Strategic Dynamic Asset Allocation

Strategic Dynamic Asset Allocation

Strategic Dynamic Asset Allocation And The Building Of Investment Portfolios; Modern Portfolio Theory (MPT) For The Smart Investor

We are contacted by many people throughout the world asking how they can get the bet investment returns on their investments.

Not only in their underlying asset allocations within their UK pensions for example their Money Purchase Pension Schemes; Self Invested Pension Plans (SIIPS, SIPP, SIP), Personal Pension Plans (PPP, PPPs) or perhaps their Stakeholder Pension Plans (SHPP); but also within their other investment portfolios.

The correct asset allocation of any investment has many elements for example a clients circumstances, future plans and times scales, and their other available assets both short (importantly cash on hand), medium and long term. Together with their known and likely future expenditure over the investment time horizon, including a large enough cash reserve. Please read the following The Most Important Person In The World YOU

Only when we / you have  clear understanding of the above criteria should we / you move on to the following:

“How to build and secure your wealth in a changing world”

We have a unique and clear vision of what “Wealth Management” really should look like. It’s a new, refreshing, exciting, and different from other Wealth Management (Independent Financial Advisory) and Financial Planning firms that you may have met and experienced.

Importantly we adhere to time tested, and rigorously robust, proven investment strategies. Our investment strategies have stood the test of time, and are underpinned by academic rigor at the highest level*,they support and underpin our client mandate; Creating, Managing, Preserving and Protecting our “Clients Wealth”; to provide for their ongoing financial security for themselves, and their family.

“The success of any portfolio hinges on the identification of the long-term asset allocation targets that best position investors to achieve the highest possible return for a given risk level”

*Markowitz 1952 (Nobel Prize 1990), Sharpe 1962 (Nobel Prize 1990), Fama 1970, Tobin (Nobel Prize 1981), Brinson 1986, Merton (Nobel Prize 1997), Ibbotson 2010.

Private Wealth Management Since 1993

Helping you, to secure your ongoing financial future for you, your family, and your dependents.

We I have a unique and clear vision of what “Wealth Management” really should look like. It’s a new, refreshing, exciting and different from other Wealth Management (Independent Financial Advisory) and Financial Planning firms that you may have met and experienced.

Its about your whole of life – not just your money! Your money is only the tool to enable you to live your “Lifestyle” and to provide for the ongoing financial security for yourself and your family.

We encourage you to “Think Big” (to achieve and maintain financial independence) and we work with you over time to help and guide you in making your dreams a reality.

We base our Wealth Management ideology around your life, goals, and ambitions; providing for your financial security. With regular meetings combined with our wealth management expertise we can keep you on track; making your goals a reality.

Strategic Dynamic Asset Allocation And The Building Of Investment Portfolios

Given all of the above our Asset Allocation video explains the process that we undertake on behalf of our clients.

Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame.


Many financial experts say that asset allocation is an important factor in determining returns for an investment portfolio. Asset allocation is based on the principle that different assets perform differently in different market and economic conditions.

A fundamental justification for asset allocation is the notion that different asset classes offer returns that are not perfectly correlated, hence diversification reduces the overall risk in terms of the variability of returns for a given level of expected return. Asset diversification has been described as “the only free lunch you will find in the investment game”. Academic research has painstakingly explained the importance of asset allocation.

Asset classes

An asset class is a group of economic resources sharing similar characteristics, such as riskiness and return. There are many types of assets that may or may not be included in an asset allocation strategy.

Traditional Assets

The “traditional” asset classes are stocks, bonds, and cash:

  • Stocks: value, dividend, growth, or sector-specific (or a “blend” of any two or more of the preceding); large-cap versus mid-cap, small-cap or micro-cap; domestic, foreign (developed), emerging or frontier markets
  • Bonds (fixed income securities more generally): investment-grade or junk (high-yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging markets
  • Cash and cash equivalents (e.g., deposit account, money market fund)

Allocation among these three provides a starting point. Usually included are hybrid instruments such as convertible bonds and preferred stocks, counting as a mixture of bonds and stocks.

Alternative Assets

Other alternative assets that may be considered include:

  • Commodities: precious metals, nonferrous metals, agriculture, energy, others.
  • Commercial or residential real estate (also REITs)
  • Collectibles such as art, coins, or stamps
  • Insurance products (annuity, life settlements, catastrophe bonds, personal life insurance products, etc.) The Most Important Person In The World YOU
  • Derivatives such as long-short or market neutral strategies, options, collateralized debt, and futures
  • Foreign currency
  • Venture capital
  • Private equity
  • Distressed securities
  • Property

Allocation Strategy

There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification: strategic, tactical, and core-satellite.

