Beyond Stocks and Bonds

DWS Alternative Asset Allocation Plus Fund

US > >


Sep 30, 2009
  • 52 Week HL
    64.77 - $49.17
  • Net Assets
    $18.4 M
  • Expense Ratio
    2.02%
  • Inception Date
    Nov 06, 1995

Q:  What are the core beliefs that constitute your investment philosophy? A : Our investment philosophy is about diversification across a broad spectrum of assets. Traditionally, U.S. individual investors have overexposure to U.S. stocks and little or no exposure to other asset classes. Assets gain in values in cycles, and we believe that it is possible to allocate funds to numerous asset categories to generate higher returns with lower volatility. We strongly believe that asset allocation plays a major role in generating long term returns, and we also think that through the process of diversification we can generate higher returns than stock and bond only portfolios over time. Q:  How does your investment philosophy translate into an investment strategy? A : Our fund is an open-ended mutual fund which seeks capital appreciation by allocating its assets among underlying DWS funds and ETFs that emphasize alternative or nontraditional asset categories or investment strategies with a low correlation with the broad U.S. stock and bond market. We identify the categories that have been underrepresented or not represented at all in typical retail portfolios, and in this way we provide retail investors with comprehensive and diversified asset allocation. The fund seeks to achieve its goals by investing in non-traditional or alternative asset categories such as emerging markets, Real Estate Investment Trusts, infrastructure, Treasury Inflation Protected Securities, international bonds, commodities, and absolute return strategies. Q:  Could you briefly explain your asset allocation strategy? A : Asset allocation is the most important choice an investor has to make. It is based on the idea that in different years a different asset is the best-performing one. It goes far beyond the argument of stocks versus bonds, but emphasizes the importance of allocation to each asset category instead, as 90% of the ultimate outcome is determined by asset allocation choices. For instance, even if an investor keeps 100% of their money in cash, that is still an asset allocation choice. For example, this year emerging markets have returned more than 50% and developed markets have returned slightly over 15%, so far. That presents us with a large difference of 35 percentage points. Over the last ten years emerging markets returned 11% on average per year, while developed markets have been flat. The difference in both these markets is high despite the high correlation in the magnitude of 70% to 80%, because volatility is high too. The benefits of diversification depend not only on correlations but also volatility, and generally the higher the volatility, the greater the benefits. That underscores the importance of having exposure to different asset classes to provide different sources of returns. Q:  How do you define “structural alpha” and its benefits? A : Diversified portfolios provide exposure to multiple risk factors and therefore, sources of potential returns in excess of traditional portfolios returns. That is what we call “structural alpha.” More diversified portfolios would potentially provide higher structural alpha in the long run. This fund, as an additional fund in typical individual investor holdings, would provide that extra diversification along with potentially extra return owing to that structural alpha. Q:  What are the other categories in your fund? A : Our fund has basically three different categories, further broken down in different allocations. We define the alternative allocations in terms of three segments - absolute return, real return and nontraditional. The first is absolute return, which seeks to generate positive returns independent of market direction, and within that we have a market neutral strategy and a global macro strategy. As part of our global macro strategy, we have currencies, global equities, and global bonds to capture short term market dislocations. We also use a US Market Neutral equity strategyl. The second one is the real return category, which holds investments designed to outpace the rate of inflation over time, such as commodities and TIPS. Thirdly, the non-traditional allocation holds investments that provide diversification, but that may not yet be held in traditional portfolios such as emerging markets, equities and fixed income, global infrastructure, global REITS, floating rate or bank loans and also international bonds. The global real estate and global infrastructure funds provide both exposure to those specific asset classes and currencies of all the countries where these investments are represented. Q:  How do you research strategies and funds? A : Because we are a fund-of-funds, our assets are invested in a combination of other DWS mutual funds, Exchange-traded funds, as well as other securities. Our research process is based upon returns, risk, and correlation. The first step in our process would be to forecast returns of various asset classes and derive longterm equilibrium returns which take into account market capitalization weights. Market capitalization weights reflect where the market consensus is and what investors expect from each asset class in terms of returns going forward. We take everything investable in the world and we back out the expected returns via a reverse optimization. In the reverse