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Asset Allocation: Risk or Reward?

Eeny, meeny, miny, moe

Asset allocation is one of the integral aspects of portfolio management, with strategic asset allocation, according to some research, (Ibbotson and Kaplan, 2000) accounting for as much as 90% of the variability in returns. Balancing risk and return and obtaining appropriate diversification are critical objectives of the asset allocator. Investment time horizons are an essential factor too, with long-term ‘strategic’ or shorter-term ‘tactical’ allocations also adding to the mix of considerations. 

In this selection of papers, a diverse range of subjects relating to most aspects of asset allocation are featured. These range from academic thinking, through the return assumptions institutional investors make about asset classes, quantitative approaches, and the practical application of current investor opinions on the relative attractions (or otherwise!) of certain assets.  

signposts asset allocation


2020 Long-Term Capital Market Assumptions (Invesco, Nov 2019 )

For compliance reasons, this paper is only accessible in certain geographies

Invesco outlines their global, long-term forecasts for the major asset classes. These estimates, based on a 10-year investment time horizon, are designed to inform and guide strategic asset allocations. This latest paper encapsulates recent changes to return forecasts, whilst also expanding on their capital market assumptions.

Volatility, fixed income, and other investment head-scratchers (Wellington, Nov 2019)

In this outlook paper from Wellington, Multi-Asset Strategist Adam Berger outlines some of the key questions that are on investors' minds then offers suggestions as to how they might respond. Their Capital Market Assumptions are described, highlighting some potential opportunities.

In a low-yield environment, income is key (Capital Group, Oct 2019)

For compliance reasons, this paper is only accessible in certain geographies

Capital Group suggests that slowing global growth and rising geopolitical risks have lead to increased uncertainty. They note that in the Fixed Interest space, increasing amounts of debt are either negative or low-yielding, so opportunities to find yield are relatively rare. The team believe that within the FI space, both US High Yield and Emerging Market Debt look relatively appealing.

Are Your Asset Allocation Models Exposed Right Now? (Intech, 2019)

For compliance reasons, this paper is only accessible in certain geographies

Intech proposes that instead of altering long-term strategic asset allocations in response to short-term changes in the risk environment, investors may be better served by focusing on what tends to be the largest of those asset classes, usually equities. One way in which strategic allocations can be maintained is by using dynamic, variable beta strategies inside an equity allocation, potentially improving portfolio efficiency.

Deep Learning for Global Tactical Asset Allocation (2018)

This academic paper offers workable suggestions for Global Tactical Asset Allocation using neural networks informed by macro-economic data and price-volume.

Q4 Global Macro Outlook (Manulife IM, Oct 2019)

For compliance reasons, this paper is only accessible in certain geographies

Manulife IM’s asset allocation strategy team shares their latest views, in which they see more aggressive central bank easing, are fearful of the strength in the USD and see little in the way of any rebound in weak manufacturing data in Europe.

Tactical Investment Algorithms (2019)

In this research paper, the author proposes that tactical investment algorithms, optimal for specific market regimes, should be backtested against synthetic datasets.

What Risk-Aversion Parameter Should I Use? And Should I Care? (Qontigo, 2019)

Qontigo investigates the use of the standard quadratic utility function and how different risk aversion parameters might affect positioning on the efficient market frontier.

An Asset Allocation Primer: Connecting Markowitz, Kelly and Risk Parity (PIMCO, 2017)

This PIMCO paper first describes, then contrasts, standard asset allocation models, noting the conditions under which the models are equivalent. It then goes on to discuss the risk/return characteristics of each approach and finally provides illustrations which compare allocations to asset classes and the risk and return measures for the various models.

Adaptive Asset Allocation: A Primer (Resolve Asset Management)

This paper addresses weaknesses in Modern Portfolio Theory (MPT) when applied to strategic asset allocations. It proposes that optimizations based upon long-term observed average values are inferior to alternative estimates taken over a shorter period. The authors demonstrate that a portfolio which integrates an Adaptive Asset Allocation policy may deliver superior performance.

Estimating Strategic Returns (Man Group, 2018)

Man Group outlines the broad methodology that helps inform their strategic risk and return assumptions.

The Current State of Quantitative Equity Investing (CFA Institute Research Foundation, 2018)

This CFA paper, which investigates Quantitative Equity Investing, also outlines principles underlying most modern investment processes, Risk and Return, Modern Portfolio Theory and Asset Pricing. Balancing Risk and Reward is one of the key elements of the Asset Allocation process.

Appraising home bias exposure (FTSE Russell, 2019)

FTSE Russell examines equity asset allocation amongst pension funds and finds that they generally exhibit a ‘home bias’, investing less in foreign equities than might be expected. In a study by the OECD, this persistent preference by investors may be explained by reluctance to avoid exchange rate or geopolitical risk, additional hedging costs and regulatory issues.

Gold as a Strategic Asset in 2019 (World Gold Council, Mar 2019)

For compliance reasons, this paper is only accessible in certain geographies

The World Gold Council outline several of the different roles that gold can offer in a portfolio.

In search of a free lunch (Aviva Investors blog, Nov 2019)

For compliance reasons, this paper is only accessible in certain geographies

Portfolio managers from Aviva Investors shed light on what impact a decade of easy monetary policy and changing correlations between asset classes has had on the way they manage assets.

Remastering Volatility: Reducing Noise in Equity Allocations (AB, 2019)

For compliance reasons, this paper is only accessible in North America and South America

In this paper Alliance Bernstein investigates the root causes of volatility to get a comprehensive view on potential risk-management solutions for today’s dynamic environment. Differentiating and identifying the various types of risk may assist investors in devising more appropriate solutions to try and counter such bouts of volatility. Such solutions may mitigate the risks that are inherent within an equity portfolio framework.

Constructing a Systematic Asset Allocation Strategy (S&P Dow Jones Indices, Nov 2018)

S&P introduce their concept of the Dynamic Tactical Allocation Index (DTAQ), which incorporates both dynamic and tactical investment strategies to ‘flex’ exposure to multiple asset classes depending on underlying market conditions. A rules-based approach removes the ‘behavioural’ element that several commentators suggest can be detrimental to performance.

The Return Expectations of Institutional Investors (2019)

Stanford University’s paper finds that institutional investors (US public pension plans) rely on past performance in setting return expectations and that they extrapolate these returns into asset allocations. An institution’s own experiences with asset classes will affect its future return assumptions.