Strategic Asset Allocation — the primary goal of a strategic asset allocation is to create an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon.

Tactical Asset Allocation — method in which an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for gains.

Core-Satellite Asset Allocation — is more or less a hybrid of both the strategic and tactical allocations mentioned above.

Systematic Asset Allocation is another approach which depends on three assumptions. These are-

  • The markets provide explicit information about the available returns.
  • The relative expected returns reflect consensus.
  • Expected returns provide clues to actual returns.

Return Versus Risk Trade-off

In asset allocation planning, the decision on the amount of stocks versus bonds in one’s portfolio is a very important decision. Simply buying stocks without regard of a possible bear market can result in panic selling later. One’s true risk tolerance can be hard to gauge until having experienced a real bear market with money invested in the market. Finding the proper balance is key.

Cumulative return after inflation from 2000-to-2002 bear market

80% stock / 20% bond −34.35%
70% stock / 30% bond −25.81%
60% stock / 40% bond −19.99%
50% stock / 50% bond −13.87%
40% stock / 60% bond −7.46%
30% stock / 70% bond −0.74%
20% stock / 80% bond +6.29%


Projected 10-year Cumulative return after inflation (stock return 8% yearly, bond return 4.5% yearly, inflation 3% yearly
80% stock / 20% bond 52%
70% stock / 30% bond 47%
60% stock / 40% bond 42%
50% stock / 50% bond 38%
40% stock / 60% bond 33%
30% stock / 70% bond 29%
20% stock / 80% bond 24%

The tables show why asset allocation is important. It determines an investor’s future return, as well as the bear market burden that he or she will have to carry successfully to realize the returns.

Modern Portfolio Theory (MPT) – Why Its Still The Best Investment Strategy

“How to build and secure your wealth in a changing world -The Efficient Frontier; Strategic Dynamic Strategic Asset Allocation”*

*Markowitz 1952 (Nobel Prize 1990), Sharpe 1962 (Nobel Prize 1990), Fama 1970, Tobin (Nobel Prize 1981), Brinson 1986, Merton (Nobel Prize 1997), Ibbotson 2010.

“The success of any portfolio hinges on the identification of the long-term asset allocation targets that best position investors to achieve the highest possible return for a given risk level”

Given the doubts raised by a small but vocal chorus, it’s worth spending some time to ask if we need a new investing paradigm and if so, what it should be. Answering that question helps show why MPT still is the best investment methodology available.

The basic questions being raised about MPT run something like this:

  • Hasn’t recent experience – i.e., the financial crisis — shown that diversification doesn’t work?
  • Shouldn’t we primarily worry about “Black Swan” events and unforeseen risk?
  • Don’t these unknown unknowns mean we must develop a new approach to investing?

Let’s begin by briefly laying out the key insights of MPT.

MPT is based in part on the assumption that most investors don’t like risk and need to be compensated for bearing it. That compensation comes in the form of higher average returns. Historical data strongly supports this assumption. For example, from 1926 to 2011 the average (geometric) return on U.S. Treasury Bills was 3.6%. Over the same period the average return on large company stocks was 9.8%; that on small company stocks was 11.2% ( See 2012 Ibbotson Stocks, Bonds, Bills and Inflation (SBBI) Valuation Yearbook, Morningstar, Inc., page 23. ). Stocks, of course, are much riskier than Treasuries, so we expect them to have higher average returns — and they do.

One of MPT’s key insights is that while investors need to be compensated to bear risk, not all risks are rewarded. The market does not reward risks that can be “diversified away” by holding a bundle of investments, instead of a single investment. By recognizing that not all risks are rewarded, MPT helped establish the idea that a diversified portfolio can help investors earn a higher return for the same amount of risk.

To understand which risks can be diversified away, and why, consider Zynga. Zynga hit $14.69 in March and has since dropped to less than $2 per share. Based on what’s happened over the past few months, the major risks associated with Zynga’s stock are things such as delays in new game development, the fickle taste of consumers and changes on Facebook that affect users’ engagement with Zynga’s games. Note: also remember Facebook’s IPO down 53% almost on issue.

