Our technical and macro-economic models indicate better opportunities are available than US Small Cap, although valuations for these asset classes remain reasonable compared to historic valuations.

The change is to sell all positions in US Equity Small Cap (IJR) and US Equity Small Cap Value (IWN) and move the proceeds to Cash (SHV). Any positions can be changed using VWAP trades or trader discretion.

We expect to use the proceeds for a more substantial allocation change in the next few weeks, once third quarter reporting begins.

“This gives us a presence in the rapidly growing asset management business in the South. We look forward to providing Summit Alliance with institutional quality portfolio management through our Dynamic Asset Allocation products.” founder and CIO Stephen Harrington explained.

For more information about Summit Alliance Capital Management visit their website at sa-cm.com.

Catherine Ryan, CFA of Cedar Rock is a Registered Investment Advisor with over 10 years of experience as a professional money manager. She has earned the right to use the Chartered Financial Analyst (CFA) designation and appreciates the emphasis the ICFA places on ethics and professionalism. Integrity is the hallmark of the Cedar Rock enterprise.

For more information on Cedar Rock Investment Advisors, contact: Catherine Ryan (Catherine.Ryan@CedarRockInvestments.com) or visit their website at cedarrockinvestments.com.

Examples of three asset allocation changes in the past two years in growth portfolios:

1. EEM (emerging markets)

   We had an allocation of 8% for EEM (emerging markets) from 2006 going into 2008. By the beginning of May, 2008, our technical and fundamental indicators signaled an allocation change. On May 10, we cut the allocation in half, to 4% and another 25%, to 3%, by July, 2008, increasing our cash allocation by 5%. We remained at this underweight allocation until March 9, 2009, when we increased the EEM allocation to 5% as part of our rotation out of cash and back into the equity and bond markets.

2. SPHIX (junk bonds):
   From inception until March, 2007, we had an allocation of 5% to High Yield (SPHIX). Technical indicators and changes in the interest rate environment signaled an allocation change. In March, 2007; we cut the allocation in half, dropping the High Yield allocation to 2.5%. By July, 2007 we had completely sold out of Junk Bonds, one of the few times we decreased exposure to an asset class to zero. We held the allocation at zero until March of 2009, when we went back into High Yield with a 2.5% allocation.
3. CASH:
   Starting in May of 2008, and going until January, 2009 we sold off investments in emerging markets, international equities, domestic equities and fixed income and increased our cash allocation. Starting at 5%, we raised the allocation to 10% by May, 2008, 15% July, 2008, 20% December, 2008 and 25% January, 2009. We decreased our cash allocation to 8% in March, 2009.

All allocation changes will be reflected to registered users of the site with a lag, only clients will have access to the most up to date asset allocations. Contact us today to sign up for these important changes and to get the latest advice on a timely basis.

The hedged portfolio employs similar tilts as the Growth Portfolio with some innovations.

• Core allocations are not used, so the neutral allocation would be 0% equities and 0% fixed income instead of the 60% equities, 40% fixed income neutral allocation in the Growth Portfolio.
• Market and Interest Rate risk are hedged using leveraged inverse ETFs.
• The portfolio generally maintains little or no cash balance.

The Hedged Portfolio is not suitable for all investors and you should consult with your broker or financial planner before investing.

We have been collecting these allocations over the past decade and over the next few months we will highlight some of these and make them available to our clients in our modeling tools.

Today, let’s talk about the Massachusetts State Pension Plan, also known as the Pension Reserves Investment Trust (PRIT). PRIT has been fairly proactive in providing information about their investment decisions and are mostly transparent in their allocation weights.

The source material for the current PRIT allocation can be found at the Mass State Pension website.

This $40B+ fund describes their core, long-term allocation, set in April, 2006 as:

• 27% Domestic Equity
• 20% International Equity
•   5% Emerging Markets
• 13% Core Fixed Income, TIPS & Commodities
•   6% Value-Added Fixed Income
•   9% Private Equity
• 11% Real Estate
•   4% Timber / Natural Resources
•   5% Hedge Funds

As the source document shows, these allocations change over time, due to investment gains and losses, suitable investments and shifts applied as managers are hired and terminated.

We can assign market proxies to the asset classes designated by the PRIT board to most of the asset classes defined. For example:

• 27% IWV – Domestic Equity
• 20% EFA – International Equity
•   5% EEM – Emerging Markets
• 13% AGG/TIP/GSG – Core Fixed Income, TIPS & Commodities
•   6% WIP/SPHIX – Value-Added Fixed Income
•   9% BX – Private Equity
• 11% ICF – Real Estate
•   4% WOOD – Timber / Natural Resources
•   5% Hedge Funds

A rough pass does miss the Hedge Fund investments. As well, the Core Fixed Income, TIPS & Commodities at 13% is not well defined; how much in TIPs? How much in Core Fixed Income?

One note about public pensions is the mix of Fixed Income and Commodities in the same asset class. All of our research indicates that these two assets, Fixed Income and Commodities, are poorly correlated. This classification is not unique to the PRIT and perhaps someone can comment on the reasoning behind it for public pensions.

Digging down deeper, we can identify the managers used by PRIT and use a greater level of detail in the asset classes. As well, we can use the actual, December 31, 2009 allocated weights in place of the target weights coming up with something like this:

• 26.0% Domestic Equity IWV
• 21.4% International Equity EFA
•  5.8% Emerging Markets EEM
• 12.2% Fixed Income, TIPS & Commodities
• 16% AGG
• 51% PTTRX
• 20% TIP
• 13% GSG
•  6.5% Value-Added Fixed Income
• 43% High Yield SPHIX
• 41% Emerging Market Debt GMCDX
• 15% Distressed
•  9.5% Alternative Investments BX
•  9.5% Real Estate
• 29% RRRAX
• 22% SLDAX
• 13% JPRCX
• 36% ICF
• 4.1% Timber WOOD
• 5.0% Hedge Funds
• 40% Equity L/S BRMIX
• 30% Relative Value CVSIX
• 20% Event Driven MERFX
• 10% Global Macro

We still have some missing public assets, so we will assume market exposure. As well, there are more than 50 Private equity investments listed in the source document, but we use just one, Blackstone (BX) as our proxy.

We then use the historic allocations for the PRIT to get a more accurate historic portfolio, instead of merely using the current allocations. This was accomplished the easy way, by using the wayback machine to query the historic web pages from PRIT.

All of the historic allocations have been loaded into our allocation tool. We do have some holes in our allocations and will fill these in as time and source documents become available.

Matching returns and historic allocation weights together allows us to perform a historic simulation of the PRIT. We compare the reported returns, listed below with our simulation and note the very good agreement.

This little exercise, which took about an hour to gather the source documents, load the historic allocations and use our tools to create a realistic backtest shows that we can have similar performance using just market instruments.

Using our simulation tool, this type of question is easy to answer.

US Small Cap Value has outperformed Gold (and most other assets) from January 19, 2010 through March 31, 2010 by almost 10%; see IWN Vs GLD, and almost 15% through today (April 23).

Small Cap Value leads the way out of recession because the market rewards companies that grow their earnings and smaller companies are more likely, on a percentage basis, to grow their earnings. In addition, monetary policy is generally accommodative (low rates) during a recession and until employment picks up again. US Small Cap Value companies are dominated by financials, which get an earnings boost from low rates, and by REITS, with attractive dividend yields to investors seeking cash flow.

During the previous recession ending in 2003, US Small Cap Value outperformed the S&P 500 by almost 40% over a two year period. This is an example of a tilt that adds value to our Dynamic Asset Allocation portfolios.