Dynamic Asset Allocation (DAA)

Dynamic Asset Allocation (DAA)


Dynamic Asset Allocation (DAA)

Mercer’s DAA service bridges the gap between long-term strategic asset allocation and the shorter-term horizons used by active investment managers. Based on a consistent, rigorous process, DAA capitalises on the potential of the medium-term, without compromising the overall investment objectives of a portfolio.

While tactical asset allocation aims to predict the movements of investment markets over very short-term periods, DAA, by contrast, adjusts or “tilts” strategic asset allocations in the medium term, to improve a portfolio’s overall risk/return characteristics. This timeframe recognises that market dislocations and mispricings can persist for several years, a time horizon that many active fund managers struggle to exploit.

A Robust Framework

Mercer’s DAA team adopts a holistic approach to assessing asset class performance, believing that no single valuation variable or model will produce optimal results. For equities, for example, Mercer considers a range of relevant factors:

  • Valuation factors, including earnings based, yield based and balance sheet measures.
  • Macro factors, including the evolution of the business cycle and earnings expectations.
  • Liquidity and Sentiment factors, including risk appetite measures. 

Rather than relying on a model-based approach, the DAA framework establishes asset class performance indicators. These are absolute valuation views, relative to Mercer’s long-term return expectations, and range from Extremely Undervalued to Extremely Overvalued. Mercer also provides relative valuation views for satellite asset classes such as Small Caps and Emerging Markets, relative to core asset classes.

Why Mercer Dynamic Asset Allocation?

An established track record: Mercer has developed a rigorous and consistent dynamic asset allocation process, with proven results for clients in Australia and New Zealand.

Valuation heavy, not valuation driven: Mercer’s DAA inputs are not driven by models, but drawn from a wide range of macroeconomic drivers and valuation variables, creating robust valuation indicators.

Experienced team: Mercer’s DAA team in Australia and New Zealand comprises experienced investment specialists with backgrounds in economic policy and the funds management and stockbroking industries.

Key Features

• Focused on medium-term economic and financial market outlooks.

• Rigorous, consistent economic analysis.

• Individually tailored asset class performance recommendations.

• Emphasis on risk management.

• Comprehensive range of underlying inputs used for valuations.

• Implementation advice tailored to the needs of every client.

• Risk management tools to measure the impact of DAA tilts.

• Access to detailed yet concise Quarterly Market Review reports.

• Presentation of DAA advice to the Board, Investment Committee or management team, as required.

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