Agenda Module 1 - Risk, Volatility & Timescale Module 2 - Asset - - PowerPoint PPT Presentation

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Feb 16, 2024 388 likes •877 views

Agenda Module 1 - Risk, Volatility & Timescale Module 2 - Asset Allocation Module 3 - Identifying the Building Blocks Module 4 - Reviewing a portfolio Asset Allocation Asset Allocation Definition Asset allocation is an investment strategy

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Agenda

Module 1 - Risk, Volatility & Timescale Module 2 - Asset Allocation Module 3 - Identifying the Building Blocks Module 4 - Reviewing a portfolio

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Asset Allocation

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Asset Allocation

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.

Investopedia

Definition

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Asset Allocation

A fixed asset allocation which is determined by long term back-testing, and which does not take a view of markets’ current behaviour or short-term outlook.

Strategic

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Asset Allocation

A fluid asset allocation which takes account of recent market movements, and the investor’s perception of the short-term outlook. It seeks to take advantage of perceived opportunities in the short term.

Tactical

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Asset Allocation

Much disputed Contribution to variance of returns between 25% and 100% Being in the market is probably the biggest factor

Impact on portfolio

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Asset Allocation

“About three-quarters of a typical fund’s variation in time-series returns comes from general market movement, with the remaining portion split roughly evenly between the specific asset allocation and active management”

Ibbotson et al, The equal importance of asset allocation and active management

Impact on portfolio

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But Ibbotson and Kaplan also extended their research to consider asset allocation’s impact on the variation of returns among funds and the level of a typical fund’s return. They found that only about 40% of the return variation between funds is due to asset allocation, with the balance due to other factors, including asset- class timing, style within asset classes, security selection, and fees. And because the average of all investors is the market itself, with good managers and bad ones cancelling each other out, Ibbotson and Kaplan concluded that asset allocation ultimately accounts for 100% of the absolute level of returns.

CFA Institute blog “Setting the record straight on asset allocation” 16/02/12 (emphasis mine)

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Investment returns

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Investment returns

Market timing Market returns Stock/Fund selection (Active management) Asset Allocation

Contributing factors

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Investment returns Market Timing

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Investment returns Market Timing

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Investment returns

Market timing Market returns Stock/Fund selection (Active management) Asset Allocation

Contributing factors

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Asset Allocation

Diversification across: Geographies Asset Classes Easiest way to diversify

Reducing Risk

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Asset Allocation

Four main asset classes that matter:

High Level

Equities (Shares) Bonds Alternatives Cash

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Asset Allocation

Strategic, Long Term AA - Good

My suggestion

Tactical, Short Term AA - Impossible for amateurs

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Asset Allocation

There is no ‘correct’ asset allocation

Some caveats

These are my examples I am NOT an economist/fund manager!

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Asset Classes

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10% 40% 50%

Equities Bonds Alternatives Cash

Asset Allocation Balanced example

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Asset Classes Equities (Shares)

Small slices of a company Give voting rights and dividend income Can be volatile A very broad church

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Size matters

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Geography matters Currency matters

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Asset Classes Bonds (Fixed Income)

Loans to governments and to companies Most traded asset class globally Produce income, but usually lower growth A very broad church (again)

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Asset Classes Bonds (Fixed Income)

Quality Yield Investment Grade Junk Bonds High Yield / High Risk Low Yield / Low Risk

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Asset Classes Alternatives

Property
Hedge Funds
Infrastructure
Private Equity
Commodities
Anything else!

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Some sample allocations

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10% 5% 65% 20%

Equities Bonds Alternatives Cash

Asset Allocation Cautious example

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5% 5% 55% 35%

Equities Bonds Alternatives Cash

Asset Allocation Mod Cautious example

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10% 40% 50%

Equities Bonds Alternatives Cash

Asset Allocation Balanced example

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10% 20% 70%

Equities Bonds Alternatives Cash

Asset Allocation Mod Adventurous example

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10% 10% 80%

Equities HY Bonds Alternatives Cash

Asset Allocation Adventurous example

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10% 5% 65% 20% 5% 5% 55% 35%

Equities Bonds Alternatives Cash

10% 40% 50% 10% 20% 70% 10% 10% 80%

Asset Allocation

Cautious Moderately Cautious Balanced Moderately Adventurous Adventurous

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Asset Classes Mapping

Over 5 years
Using indices
Charge of 1% per year
Rebalancing quarterly
Strategic AA only!

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Mapping

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Mapping

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Mapping

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10% 5% 65% 20% 5% 5% 55% 35%

Equities Bonds Alternatives Cash

10% 40% 50% 10% 20% 70% 10% 10% 80%

Asset Allocation

Cautious Moderately Cautious Balanced Moderately Adventurous Adventurous

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10% 2% 3% 10% 55% 15% 5%

Asset Allocation

Cautious Moderately Cautious Balanced Moderately Adventurous Adventurous

5% 2% 3% 15% 40% 26% 9% 5% 5% 15% 25% 37% 13% UK Equities Overseas Equities Bonds HY Bonds Property Commodities Cash 5% 5% 15% 5% 52% 18% 5% 5% 10% 60% 20%

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Summary

Strategic vs Tactical Allocation Pretty much the only thing you can control Asset allocation reduces risk High-level and sub-level allocation There is no ‘right’ allocation

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Look at other allocations on different sites

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