J.P. Morgan

E X E C U T I V E S U M M A R Y G i v e n t h e t w i s t s i n the 2013 and 2014 global equity markets—and the notable outperformance of the U.S. markets—investment committees may be well advised to re-examine their portfolio-wide equity allocation and execution options, taking into full account the uniqueness of the current environment and optimal ways to extract investment value across geographic regions. When recasting allocations, we believe it is important for endowments and foundations to think through the impact and trade-offs between equilibrium global weights as provided by established index providers, forward-return expectations, alpha potential, volatility of returns, illiquidity of assets and home-country bias. In addition to organizations establishing their tolerances for illiquidity and risk, we suggest their decision making should also be informed by dispersion of return and factor risk. There is, unfortunately, no multidimensional optimization that provides a definitive framework for establishing an appropriate strategic allocation incorporating quantitative and qualitative factors (including geography, execution strategy characteristics and home-country biases). However, we believe it is important to examine all the options and key questions raised by these issues when developing a plan to meet an organization's long-term objectives. At J.P. Morgan, we take a disciplined yet opportunistic approach in constructing portfolios. In this paper, we share the general outline of our thinking when establishing a strategic allocation and implementation plan that is both rooted in well-considered, forward-looking assumptions and execution options, and premised on a thorough understanding of an organization's risk parameters. 1 1 Long-Term Capital Market Return Assumptions (2014), J.P. Morgan.

• Cover