home runs in a single
  season?

Hank Aaron His consistent play earned him 755
home runs, 2297 RBIs, Over the course of 3200
games
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Importance of Asset Allocation

• Current financial markets
• What is asset allocation and why it makes sense
  for you?
• Developing an asset allocation strategy

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Why Pursue an Asset Allocation Strategy?
The Financial Markets Are a Moving Target
Best Performer
Worst Performer
92 Small-Cap Value Stocks
29.1 International Stocks -11.9 93
International Stocks 32.9 Large-Cap
Growth Stocks 2.9 94 International Stocks
8.1 U.S. Fixed Income -2.9 95
Large-Cap Value Stocks 38.4 Money
Market 5.8 96 Large-Cap Growth
Stocks 23.1 U.S. Fixed Income 3.6 97
Large-Cap Value Stocks 35.2 International Fixed
Income 0.2 98 Large-Cap Growth
Stocks 38.7 Small-Cap Value Stocks -6.5 99
Small-Cap Growth Stocks 43.1 International
Fixed Income -4.3 00 Small-Cap Value
Stocks 22.8 Small-Cap Growth Stocks -22.4 01
Small-Cap Value Stocks 14.0 International
Stocks -21.2 02 International Fixed
Income 19.5 Small-Cap Growth
Stocks -30.3 03 Small-Cap Growth
Stocks 48.5 U.S. Fixed Income 4.1
Source 12/31/03 Ibbotson Associates, Inc. Asset
classes are based on the following indices
Large-Cap Growth Stocks Russell 1000 Growth
Index Large-Cap Value Stocks Russell 1000 Value
Index Small-Cap Growth Stocks Russell 2000
Growth Index Small-Cap Value Stocks Russell
2000 Value Index International Stocks MSCI EAFE
Index U.S. Fixed Income Lehman Brothers
Aggregate Bond International Fixed Income
Merrill Lynch Global Government Bond Index Money
Market 3-Month Treasury Bills. Past performance
is no guarantee of future results and it is not
possible to make investments directly in an
index. The returns of these indices in no way
reflect the past or future performance.
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Historical Performance
Source Ibbotson, December 31, 2003. Past
performance is no guarantee of future results.
US Small Cap is represented by the Russell 2000
Index which is comprised of the smallest 2,000
companies in the broad-market Russell 3000 Index.
US Large Cap is represented by the Russell 1000
Index which contains those largest securities in
the Russell 3000 Index. The Russell Midcap Index
includes the smallest 800 securities in the
Russell 1000. International is represented by
the MSCI EAFE index which measures the
performance of markets in developed regions of
Europe, Australasia and the Far East. Bonds are
represented by the Lehman Brothers Aggregate,
comprised of US investment-grade fixed-rate
bonds. All indices mentioned are unmanaged. An
investor cannot invest in an index, and its
results are not indicative of the performance of
any specific investment.
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Stocks and bonds risk versus return
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maximum risk portfolio 100 stocks
19702003
80 20
60 40
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50 50
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Return
25 75 minimum risk portfolio
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100 bonds
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10
11
13
15
16
17
18
Risk
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Source Ibbotson Associates December 31,
2003 Risk is measured by standard deviation.
Return is measured by arithmetic mean. Risk and
return are based on annual data over the period
19702003. Portfolios presented are based on
modern portfolio theory. Standard deviation is
applied to the annual rate of return of an
investment to measure the investment's
volatility.
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Mid Cap Valuein an Asset Allocation Strategy
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Investor A

• Investor A
• 100 Large Cap Core
• 10 Year Return
• 11.07
• 10 Year Standard Deviation 15.84

S P 500
Clients should be aware that their specific
investment objectives may not be met. Source
MPI Stylus, 12/31/03. Ten year time frame from
December 31, 1993 to December 31, 2003. SP 500
is a trademark of the McGraw-Hill Companies, Inc.
The SP 500 is an unmanaged index and is widely
regarded as the standard for measuring large-cap
U.S. stock market performance. Results assume
the reinvestment of all capital gains and
dividend distributions. An investment can not be
made directly into an index. Standard deviation
is applied to the annual rate of return of an
investment to measure the investment's
volatility.
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Investor B

• Investor B
• 60 Large Cap Core
• 40 Bonds
• 10 Year Return
• 9.94
• 10 Year Standard Deviation 10.29

Source MPI Stylus, 12/31/03. Ten year time
frame from December 31, 1993 to December 31,
2003. Portfolio has been rebalanced annually.
SP 500 is a trademark of the McGraw-Hill
Companies, Inc. The SP 500 is an unmanaged
index and is widely regarded as the standard for
measuring large-cap U.S. stock market
performance. Results assume the reinvestment of
all capital gains and dividend distributions. An
investment can not be made directly into an
index. The Lehman Brothers Aggregate Bond Index
is an unmanaged market value-weighted performance
benchmark for investment-grade or better
fixed-rated debt issues, including government,
corporate, asset-backed, and mortgage-backed
securities, with maturities of at least one year.
Standard deviation is applied to the annual rate
of return of an investment to measure the
investment's volatility.
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Investor C

• Investor C
• 30 Large Cap Growth
• 30 Large Cap Value
• 40 Bonds
• 10 Year Return
• 9.93
• 10 Year Standard Deviation
• 10.27

Source MPI Stylus, 12/31/03. Ten year time
frame from December 31, 1993 to December 31,
2003. Portfolio has been rebalanced annually.
SP 500 is a trademark of the McGraw-Hill
Companies, Inc. SP 500/BARRA Value Index
consists of stocks that have lower price-earnings
ratios, higher dividend yields, and lower
historical and predicted earnings growth, in
addition to lower price-book ratios. SP
500/BARRA Growth Index consists of stocks that
also have higher price-earnings ratios, lower
dividend yields, higher predicted earnings
growth, and larger capital market
capitalizations, in addition to higher price-book
ratios. The Lehman Brothers Aggregate Bond Index
is an unmanaged market value-weighted performance
benchmark for investment-grade or better
fixed-rated debt issues, including government,
corporate, asset-backed, and mortgage-backed
securities, with maturities of at least one year.
Standard deviation is applied to the annual rate
of return of an investment to measure the
investment's volatility.
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Investor D

• Investor D
• 20 Large Cap Growth
• 20 Large Cap Value
• 20 Mid Cap Value
• 40 in Bonds
• 10 Year Return
• 10.32
• 10 Year Standard Deviation
• 9.70

Source MPI Stylus, 12/31/03. Ten year time
frame from December 31, 1993 to December 31,
2003. Portfolio has been rebalanced annually.
SP 500 is a trademark of the McGraw-Hill
Companies, Inc. SP 500/BARRA Value Index
consists of stocks that have lower price-earnings
ratios, higher dividend yields, and lower
historical and predicted earnings growth, in
addition to lower price-book ratios. SP
500/BARRA Growth Index consists of stocks that
also have higher price-earnings ratios, lower
dividend yields, higher predicted earnings
growth, and larger capital market
capitalizations, in addition to higher price-book
ratios. The Russell Midcap Value Index is an
unmanaged index that measures the performance of
the 800 smallest companies in the Russell 1000.
Results assume the reinvestment of all capital
gain and dividend distributions. The Lehman
Brothers Aggregate Bond Index is an unmanaged
market value-weighted performance benchmark for
investment-grade or better fixed-rated debt
issues, including government, corporate,
asset-backed, and mortgage-backed securities,
with maturities of at least one year. Standard
deviation is applied to the annual rate of return
of an investment to measure the investment's
volatility.
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