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Retirement Fund Current Model Portfolios

* The current active model portfolio for Overall Portfolio Holdings
remains the "FULL RISK" model portfolio.
Model Portfolio Overview

Below is the current asset allocation models for retirement fund accounts.  There are 2 distinct model portfolios defined as follows:

1. Systematic Ongoing Contributions (weekly/monthly/quarterly ongoing investment contributions)

Ongoing recurrent contribution models are typically not changed unless a severe bear market associated with a recession is indicated or a selected fund has substantially underperformed its peer group (at which point it is replaced with another equivalent fund).

Two tables are provided:
  • One table for "Generic" ongoing contributions for those investing in portfolios outside the Emirates Group Provident Scheme (EGPS).
  • One table for those using the EGPS.


2. Overall Portfolio holdings

Overall portfolio holdings are altered according to indications from our 5-Factor model.  There are 3 portfolios aligned in accordance with market conditions:
  • Full Risk Model Portfolio
  • Risk Reduction Level I Model Portfolio
  • Risk Reduction Level II Model Portfolio

Two tables are provided:
  • One table for "Generic" ongoing contributions for those investing in portfolios outside the Emirates Group Provident Scheme (EGPS).
  • One table for those using the EGPS.
1. Systematic Ongoing Contributions
 
Ongoing model contributions to retirement accounts (weekly/monthly/quarterly) are typically not adjusted as market conditions change.  This allows investors to take advantage of "dollar cost averaging" by way of purchasing increased units-per-price in a given fund over the decline phase of a complete market cycle.

We conduct a complete review each of the funds within the Emirates Group Provident Scheme (EGPS) quarterly to ensure "best-of-breed" funds are maintained within our model portfolios.  The below EGPS allocation model is changed if a given fund has underperformed over a 2-3 year period relative to its peer group.  If so, an alternative fund is provided (if available within EGPS).

Emirates Group Provident Scheme (EGPS)
Risk Group Adjusted Model
Systematic Ongoing Contributions


2. Overall Portfolio Holdings


The overall portfolio holdings model is adjusted for changing market conditions using our 5-factor model.  The model reduces portfolio risk in 3 phases as conditions begin to deteriorate to protect investment capital from severe bear market declines.

  • Full Risk model:
When the 5-factor model remains bullish the "Full Risk" model is utilized.  When within full-risk market conditions, the Overall Portfolio Holdings model will match the Systematic Ongoing Contributions model as discussed above.

Emirates Group Provident Scheme (EGPS)
Risk Group Adjusted Model
Full Risk
Risk Reduction Methodology
As our 5-factor model reverts negative our model begins a phased reduction in equities as follows:

  • Risk Reduction Level I model:  a 50% reduction in equity holdings from full allocation (in accordance with each specific risk group allocation)  is completed with the assets moved to cash.  This reduces respective risk group equity holdings to 50% of fully invested.  Russell fund model holdings are not adjusted as Russell has their own internal risk management process (see description below from their prospectus).

  • Russell Risk Reduction Process:  The Russell family of funds incorporate their own risk management process at the fund-family level utilizing Value-at-Risk (VaR).  Details of the specific methods their utilize are included in the below document from their prospectus.
  • As an overview, Value-at-Risk is a statistical measure of the "riskiness" of a portfolio.  It is defined as the maximum dollar amount expected to be lost over a given time horizon, at a predefined confidence level. For example, if the 95% one-month VAR is $1 million, there is 95% confidence that over the next month the portfolio will not lose more than $1 million.

There are several way to determine VaR:
  • it can be calculated under the parametric method (also known as variance-covariance method) as a function of mean and variance of the returns series, assuming normal distribution.
  • with the historical method, VAR is determined by taking the returns belonging to the lowest quintile of the series (identified by the confidence level) and observing the highest of those returns.
  • the Monte Carlo method simulates large numbers of scenarios for the portfolio and determines VAR by observing the distribution of the resulting paths.

VaR suffers from a number of drawbacks. Firstly, while quantifying the potential loss within that level, it gives no indication of the size of the loss associated with the tail of the probability distribution out of the confidence level. Secondly, it is not additive, so VaR figures of components of a portfolio do not add to the VaR of the overall portfolio, because this measure does not take correlations into account and a simple addition could lead to double counting. Lastly, different calculation methods give different results.

As such, portfolio models are not altered for Russell funds when conditions warrant a Risk Reduction Level I portfolio but are applied when Risk Reduction Level II conditions are present.

Russell Funds VaR Risk Management Process (from Prospectus)
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  • Risk Reduction Level II model:  a further reduction in equity holdings (in accordance with each specific risk group allocation) is completed with the assets moved to cash.  This reduces respective risk group equity holdings to 25% of fully invested values (75% of equity target in cash).
  • Russell Risk Reduction Process:  Russell fund model holdings are reduced by 50% as their VaR risk management process does not adequately protect from severe bear market conditions associated with recessionary conditions.