optimization we have weights which we believe are optimal, the covariance matrix, and we back out the implied returns that are embedded in the market weights. Next, we take views from various Deutsche Asset Management’s investment teams located all over the world, who contribute to the global asset allocation platform. Consequently, we combine these views with the long-term equilibrium returns to arrive at medium-term forecasts. For example, one of the signals that is used is the mean reversion. If a specific asset class becomes overvalued, our investment teams would identify that and express their views, which we will capture in our return forecast. We then incorporate these return views with risk and correlation to create an optimal allocation to the underlying DWS funds and ETF’s. Q:  What does the term “return forecast” imply, in your opinion? A : The term “return forecast” implies that we don’t rely on the present market conditions, but we create our portfolios with a forward-looking framework, as we try to forecast market returns in the future while taking into account various medium term signals such as mean reversion or overvaluation in certain markets. For instance, the forecast for the difference in returns between emerging markets and developed markets is 10% per annum, and that estimate of the difference in returns is driven by two variables – correlation and volatility. This applies not only to emerging markets but also to every other category represented in the fund. So, whatever category we take, the difference in returns in any given period is very large. That underscores the importance of asset allocation choices. It also provides the opportunity set to emphasize the right asset class at the right time. Q:  What are the top three holdings in your fund? A : The limit for a holding in each individual fund is 30% of the assets. Our first largest holding is the DWS Disciplined Market Neutral Fund, which is an absolute return strategy with a 20% weighting in our portfolio. Through our disciplined approach we are looking across valuation, growth and market sentiment information of stocks within the Russell 1000. Then, we group that by industry categories and we go long and short within the industries that we think are overvalued and undervalued. The second largest holding is the DWS RREEF Global Real Estate Fund, a fund that seeks to look across global markets and identify real estate opportunities through REIT securities. The top-down regional allocation and bottom-up stock selection drive the portfolio. Each regional team is responsible for coverage of local markets, and all leverage the global breadth of RREEF and Deutsche Bank. Our third largest holding in the fund is the TIPS portfolio, which looks across the U.S. government issued inflation protected securities with various maturities. The investment process involves both top-down analysis as well as bottom up security selection. In performing top-down analysis, the portfolio managers take into account breakeven rates of inflation, current economic conditions, real yield curve shape and high quality credit spread levels. Q:  What is your portfolio construction process? A : The fund invests in nine DWS mutual funds, two ETFs plus a global alpha strategy, which combined provide exposure to alternative asset classes. Such a bundled approach helps us dampen volatility and enhance portfolio diversification over time. For our portfolio construction we use the return, risk, and correlation to find optimal weights. We create a completion allocation essentially by taking into account the typical core holdings that are represented in an individual investor’s portfolio, so that this fund is complementary to core holdings. We use our proprietary system that we call PortfolioChoice®. This tool is based on advanced statistical techniques and provides several advantages over traditional mean variance optimization. PortfolioChoice can forecast and control risk in the optimal allocation for portfolios that we create as well as model alternative investment categories. It also recognizes the uncertainty in forecasts and directly models it, and allows us to combine short histories of returns with very long histories of returns without discarding any data. Finally, the PortfolioChoice system can minimize downside risk or maximize probability to outperform a specific benchmark. We use the PortfolioChoice system to create all asset allocation portfolios that we manage. In summary, multi-manager portfolios are constructed using holdings based optimization and our proprietary optimization technology. It incorporates statistical methodology, which is designed to blend information from two sources: historical data and forward-looking views. Ongoing monitoring and oversight is designed to help seek consistent results in any market environment. Q:  What are the risks perceived in the portfolio and how do you mitigate them? A : We do not simply measure risk. Risk is embedded in all steps of our investment process and the resulting allocations are very efficient and well diversified. First, we scale the views that come from our investment teams to a certain risk level via risk budgeting. We know exactly how much risk we are taking from each specific view. The portfolio construction for the fund is designed to minimize downside risk. Although asset allocation among different asset categories generally limits risk and exposure to any one category, the risk remains that management may favor an asset category that