Managing Risk: Our Approach to Asset Allocation

At Congress Wealth Management, LLC we believe the greatest threat to achieving your wealth and legacy goals is extreme losses within your portfolio over a short period of time. In the years following the global financial crisis of 2008, two lessons were re-confirmed:

  • Drawdowns can derail even the best financial plans
  • Traditional measures used to protect against drawdowns (think diversification) can fail at the worst possible time

As a defense against drawdowns we employ an institutional-quality asset allocation framework that focuses on risk allocation. We prefer to view an investor’s total portfolio not as a collection of stocks and bonds, but by categorizing asset exposures as either A. Return-Generating or B. Risk-Managing.


We believe the distinction between “return-generating” and “risk-managing” exposures better aligns portfolios and expectations than the distinction between “equity” and “fixed income.” Using this approach, investors can:

  1. Separate and manage various sources of portfolio risk to improve portfolio structure and efficiency; 
  2. Add return generating opportunities and / or volatility-reducing asset classes to a portfolio;
  3. increase the likelihood of meeting their specific financial goals.

Core strategies provide efficient exposure to asset classes that are broadly representative of the market (much of this market representation comes in the form of equity and interest rate risk). While implementation strategies vary, we believe that a combination of active, structured or passive strategies provide a solid core for most investors. Satellite strategies generally deliver higher levels of active alpha (returns derived from skilled active management) or exotic beta (exposure to risk factors with low correlation to global markets) and can enhance expected returns. Examples include REITS, Commodities, High Yield Bonds and Emerging Markets.

► Our 4-Step Portfolio Construction Process:

 1 ► 5-Year forward looking capital market assumptions
 2  Our Core/Satellite Framework
  Comprehensive evaluation of risk (systematic and idiosyncratic) and return (capital appreciation and income) 
 4  Seek diversification both within and across credit risk, FX/currency risk, interest rate risk, inflation risk and equity beta risk

► A Deeper Dive on Our Approach:

  • Our asset allocation approach is less sensitive to expected return assumptions because it places greater emphasis on risk forecasts
  • The risk allocation is simply the allocation of portfolio risk to each exposure; an optimal risk allocation takes risks where investors are most confident in risk-adjusted excess returns
  • We consider a broad range of asset classes
  • We separate the portfolio into return generating assets and risk mitigating assets, and allocate to these pools based on investor-specific constraints and objectives
  • The risk mitigating portfolio is customized based on the investment objectives of the institution
  • We seek asset classes that have an imperfect correlation to the core holdings (i.e., public developed large cap equity) (lower correlation is better) and that have an independent source of returns
  • We believe our capabilities in modeling alternative asset classes is a competitive advantage
  • We have conducted extensive research on how to model and size alternative investments in client portfolios

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