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Investment Outlook

Q&A: The asset allocation process of a long-term investor

Nicholas Liolis
Chief Investment Officer, TIAA General Account
Views from TIAA GA  September 2022

Views from the TIAA General Account

Q: Tell us about asset allocation planning at the TIAA General Account.

A: We have a three-tiered asset allocation process at TIAA. Our strategic asset allocation (SAA) is long-term, our dynamic asset allocation (DAA) is medium-term and our tactical asset allocation (TAA) is short-term.

This is the time of year we kick off our annual DAA process. This produces the ranges and target asset allocations for the cash flow we expect to have available for investing next year.

We start with market assumptions and forecasts provided by our portfolio managers (including those at Nuveen) to determine what returns might look like over the medium-term, while also taking into account potential market capacity limits for the different asset classes. Our team and other internal stakeholders discuss these assumptions as a group and check them against the views of other global asset managers.

Our models run multiple scenarios factoring in different risks that lead to optimal allocation ranges for each asset class along with a target within that range. Having ranges for each asset class allows us to use our more frequent tactical asset allocation process to take advantage of shifting opportunities in the markets during the year. The final step in our DAA process is to have our plans reviewed and approved by our Asset Liability Committee and the Investment Committee of our Board of Directors.

Q: How do DAA and TAA fit within SAA?

A: I think of our long-term SAA as the current set of possible portfolios that will likely get us to our destination safely. The DAA is the best course to take to that destination over the next year or so. And our TAA allows us to make finer course corrections in the short-term to deal with unexpected obstacles, challenges and opportunities.

For example, say our SAA tells us that our optimal long-term portfolios should have an allocation to a particular asset class that is between five and fifteen percent of our portfolio and our current portfolio allocation to that asset class is ten percent. Based on our expectations for the year ahead and the relative value we see at year end, our DAA could tell us that we should increase that allocation from ten to twelve percent.

But we all know that markets and therefore relative value opportunities are constantly changing. Because we are re-evaluating this landscape as we move through the year, it’s our TAA process that helps us determine exactly how much of that trade to do and when. It might even make sense to reduce our current exposure to that asset class depending on what’s happening in the markets. Most of the time, the shifts aren’t drastic, but this illustrates how the process gives us room to maneuver and take advantage of changes in relative value.

Q: Is the process for SAA different from DAA and TAA?

A: Yes, our SAA models are intended to be run every few years or when there are any significant changes in our liabilities or objectives. It’s different from our annual allocation exercise as it’s a complete modeling of our assets and liabilities and the interactions between them for the next 20 to 30 years. The DAA has a shorter time frame and is more asset focused.

But all of our asset allocation plans are anchored by the General Account’s primary objective and our risk appetite. Our objective is to guarantee income for individual retirement portfolios across multiple potential economic scenarios. This means we’re a long-term investor, investing through market cycles with a high-quality asset portfolio and an established risk appetite. Our asset allocation processes reflect this.

Q: In private markets, pricing generally lags. How does this affect your asset allocation approach?

A: In many ways, it doesn’t. Determining relative value for private assets is more of a longer-term game. And of course our investment horizon and objectives are all long-term as well. We maintain discipline and stick to our strategy knowing that values are eventually going to change. We don’t believe in trying to time the markets. We have a lot of money to put to work and we like to stay fully invested. Dollar-cost averaging into the private asset classes that fit our long-term strategy is the best way to meet our objectives.

Q: What advice can you give others making asset allocation decisions?

A: I’d give the same advice to any investor, whether a CIO at an insurance company or an individual: Take the time to truly understand your objectives and your particular strengths as an investor. Play to those strengths and stick with your plan through all the market volatility. Don’t try to time the market. Stay fully invested. Develop a quantifiable risk appetite and stick to it. Don’t take on risks you can’t afford.

All allocation plans are anchored by the General Account’s objective and risk appetite.

As part of his participation in Nuveen’s Global Investment Committee, Nick Liolis offers his perspective as an institutional investor and asset allocator. Neither Nick nor any other member of the TIAA General Account team are involved in portfolio management decisions for any third-party Nuveen strategies.

Any guarantees under annuities issued by TIAA are subject to TIAA’s claims-paying ability.

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