performs poorly relative to the other asset categories. Some of those risks include stock market risk, credit and interest-rate risk, volatility in commodity prices and high-yield debt securities, short sales risk and the political, general economic, liquidity and currency risks of foreign investments. Q:  Do you modify your asset allocation process over time? A : We review our strategic asset allocation at least on an annual basis and monitor our forecasts quarterly. The fund is rebalanced periodically so this asset allocation is subject to change. The absolute return segment also incorporates a global macro strategy, or portable alpha strategy, which attempts to take advantage of short- and mediumterm mispricings within global equity, bond and currency markets. Q:  What is the benchmark for the fund? A : We have two benchmarks. One is a blended benchmark of 70% MSCI World Index and 30% Barclays Capital U.S. Aggregate Index. We are creating assets in the completion portfolio, and we are trying to outperform over time high return expectations, in addition to lowering the portfolio risk by adding assets to the core asset allocation. We use the blended benchmark along with the S&P 500 Index. Q:  How do you derive the long-term equilibrium return for different asset categories in your fund? A : First of all, market capitalization weights present a portfolio with efficiency that is very hard to beat even if some of the assets are overvalued at any particular moment in time. We do complement it with our views, which are based on multiple factors contributed by our investment teams such as mean reversion or other fundamental factors, like price to earnings ratios for equities, or slope of the yield curve for bonds. We take into account various valuation parameters as well as technical factors to override this long-term equilibrium returns that are derived from market capitalization weights with our views. In various market cycles cash serves as the benchmark, but we achieve anywhere between 6% and 7% return over a market cycle where real return is going to depend on commodities and TIPS. Q:  What kind of opportunities does this fund provide to investors? A : Retail investors tend to be underallocated to the alternative or non-traditional asset classes. Within mutual funds we have been able to forge that forward in many categories to enable investors to further diversify their portfolios. That is where we see the value proposition. As investors increase their allocation to alternatives, it may be beneficial to diversify the alternatives allocation across many categories all in one fund option. We are trying to help investors build a better, overall portfolio by having a satellite portfolio that they can add to a traditional asset allocation mix. The benefits of the fund do not necessarily lie in risk reduction but also in potential return enhancements. Our fund’s goal is not only to help investors reduce risk in their allocations, but also to provide access to additional return sources and structural alpha. Q:  What kind of global asset allocation are you trying to achieve? A : We review the allocation of the fund at least on an annual basis, and we look for opportunities to introduce additional asset classes into this fund frequently. The ultimate goal is to have everything investable in the world, including every single asset class that exists. Obviously, that comes to complement traditional asset classes that are already more than represented in the individual holdings. While asset classes such as U. S. large cap equities or U.S. bonds are overrepresented, many other asset categories such as absolute return, floating rate notes (bank loans), and international small-cap equities are not represented at all. We introduce them as a great source of diversification. We have added two new asset classes, namely the DWS RREEF Global Infrastructure Fund and the DWS Floating Rate Plus Fund category. With the addition of these two asset classes we decided to reduce the allocation to the real return to commodities and TIPS. In 2009 we have added some more diversification through the integration of some new asset classes into the portfolio via Exchange-traded funds. Q:  How do you identify the investment themes for the asset classes in your fund? A : We capture the medium- to longerterm themes with the help of our strategic asset allocation review. If it is more of a tactical play or trade, then it is captured via our global tactical overlay, and we attempt to take advantage of short- and medium-term mispricings within global equity, bond and currency markets. For example, from the dollar perspective we just added international fixed income as an ETF into the portfolio, and we also increased some of the emerging markets fixed income. We are thinking about this as a strategic decision from a longer-term perspective.

Annual Return

20212020201920182017201620152014201320122011
AAAAX 18.1 -35.9 28.5 -1.9 22.1 8.4 -7 2.6 43.9 14.1

in percentage


More Information

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The history of the fund actually starts before it was established. The team came together at the end of 2003. Using the same strategy we employ today, we primarily managed institutional international and global equity portfolios.

The history of the fund actually starts before it was established. The team came together at the end of 2003. Using the same strategy we employ today, we primarily managed institutional international and global equity portfolios.