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Dynamic Target Allocation Table (December, 2010)

Article Summary:

AXIS offers a new functionality, introduced in version 12.7.03.001, that allows the user to vary the target allocation in a Reinvestment Strategy dynamically based on market conditions in the scenario.


AXIS now offers a new functionality, introduced in version 12.7.03.001, that allows the user to vary the target allocation in a Reinvestment Strategy dynamically based on market conditions in the scenario. Previously target allocations had to be pre-determined at the start of the projection.

A new table section has been added to the Target Allocation section in Reinvestment Strategy assumption screen that allows target allocation to be adjusted based on scenario. The new table section “Dynamic target allocation [Composite]” is a composite table with the following structure:

  • It has two child tables:
    • The first child table can be any of the existing target allocation table sections.
    • The second child table is an allocation adjustment formula table.

How It Works

First, a target allocation is defined in the first child table. This allocation will be the original allocation used if no adjustments are made.

Next, an allocation adjustment formula table is defined in the second child table. The purpose of this table is to adjust the original target allocation based on any information available in the scenario which can be accessed through standard input functions. The adjusted target allocation can be set by using output function SetTargetByCategory on a period-by-period basis for any specified Reinvestment Category. Additionally, the input function GetTargetByCategory provides reference to the original target allocation used.

Target allocations are always normalized before the strategy is executed. For example, if the target allocation in the first child table is set to 1, 1 and 2 among three Reinvestment Categories, then the allocation used will be a 25%, 25% and 50% split among the corresponding three Reinvestment Categories. If the target for the first Reinvestment Category is adjusted to 2, then the new allocation will be a 40%, 20% and 40% split among the corresponding three Reinvestment Categories.

Note that only the target allocations for Reinvestment Categories already defined in the first child table can be adjusted or referenced.

Case Example

Consider the following reinvestment strategy:

  • In a low interest rate environment, assets are allocated 75% in equities and 25% in bonds
  • In a high interest rate environment, assets are allocated 80% in bonds and 20% in equities
  • In a medium interest rate environment, assets are allocated 50% in bonds and 50% in equities
  • A low interest rate environment is defined as the period where the 3-month rolling average of the 5 year rate is less than 2%
  • A high interest rate environment is defined as the period where the 3-month rolling average of the 5 year rate is greater than 6%
  • A medium interest rate environment is defined as the period where the 3-month rolling average of the 5 year rate is between 4% and 6%

To Implement This Strategy:

For the first child table, a monthly target allocation table is chosen with two selected Reinvestment Categories “Equities” and “Bonds” that is linked to reinvestment assets of said type. The allocation is set to be a constant 50-50 split between the two categories.

For the second child table, the code snippet shown below is used:

Dim InterestRateAverage As Single

InterestRateAverage = YieldCurveAverage (5, -2, 0)

‘Note that the above YieldCurveAverage function will average the rates from 2 months prior
‘to the current month

If (InterestRateAverage > 0.06) Then

    Call SetTargetByCategory (20, “Equities”)

    Call SetTargetByCategory (80, “Bonds”)

ElseIf (InterestRateAverage < 0.04)

    Call SetTargetByCategory (75, “Equities”)

    Call SetTargetByCategory (25, “Bonds”)

End If

 

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