Asset allocation is the key to portfolio management. Studies have determined that 95% of the investment return is explained by asset allocation decisions. Asset allocation helps stabilize returns because all asset classes will have good or bad years. Diversification makes a portfolio less risky; assets having good years can mitigate the losses of assets having bad years.
Annually, the Trustees of the Alaska Retirement Management Board analyze a wide array of asset classes, examining expected returns and risk parameters. This review is necessary to ensure that the optimal combinations of investments are balanced with the Funds' long term objective of meeting future liabilities. The Board endeavors to achieve its expected long-term total return, as determined by the actuarially-required rate of return, while minimizing risk as determined by the projected standard deviation of the range of potential future returns.
Asset allocation policy identifies target allocations to the classes of assets invested in and the ranges within which each can fluctuate as a percent of the total portfolio for each plan. At times the asset allocation for a plan may drift beyond the proscribed bands of the target allocation. At such times, staff considers the costs and benefits of rebalancing the asset allocation to comply with the plan’s asset allocation policy.