Within our Asset Management division, we operate a globally unconstrained asset allocation derived from our centralised investment processes. It shapes all our clients’ portfolios, and is vital to achieving the best possible risk-adjusted returns, achieving our inflation targets, and accommodating our clients’ risk appetites.
Following the three-year anniversary of our Tailored Discretionary Managed service, we wanted to share how we apply our centralised investment framework, with specific comments on our globally unconstrained approach and why we seek to avoid a home-country bias.
Asset allocation
A robust Strategic Asset Allocation (SAA) is the base of all strong portfolios. We carry out an annual review process to determine our optimum portfolios over a long time-horizon (five years plus). This is an internal process, as opposed to outsourcing, to ensure we fully understand our SAA and how to implement it to deliver the best value to clients.
A detailed explanation of the process can be provided by your usual contact, however the key steps to be aware of are:
- Generating forward-looking return assumptions for each asset class & region
- Optimisation process to establish the ideal asset allocation for any given risk level
- Final adjustments and stress testing
After optimising, we may make qualitative adjustments to the proposed allocations based on portfolio construction considerations and stress testing against risk scenarios.
The optimisation process is the more complex, quantitative element, but simply represents a consideration of all possible combinations of asset classes within different portfolios. When plotting these against the expected risk and return, portfolios with the best risk and return characteristics form an “efficient frontier”. It is from this frontier that you can select the portfolios with the best risk-adjusted return for a given risk level.
The SAA process occurs once a year, but it is important to note that we regularly review our medium and shorter-term views, using the combined expertise of our Asset Management and Research teams to inform our portfolio positioning. We are strong believers that active management is essential in a rapidly changing world.
Portfolio construction
Once our ideal positioning is established, the Tailored team then determine how best to apply this to client portfolios. Alongside our unconstrained asset allocation, we also have an unrestricted investment universe – we invest in direct equities and bonds, investment trusts, and active & passive collectives – allowing us to select the right investment vehicle for the desired exposure.
The selection of holdings is fully supported by our Research team and all portfolio changes and construction are debated and challenged by the wider Asset Management team.
Home bias
One of the key outcomes of running a globally unconstrained approach and ensuring that we are considering the full opportunity set available to us is that the result is free of any “UK home bias”. This is in stark contrast to some of our peers, with the UK allocation in the MSCI PIMFA Private Investor Growth Index at 22.5% well in excess of the 3.5% UK weighting found in the MSCI ACWI global benchmark, and which is closer to the Tailored portfolio allocation of approximately 4%.
Investing in the UK compared to other regions has its merits, however it should be recognised that the impact of artificially constraining client portfolios to accommodate a higher UK allocation means limiting your investment opportunity as you have less available to allocate elsewhere.
Linking back to our SAA process, this leaves you unable to invest in some of the previously available portfolios, shifting your “efficient frontier”. Ultimately, clients are left with sub-optimal outcomes; either accepting lesser returns for the same level of risk or being forced to take on additional risk to achieve the same expected returns.
There are historic reasons for this bias. Commonly cited are managers’ market knowledge and greater comfort investing in UK-listed names, as well as client name-recognition, appreciating that clients may like to recognise the companies they are investing in. In our view, these do not justify asset allocations that negatively impact client outcomes in the long-run.
If you find yourself questioning conventional biases and are contemplating the impact of home-country bias on your investment strategy, now might be the time to reconsider. Our Tailored Discretionary service, provides a refreshing departure from traditional constraints, embracing a globally unconstrained approach.
To discover how our Tailored Discretionary service can enhance your investment journey, reach out to us today. Let's navigate the nuances together and pave the way for a more diversified portfolio tailored to your needs.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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