For company insiders, who have much of their wealth tied up in the company, Zynga is clearly a risky investment. Although those insiders are exposed to huge risks, they aren’t the investors who determine the “risk premium” for Zynga. (A stock’s risk premium is the extra return the stock is expected to earn that compensates for the stock’s risk.)

Rather, institutional funds and other large investors establish the risk premium by deciding what price they’re willing to pay to hold Zynga in their diversified portfolios. If a Zynga game is delayed, and Zynga’s stock price drops, that decline has a miniscule effect on a diversified shareholder’s portfolio returns. Because of this, the market does not price in that particular risk. Even the overall turbulence in many Internet stocks won’t be problematic for investors who are well diversified in their portfolios.

Modern Portfolio Theory focuses on constructing portfolios that avoid exposing the investor to those kinds of unrewarded risks. The main lesson is that investors should choose portfolios that lie on the Efficient Frontier (Markowitz 1952 (Nobel Prize 1990)), the mathematically defined curve that describes the relationship between risk and reward. To be on the frontier, a portfolio must provide the highest expected return (largest reward) among all portfolios having the same level of risk.

Now let’s ask if anything in the past five years casts doubt on these basic tenets of Modern Portfolio Theory. The answer is clearly, “No.” First and foremost, nothing has changed the fact that there are many unrewarded risks, and that investors should avoid these risks. The major risks of Zynga stock remain diversifiable risks, and unless you’re willing to trade illegally on inside information about, say, upcoming changes to Facebook’s gaming policies, you should avoid holding a concentrated position in Zynga.

The efficient frontier is still the desirable place to be, and it makes no sense to follow a policy that puts you in a position well below that frontier.

Most of the people who say that “Diversification failed” in the financial crisis have in mind not the diversification gains associated with avoiding concentrated investments in companies like Zynga, but the diversification gains that come from investing across many different asset classes, such as domestic stocks, foreign stocks, real estate and bonds. Those critics aren’t challenging the idea of diversification in general – probably because such an effort would be nonsensical.

True, diversification across asset classes didn’t shelter investors from 2008’s turmoil. In that year, the S&P 500 index fell 37%, the MSCI EAFE index (the index of developed markets outside North America) fell by 43%, the MSCI Emerging Market index fell by 53%, the Dow Jones Commodities Index fell by 35%, and the Lehman High Yield Bond Index fell by 26%. The historical record shows that in times of economic distress, asset class returns tend to move in the same direction and be more highly correlated. These increased correlations are no doubt due to the increased importance of macro factors driving corporate cash flows. The increased correlations limit, but do not eliminate, diversification’s value. It would be foolish to conclude from this that you should be undiversified. If a seat belt doesn’t provide perfect protection, it still makes sense to wear one. Statistics show it’s better to wear a seatbelt than to not wear one. Similarly, statistics show diversification reduces risk, and that you are better off diversifying than not.

Timing The Market

The obvious question to ask anyone who insists diversification across asset classes is not effective is: What is the alternative? Some say “Time the market.” Make sure you hold an asset class when it is earning good returns, but sell as soon as things are about to go south. Even better, take short positions when the outlook is negative. With a trustworthy crystal ball, this is a winning strategy. The potential gains are huge. If you had perfect foresight and could time the S&P 500 on a daily basis, you could have turned $1,000 on Jan. 1, 2000, into $120,975,000 on Dec. 31, 2009, just by going in and out of the market. If you could also short the market when appropriate, the gains would have been even more spectacular!

Sometimes, it seems someone may have a fairly reliable crystal ball. Consider John Paulson, who in 2007 and 2008 seemed so prescient in profiting from the subprime market’s collapse. It appears, however, that Mr. Paulson’s crystal ball became less reliable after his stunning success in 2007. His Advantage Plus fund experienced more than a 50% loss in 2011. Separating luck from skill is often difficult. 

“It is difficult to make predictions, especially about the future” – Mark Twain

Some people try to come up with a way to time the market based on historical data. In fact a large number of strategies will work well “In the back test.” The question is whether any system is reliable enough to use for future investing.

There are at least three reasons to be cautious about substituting a timing system for diversification.

