Issue link: https://resources.envestnet.com/i/1527492
FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY Envestnet | PMC Investment Methodology Guide | 7 Capital Markets Assumptions and Asset Class Portfolios CMAs are the foundation of the ACPs on the Envestnet platform. Developed by PMC's Quantitative Research Group (QRG), these data sets help advisors determine risk profiles and suitable portfolios based on client needs and preferences. Capital Markets Assumptions CMAs are the expected returns, standard deviations, and correlations representing the long-term risk/return forecasts for the asset classes on the Envestnet platform. We use these values to score portfolio risks, assist advisors to build portfolios, construct our asset allocation models, and create Monte Carlo simulation inputs for portfolio wealth forecasts. PMC's approach to estimating CMAs and constructing asset allocation models is based on the following general assumptions: • Global capital markets are largely efficient in the long run, where the market efficiency is measured by the Capital Asset Pricing Model (CAPM). • Identifiable shorter-term inefficiencies may exist in the capital markets. • Risk premia are time-varying. Asset Allocation The expected returns, standard deviations, and correlations derived from the CMAs process are used to create portfolios at various risk levels, grounded in a mean/variance optimization (MVO) approach that employs a resampled (also called bootstrap) version. A simple MVO approach produces portfolios that are sensitive to even slight changes in the expected return assumptions, exacerbated by estimation error in those returns (as well as in standard deviations and correlations). Combining optimization with bootstrap statistical methods counters the inherent instability of the simple MVO approach. The portfolios that result are designed to be optimal under a broad variety of conditions and are far more stable over time than simple MVO-generated portfolios. We also apply constraints based on the relative capitalization of various asset classes to ensure that the portfolios do not stray too far from the market portfolio. Additionally, we include a variety of diversifying asset classes, such as commodities, REITs, emerging markets equities, and high yield fixed income. To accommodate the various combinations of diversifying asset classes, we first create a portfolio with all the asset classes at a 50/50 equity/ 1 PMC Supports CMAs for the following asset classes. Equity Fixed Income Alternatives • All Cap • Global Equity • Large-Cap Core • Large-Cap Growth • Large-Cap Value • Mid-Cap Core • Mid-Cap Growth • Mid-Cap Value • Small-Cap Core • Small-Cap Growth • Small-Cap Value • International Developed Markets • International Emerging Markets • Foreign Large Cap Core • Foreign Large Cap Growth • Foreign Large Cap Value • Foreign Small Mid Cap Core • Foreign Small Mid Cap Growth • Foreign Small Mid Cap Value • REITs • Commodities • Intermediate Bond • Intermediate Muni • Long Bond • Long Muni • Short Bond • Short Muni • High Yield • International Bond • TIPS • Balanced • Bank Loan • Emerging Markets Bond • Cash • Alternative • Equity Market Neutral • Event Driven • Hedged Equity • Bear Market • Multi-Strategy • Alternative Fixed Income • Managed Futures • Inverse • Leveraged • Long/Short Credit • Global Macro • Private Equity • Private Real Estate • Private Credit • Structured-Minimal Market Sensitivity • Structured-Low Market Sensitivity • Structured-Medium Market Sensitivity • Structured-High Market Sensitivity