The Science—Price Matters™.

We believe that every portfolio’s asset allocation strategy should be based on an investor’s return objectives and risk tolerance. Building strategic asset allocation models requires looking beyond short-term fluctuations inherent in financial markets and developing long-term, multi-cycle forecasts for the major asset classes, in our view. RiverFront’s analysis of historical returns reveals a strong relationship between the price paid for an asset and its returns over the next five to ten years. Periods that begin with an asset class priced well above its long-term trend have historically produced below-average returns, while periods that begin below trend have tended to produce above-average returns. In fact, depending upon the asset class, we have found that 60% to 90% of the variation in long-term returns can be explained by the price level of the asset class at the beginning of the investment period. Simply put, Price Matters^TM.

RiverFront has developed sophisticated mathematical models using long-term price and total return data to produce forward looking estimates of return. For equities and commodities these models are driven by the price of the asset class relative to its long-term trend (Price Matters^TM), while our fixed income models are driven by beginning yield (Yield Matters). These models also process estimates of investment risk, including volatility, correlation, and best case/worst case potential returns. These capital market assumptions (CMAs) combine with our assessment of the macroeconomic environment to provide the inputs to our asset allocation process. Thus our strategic allocation models are dynamic and change as our perception of long-term value in the market changes.

Riverfront’s estimates of return and potential risk are loaded into our proprietary optimization process in order to calculate our asset allocation strategy. Unlike typical optimization techniques, RiverFront’s optimization tools define risk the way we believe our clients do – risk means losing money. The probability of losing money is determined by the worst case potential returns calculated in our Price Matters^TM framework. We measure the probability of losing money for every asset class at various time horizons (3, 5, 7 and 10 years). This definition of risk allows us to combine short term volatility, time horizon, and price into a powerful risk framework that is easy for clients to understand.

To set our asset allocation strategy, the optimization process seeks the combination of asset classes with the highest potential return subject to a low probability of loss across an investor’s specific time horizon (3, 5, 7 or 10 years). The longer the time horizon the greater the probability that below average prices will result in above average returns. Thus asset allocations tailored for 7 or 10 year time horizons will have higher weightings to asset classes with higher short term risks and higher long term expected returns. Since downside risks increase as prices rise and decrease as prices fall, the Riverfront optimization process creates an automatic “buy low/sell high” discipline within our investment strategies.