  • First, a timing system that does not work can impose significant transaction costs (including avoidable adverse tax consequences) on the investor for no gain.
  • Second, an ill-founded timing strategy generally exposes the investor to risk that is unrewarded. In other words, it puts the investor below the frontier, which is not a good place to be.
  • Third, a timing system’s success may create the seeds of its own destruction. If too many investors blindly follow the strategy, prices will be driven to erase any putative gains that might have been there, turning the strategy into a losing proposition. Also, a timing strategy designed to “Beat the market” must involve trading into “Good” positions and away from “Bad” ones. That means there must be a sucker – or several suckers – available to take on the other – losing – sides. (No doubt in most cases each party to the trade thinks the sucker is on the other side).
  • Are we really saying that we / you are cleaver, have more information, time, and experience than everybody else?

Black Swans

What about those Black Swans? Doesn’t MPT ignore the possibility that we can be surprised by the unexpected? Isn’t it impossible to measure risk when there are “Unknown unknowns”?

Most people recognize that financial markets are not like simple games of chance where risk can be quantified precisely. As we’ve seen (re: the “Black Monday” stock market crash of 1987 and the “Flash crash” of 2010), the markets can produce extreme events that hardly anyone contemplated as a possibility. As opposed to poker, where we always draw from the same 52 card deck; in financial markets, asset returns are drawn from changing distributions as the world economy and financial relationships change.

Some Black Swan events turned out to have limited effects on investors over the long term. Although the market dropped precipitously in October 1987, it was close to fully recovered in June 1988. The flash crash was confined to a single day. This is not to say that all “Surprise” events are transitory. The Great Depression followed the stock market crash of 1929, and the effects of the financial crisis in 2007 and 2008 linger on five years later.

The question is, how should we respond to uncertainties and Black Swans? One sensible way is to be more diligent in quantifying the risks we can see. For example, since extreme events don’t happen often, we’re likely to be misled if we base our risk assessment on what has occurred over short time periods. We shouldn’t conclude that just because housing prices haven’t gone down over 20 years that a housing decline is not a meaningful risk. In the case of natural disasters like earthquakes, tsunamis, asteroid strikes and solar storms, the long run could be very long indeed. While we can’t capture all risks by looking far back in time, taking into account long-term data means we’re less likely to be surprised.

Some people suggest you should respond to the risk of unknown unknowns by investing very conservatively. This means allocating most of the portfolio to “Safe assets” and significantly reducing exposure to risky assets, which are likely to be affected by Black Swan surprises. This response is consistent with MPT. If you worry about Black Swans, you are, for all intents and purposes, a very risk-averse investor. The MPT portfolio position for very risk-averse investors is a position on the efficient frontier that has little risk.

The cost of investing in a low-risk position is a lower expected return (recall that historically the average return on stocks was about three times that on U.S. Treasuries), but maybe you think that’s a price worth paying. Can everyone take extremely conservative positions to avoid Black Swan risk? This clearly won’t work, because some investors must hold risky assets. If all investors try to avoid Black Swan events, the prices of those risky assets will fall to a point where the forecasted returns become too large to ignore.

A third and arguably pathological response to the Black Swan problem is to say that nothing is safe. An extreme event could significantly reduce the value of any asset (“We may not have seen it, but this doesn’t mean that it couldn’t happen”). I doubt anyone has gone to this nihilistic extreme, and I mention it to make it clear that being aware of the potential for unknown unknowns is useful, but not at the cost of decision-making paralysis.

Of course, if you are that privileged investor with a reliable enough crystal ball, by all means use it. The problem lies in knowing whether it is reliable enough.

Although unknown unknowns and Black Swan events make evaluating investment risks more challenging, they don’t change the value of diversification and controlling the risks we do know about.

MPT is acknowledged and supported by Markowitz 1952 (Nobel Prize 1990), Sharpe 1962 (Nobel Prize 1990), Fama 1970, Tobin (Nobel Prize 1981), Brinson 1986, Merton (Nobel Prize 1997), Ibbotson 2010.

Are we really saying that we are cleaver, have more information, time, and experience than these Noble Prize winners who have spent their lives researching and investigating the securities markets for over 100 years.

Interestingly in doing so they have all tried to “Disprove” MPT; they have all been unsuccessful. As a consequence of not being able to disprove MPT they all acknowledge the benefits of implementing a MPT approach.

Importantly then for most investors MPT has all of the benefits that people are looking for in their investment portfolio’s. The ability to participate in the superior investment returns of the stock market, while substantially mitigating the associated risks of doing so.

What if You Only Invested at Market Peaks?

