We’ve been getting a number of queries from clients and advisors regarding how we’ve been managing our asset allocation through this difficult period and more importantly, how we position our asset allocation over the medium to longer term. So I’ve got a couple of charts that I’d like to show you on how we’ve been thinking about our asset allocation and the value add that we’ve been able to derive from that.
This first chart gives you a snapshot in terms of the underlying investments that we hold across our balanced portfolios since the inception of that portfolio back in 2015. From our point of view, one of the key things when we think about asset allocation and setting a strategy for particular portfolios is that you really want to look to have as many investment opportunities as you can within that portfolio. That does a couple of things.
First and foremost, it allows you to have greater alpha investment opportunities, as we say. But equally and more importantly, it allows you to be able to better balance the risk characteristics associated with individual portfolios. So when we think about asset allocation, not only are we looking at it from a return point of view, but more importantly, through time, it’s all about managing risk – how can we better manage risk in order for us to be able to protect capital that will then lead to superior performance.
The second aspect to note from from that chart is that clearly we have been been active. We have been prepared to take positions in individual asset classes like introducing new positions in asset classes such as infrastructure, as an example. We’re also removing ourselves from an individual asset class if we feel that we’re not getting compensated for the risk that we’re taking. This is a really important part in the way that we think about setting strategy, whether it be in our multi asset portfolios as we’re showing here or even in our Australian equity portfolios. We’re really thinking about how we’re setting strategy and how we’re thinking about the return profile and how we can then deliver on the objectives of that strategy through time. As you can see here, the underlying asset allocation across individual asset classes clearly varies. From our point of view, the ability to be able to do that in an efficient manner is really important in not only adding value but more importantly, protecting the capital side of it and managing risk accordingly.
The second chart just highlights the value add. Because ultimately if you are making changes portfolio, you want that to be accretive in a an overall portfolio return perspective. As you can see here, this charts just showing the value add that we’ve been able to deliver across the entirety of that portfolio since its inception. You can see there that it’s been a consistent value add in the way that we’ve been able to manage our active or tactical asset allocation.
The other important point to note in the context of the overall portfolio is what’s been delivered. You can see there that one of the important elements that we look for when we set individual strategies and when we manage the asset allocation is to try and deliver that consistency of investment performance. You can see that two thirds of the time, we’ve been able to live a positive absolute return for any given month for that portfolio. More importantly, you can see there that equally the month where we do deliver a positive return it is roughly around about half a percent greater than the month where unfortunately the portfolio might underperform. So, there is a clear skewness to the up months being a lot more positive on a more consistent basis, relative to the down months. From our point of view, that’s an important part because it means that you’re delivering a more consistent investment return over time.
The final point to note is that when we’re thinking about the current market environment it’s really important to just have that focus onwhat are you trying to achieve over the medium to long term. Despite obviously the challenges that we’ve seen, particularly through the months of February and March, portfolio performance over that longer term period is a cumulative return of 8% and we believe that’s a really solid investment return, particularly when you think about the risk that you’re taking on board.
Another important component part is understanding and managing that risk and you can see that the risk of the portfolio is little over nine and a half percent. In the context of comparing that to equities that’s roughly nearly half of what you’re getting if you’re just investing in Australian equities. So, again, the value add that you can see through having additional asset classes and diversity of strategy within your individual portfolios can really add value over the medium to longer term. More importantly it can help you manage the risk of the underlying portfolio.
Hopefully this gives you a snapshot in terms of how we’ve been managing asset allocation, and ultimately how that then feeds into the decisions we make and ultimately the performance of the portfolios. As always, if you have any concerns or queries, please feel free to reach out to your advisor.
Piers Bolger is Chief Investment Officer at Viridian Advisory
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