Report Detail Summary

The LJE Asset Allocation Process: Third Quarter Performance and Fourth Quarter 2018 Outlook

September 30, 2018

The LJE Allocation is a two-step process. First, our quantitative model estimates the probability that one asset class will outperform another. Second, we tilt the benchmark allocation for the asset classes in direct proportion to the probability estimates. Our model prescribes a decrease in the portfolio’s fixed income exposure relative to the benchmark. Within fixed income, our model calls for a slight increase in duration. It decreases the T-Bill allocation to 3.23%, as well as a decrease in the T-Bond allocation to 30.24%. Overall, the allocation to fixed income declines to 33.47% versus a 40% benchmark allocation. The equity allocation between domestic and international stocks is driven by the likelihood of foreign stocks outperforming domestic stocks. Collectively, we estimate the likelihood of international stocks outperforming the U.S. to be 47%. Thus, an increased exposure to domestic equities at the expense of international stocks is warranted this quarter. Overall, the net allocation to foreign equities increased to 31.6%, slightly above its 30% benchmark allocation. The combination of the fixed income/equity choices and the U.S./international choices produce an increased exposure to U.S. equities. Domestically, small-cap stocks are expected to outperform mid-cap and large-cap stocks. In turn, the large-caps are expected to outperform the mid-cap stocks. Overall, the equity allocation to domestic and international equities increases to 66.5% from a benchmark allocation of 60%.

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