Harvard Business Review (HBR Posted on February 25, 2014)

“Warren [Buffett], it strikes me that if you did nothing else you never sell. That is, if you can grit your teeth through and just disregard short-term declines in the market or even long-term declines in the market, you will come out well. I mean you just stick all your money in stocks and go home and don’t look at your portfolio you’ll do far better than if you try to trade it.”  – Alan Greenspan

Meet Bob,

Bob is the world’s worst market timer.

What follows is Bob’s tale of terrible timing of his stock purchases.

Bob began his career in 1970 at age 22. He was a diligent saver and planner.

His plan was to save $2,000 a year during the 1970s and bump that amount up by $2,000 each decade until he could retire at age 65 by the end of 2013 (so $4,000/year in the 80s, $6,000/year in the 90s then $8,000/year until he retired).

He started out by saving the $2,000 a year in his bank account until he had $6,000 to invest by the end of 1972.

Bob’s problem as an investor was that he only had the courage to put his money to work in the market after a huge run up.

So all of his money went into an S&P 500 index fund at the end of 1972 (I know there were no index funds in 1972, but just go with me here…see my assumptions at the bottom of the post).

The market dropped nearly 50% in 1973-74 so Bob basically put his money in at the peak of the market right before a crash.

Yet he did have one saving grace. Once he was in the market, he never sold his fund shares. He held on for dear life because he was too nervous about being wrong on both his sell decisions too.

Remember this decision because it’s a big one.

Bob didn’t feel comfortable about investing again until August of 1987 after another huge bull market.  After 15 years of saving he had $46,000 to put to work. Again he put it in an S&P 500 index fund and again he invested at a market peak just before a crash.

This time the market lost more than 30% in short order right after Bob bought his index shares.

Timing wasn’t on Bob’s side so he continued to keep his money invested as he did before.

After the 1987 crash Bob didn’t feel right about putting his future savings back into stocks until the tech bubble really ramped up at the end of 1999. He had another $68,000 of savings to put to work. This time his purchase at the end of December in 1999 was just before a 50%+ downturn that lasted until 2002.

This buy decision left Bob with some more scars but he decided to make one more big purchase with his savings before he retired.

The final investment was made in October of 2007 when he invested $64,000 which he had been saving since 2000. He rounded out his string of horrific market timing calls by buying right before another 50%+ crash from the credit blow-up.

After the financial crisis he decided to continue to save his money in the bank (another $40,000) but kept his stock investments in the market until he retired at the end of 2013.

To recap, Bob was a terrible market timer with his only stock market purchases being made at the market peaks just before extreme losses.

Here are the purchase dates, the crashes that followed and the amount invested at each date:

Date Of Investment  Investment Return %   Amount Invested USD

Dec 1972                                           -48                                         6,000

Aug 1987                                           -34                                       46,000

Dec 1999                                           -49                                       68,000

Oct 2007                                           -52                                       64,000

Total Invested                                                                         184,000

Luckily, while Bob couldn’t time his buys, he never sold out of the market even once.  He didn’t sell after the bear market of 1973-74 or the Black Monday in 1987 or the technology bust in 2000 or the financial crisis of 2007-09.

He never sold a single share.

So how did he do?

Even though he only bought at the very top of the market, Bob still ended up a millionaire with $1.1 million.

How could that be you might ask?

First of all Bob was a diligent saver and planned out his savings in advance. He never wavered on his savings goals and increased the amount he saved over time.

Second, he allowed his investments to compound through the decades by never selling out of the market over his 40+ years of investing.  He gave himself a really long runway.

He did have to endure a huge psychological toll from seeing large losses and sticking with his long-term mindset, but I like to think Bob didn’t pay much attention to his portfolio statements over the years.  He just continued to save and kept his head down.

And finally, he had a very simple and low cost investment plan — one index fund with minimal costs.

Obviously, this story was for illustrative purposes and I wouldn’t recommend a portfolio consisting of 100% in stocks of a single market like the S&P 500 unless you have an extremely high risk tolerance. Even then a more balanced portfolio in different global markets with a sound rebalancing policy makes much more sense – MPT.

And if he would have simply dollar cost averaged into the market on an annual basis with his savings he would have ended up with much more money in the end (over $2.3 million).

But then he wouldn’t be Bob, The World’s Worst Market Timer.

