The Savvy Investor Asset Allocation (AA) and Tactical Asset Allocation (TAA) section has an abundance of academic research materials, thought-leadership pieces, and white papers on asset allocation strategies, portfolio construction and diversification, and on index and core-satellite allocation.
Asset allocation is an investment strategy which seeks to maintain balance between risk and reward by apportioning ‘weightings’ within a portfolio which take on board an individual’s investment objective, risk appetite, and return horizon. Asset classes, which are considered within allocation strategies, comprise equities, fixed-income instruments, and cash or cash equivalents. Alternative assets include items such as real estate, commodities, and cryptocurrencies...
Encompassed within allocation strategies is diversification, and consolidation. A diversified portfolio might see a percentage of invested funds attributed to bonds, large cap equities, small cap equities, and cash and cash equivalents. The portfolio weightings in this example may be 10%, 40%, 20%, 30% respectively. That, compared to a consolidated portfolio of 85% of funds invested in large cap equities and 15% in bonds will both give different levels of return performance and risk levels.
Strategic asset allocation determines the long-term investment framework, considering the fund’s over-arching objectives and the inherent liabilities. Tactical asset allocation represents the ability to deviate from long-term benchmark performance returns in order to gain excessive alpha generation, by identifying which asset classes are likely to under- and overperform in the short term. Factor-based investing, liability-driven investing (LDI), and cashflow-driven investing (CDI) are additional examples of appropriating stock selection processes (smart beta) within the asset allocation selection process itself.
Core-satellite, or core & satellite, investing describes an approach that combines passive investments such as index-linked funds, the ‘core’, with actively managed funds or other direct investments, ‘satellites’. This approach is aimed at bringing stability to an investment portfolio while at the same time providing exposure to higher returns from actively managed investments. It also enables greater diversification across the portfolio, improved after-tax returns, and reduced overall fund management costs.
Asset allocation and tactical asset allocation (TAA) pertain to:
- Life-cycle funds
- Constant weighting