Asset allocation is the DNA of an investment strategy and defines the fund. A fund’s specific asset allocation is the mix of asset classes and weighting which will produce the optimal result that aligns with the stated strategy’s investment mandate. Understanding a fund’s asset allocation mix is essential to understanding the definition of the strategy as well as the risk and return potential available as part of the investment. A typical, more traditional, asset allocation comprises a combination of stocks, bonds and other investment classes, as well as cash or cash equivalents. As you dig deeper you will see the specific detail on the types of stocks (value, dividend, growth, sector-specific), bonds (investment grade, high yield, government, corporate) and cash and equivalents (deposits, money markets) as well as other investment classes that may also include hybrid investments such as callable subordinated or convertible bonds.
If we were to broaden our search and look at other types of investments we will start to see that they may utilize other classes as part of their asset allocations, such as commodities, real-estate, derivatives, insurance products, venture capital, private equity or even other alternative assets such as arts and collectibles.
Understanding the asset allocation and the different investments contained within is a critically important factor in understanding your investment strategy. This is important because different asset types will perform differently in different market and economic conditions. Additionally, it is important to understand the interplay of the many different components, to best understand the diversification benefits and correlation impact.
Last but not least, it is in the interest of you, as the portfolio manager, to report as precisely as possible your actual asset allocation to prevent investor misinterpretation of what comprises the strategy’s return and risk.
One of the challenges associated with allocations is that the definition and information contained within fund documents only scratches the surface and oftentimes neglects to disclose the full scope of detail that is necessary for investors to fully appreciate and understand a specific fund strategy.
Providing investors with insight into the allocation categories has always been a primary consideration but with a changing regulatory environment, this is becoming critically important with investors requiring proper disclosure of risks and investment criteria in far greater detail that was provided historically.
In our recent webinar we highlighted some key challenges associated with understanding asset allocations and endeavour to give our viewers insight on what questions to ask when looking into an investment allocation. In our webinar we walk through this and other key parts in understanding investment strategies and present solutions on how the superior reporting of asset allocation criteria can help portfolio management teams achieve all regulatory requirements, even for more complex investment strategies that utilize their individualize approaches. This will help overcome the important challenge for a portfolio manager in preventing investors from misinterpreting or misunderstanding the investment strategy criteria and asset allocation information. For more information, please register for our webinar using the form below.