Interview: Getting A Better Handle On Smart Asset Allocaton - Zephyr Associates

Tom Burroughes

26 April 2012

It is an oft-stated comment that asset allocation accounts for more than 90 per cent of the variation in returns but as ever, predicting how a portfolio will perform in different market conditions is hard. And yet, with recent market turmoil in people’s mind, there is demand for such information.

Among the legions of investment analysis firms out there attempting to plug such knowledge gaps is a US-based company, Zephyr Associates. It has spread its wings outside its home turf to market its risk-based portfolio analysis software to a new audience. Recently, this publication caught up with Andrew Bernstein, who runs Zephyr’s London-based sales management team. He founded the UK operation – based in London’s Canary Wharf district – around two years ago. Another senior member of the team is Marc Odo, director of applied research. He also spoke to this publication.

"We are known for pushing the envelope in providing analytical material and thought leadership. We have been the first to do such risk-based style analysis ,” Odo said. "Asset allocation is a very powerful tool but if you are not thoughtful about the inputs, then you get the problem of `garbage in, garbage out'."

In the aftermath of the 2008 crunch, and for that matter, other market debacles such as the end of the dotcom boom, wealth managers and other firms will likely be receptive to new ways of getting a handle on how their clients’ portfolios will perform in different situations. Such knowledge is also increasingly in demand as regulators force advisors to ensure clients are invested in suitable ways.

Forecasting returns

Ten years ago, the firm implemented the Black-Litterman model which is designed to forecast future returns. "If we're looking at the future, then you want to know what sort of data inputs to put in . You don't just rely on historical data," Odo said.

Odo said this model, and its use in shaping asset allocation for clients, is now part of the curriculum for people undertaking CFA courses, for example.

"We've an open system; since we get data from all kinds of organisations, we can analyse data from pretty much anywhere. We have sub-licensing deals with other providers so we are not beholden to any one particular source," Odo said.

The firm provides risk-based portfolio analysis software; it looks as the returns from different styles of investment. This technology is integral in deciding on, say, efficient asset allocation.

Zephyr was founded in 1994 and is headquartered in Lake Tahoe, Nevada, with a large office in New York; it now has around 1,000, of which around 65 are outside the US. Clients range from large institutional pension funds to wealth managers, investment firms and registered investment advisors. The firm draws on data under licence from the likes of Morningstar, Lipper and other other organisations. Zephyr has around 55 staff.

Wealth managers

"We are talking more with family offices and wealth managers; they want to be more transparent and professional about how they present advice to their clients,” said Bernstein.

"Step one for us was to get off the ground in support of existing clients. Now we have got a team here and we are looking to increase awareness of our brand,” he said. "We are speaking to wealth managers who will want to be able to distribute to adviser a factsheet showing they are doing a right thing in terms of client risk".

Zephyr already has an impressive client list, ranging from Bank of America, Citigroup Private Bank, Morgan Stanley Smith Barney, to Royal Bank of Canada and E* Trade. Now that Zephyr has established a presence in Europe and beyond, that list should get longer.