Lessons from Bob’s Journey:

  • If you are going to make investment mistakes, make sure you are biased towards optimism and not pessimism. Long-term thinking has been rewarded in the past and unless you think the world or innovation is coming to an end it should be rewarded in the future. As Winston Churchill once said, “I am an optimist.  It does not seem too much use being anything else.”
  • Losses are part of the deal when investing in stocks.  How you react to those losses is one of the biggest determinants of your investment performance.
  • Saving more, thinking long-term and allowing compound interest to work in your favor are your biggest accelerants for building wealth. These factors have nothing to do with picking stocks or a complex investment strategy. Get these big things right and any disciplined investment strategy should do the trick.

Source: What Alan Greenspan has learned since 2008 (HBR)

I mean you just stick all your money in stocks and go home and don’t look at your portfolio you’ll do far better than if you try to trade it. The reason that’s the case is this asymmetry between fear and euphoria. The most successful stock market players, the best investors, are those who recognize that the asymmetric bias in fear vs. euphoria is a tradable concept and it can’t fail for precisely this reason.

Investment Approach: Modern Portfolio Theory (MPT) – “Core and Satellite”

“Asset allocation constitutes the most important step in portfolio construction accounting for more than 90% of the variability in portfolio performance over time” G.P. Brinson, B.D. Singer, G.L. Beebower, “Determinants of Portfolio Performance II: An Update”, in Financial Analyst Journal, May-June 1991

We have a two part investment process:

  1. Asset Allocation – The target asset allocation for each portfolio; incorporating a client’s base currency, and risk profile.
  2. Fund Portfolio Construction – Using a core-satellite portfolio approach; in order to build portfolios that meet the target asset allocations that have been agreed with the client.

Different asset classes such as equities, bonds and cash have different characteristics meaning that they respond differently to changing economic scenarios. These differences allow for the creation of (non-correlated) asset allocation combinations with appropriate risk and return profiles.

By altering the asset allocated weighting “Tactically”; combinations of asset classes can be produced offering differing risk and return outcomes. By tilting a portfolio’s exposure between different asset classes at different times there is value to be earned: this is the premise behind tactical asset allocation. This active methods of portfolio management aim to intelligently add to or take from different asset classes within the portfolio depending on whether valuations and the outlook for a particular asset class are attractive at that point in time or not. This process is known as “Active Management”.

Framework for Strategic Allocation

The approach to setting strategic asset allocation attempts to overcome two of the most fundamental criticisms of traditional portfolio construction:

  • The normal distribution does not accurately reflect the actual outcomes of financial markets, which limits the usefulness of measures such as standard deviation when assessing the potential range of outcomes.
  • Historical returns are not necessarily a good guide to future returns. This is especially true for alternative assets (such as hedge funds) because the data suffers from survivorship bias. The common approach to asset allocation is based on the assumptions of future market returns. Many investors simply allocate among the asset classes popular at the time in proportions similar to those of other investors. While this often creates uncontroversial portfolios, it often leads to substantial weightings in whatever the asset class of choice is at a particular point in time. Contrary to this approach, by applying a Modern Portfolio Theory (MPT) ideology; we aim to avoid making allocations based on the “fashion of the day”. Fund Portfolio Construction

Fund Portfolio Construction

The core-satellite approach to portfolio construction uses diversified multi-asset, multi-manager funds as the stable ‘Core’ of the portfolio. With the core of the portfolio in place, ‘Satellite’ holdings are then carefully selected to bring the overall portfolio asset allocation as close as possible to the target asset allocation.

Portfolio construction involves the following 3 steps:

  1. Core Allocations and Fund Selection: The ‘Core’ holdings in the portfolios will usually make up 60% plus of the total allocation where possible depending on the clients risk profile, base currency and the investment platform used.
  2. Satellite allocations: After a look through at the underlying asset allocation of the core holdings, various ‘shortfalls’ or under weights in the target asset allocation may be identified. For example, the target allocation to investment grade bonds may be 15% but the 50% allocation to the core holding may only provide exposure of 5% to investment grade bonds; therefore a 10% satellite allocation is required in that space to make up for the underweight.
  3. On-going review: Each asset allocation then undergoes on-going reviews. The funds selected for investment are monitored against the relevant benchmarks and their peers on an on-going basis. If the characteristics of any individual fund changes relative to its previous history and/or their benchmark, this would flag the need for a review of the fund.

Would you like to know more, and explore your options, then please contact us we will be pleased to meet you.

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