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The Case for Asset Allocation

Asset Allocation Principle

The Case for Asset Allocation

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Global Investment

  • We invest globally and diversify widely to ensure a good spread of risk, but not so widely that success is diluted and investment performance becomes bland.

  • We place a strong emphasis on investment in real assets such as shares and property except in the case of explicitly short-term reserve funds that may be needed for other purposes – over most time periods real assets will outperform monetary assets such as bonds.

  • The main attraction of real assets is a worthwhile and growing income. We will normally invest in real assets with this fundamental characteristic.

  • We place a strong emphasis on genuine investment grade asset classes, being those that display characteristics of liquidity, transparency, sound regulation and security of title.

  • When comparing asset classes, we take full account of relative transaction costs, costs of ownership and differing tax treatments.

  • We take full account of any currency judgements implicit in an asset allocation decision and may hedge back into the base currency unless there is an explicit wish to take the currency risk as well as the underlying investment risk.

  • We concentrate on capturing good market returns, recognising that the general movement (beta) of any given market is the main determinant of overall returns. These market ('beta') returns can be easily captured in a cost-efficient, liquid way via index-tracking Exchange Traded Funds (ETFs).

  • We never underestimate the power of mean reversion. Markets are cyclical and the cry that “it is different this time” hardly ever turns out to be true. If an asset class has beaten all previous performances and is looking very expensive compared to past valuation, we are very sceptical before accepting that it is going through a fundamental re-rating and is still cheap. Similarly, if an asset class has performed very badly, and looks very cheap by past standards, we are sceptical of the ultra pessimists who think the asset will never recover properly. History shows us there are fewer of these fundamental re-ratings than commentators like to think.

  • We are wary of 'black box' modelling and in particular correlation and efficient frontier analysis – 'black box' outputs are just as fallible as other judgements and correlations and efficient frontiers are far from constant.

  • We think long-term and concentrate on getting the big picture right. We do not engage in frequent major asset allocation changes – successful short-term market timing is just as rare as successful stock picking and adds significantly to costs.

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