We believe asset allocation is the most crucial step in the management of diversified portfolios as it sets up the risk profile of a portfolio, and hence its total return potential.
We believe that risk can be reduced by combining asset classes that have a low correlation with each other. Investing in assets that are influenced by different return drivers, or which access unique sources of return, can further enhance the degree of diversification in a portfolio.
Success in portfolio construction requires an understanding of where risk is taken in a portfolio, and ensuring investors are appropriately compensated for that risk.
Once the asset allocation mix has been determined, there are a number of ways a fund can gain exposure to the underlying asset classes. This may involve deciding whether a passive or active approach is more appropriate, and whether appointing single or multiple managers will provide the most compelling investment opportunities.