Asset Investment Management Hong Kong


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Investment Strategy has moved from focusing on INVESTMENT RETURNS to focusing on INVESTMENT RISK. Welcome to the world of

“Dynamic Asset Allocation”

Gary Williams
Asset Investment Management Hong Kong

Published in: Economy & Finance, Business
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Asset Investment Management Hong Kong

  1. 1. Dynamic Asset Allocation• Asset Management• Investment Management• Portfolio Construction
  2. 2. Investment Strategy has moved from focusing on INVESTMENT RETURNS to focusing on INVESTMENT RISK. Welcome to the world of “Dynamic Asset Allocation” Gary Williams
  3. 3. IntroductionSection A: HistorySection B: Investment Philosophy and Process for Dynamic Asset Allocation Dynamic Asset Allocation Fund Selection Portfolio Construction
  4. 4. Section A History: key influencesDate Influence Nature of the influence Area of impact Diversification; efficient frontiers Diversification and risk1952 Harry Markowitz and modern portfolio thinking management Professor Brinson The factors influencing portfolio1991 Asset allocation (and others) performance over time The psychological influence on2002 Daniel Kahneman Investor attitude to risk investment decisions
  5. 5. Section A History: Markowitz Modern Portfolio Theory• Investors’ requirements revolve around obtaining reasonable investment returns without excessive volatility (Risk).• It’s not about getting high returns!• It’s all about blending different asset classes to produce average to good results at a lower risk (Volatility).• Investment Strategy has moved from focusing on RETURNS to focusing on RISK
  6. 6. Section A History: Brinson Asset allocation constitutes the most important step in portfolio construction, accounting for more than 90% of the variability in portfolio performance over time11 G.P. Brinson, B.D.Singer, G.L. Bebower, “Determinants of Portfolio Performance II: An Update”, Financial Analyst Journal, May-June 1991.
  7. 7. Section A History: KahnemanThe 2002 Nobel prize for Economics¹ winner Daniel Kahnemanstates that individuals are more depressed with losses than theyare satisfied with equivalent returns.¹ The Sveriges Riksbank Prize in Economic Science
  8. 8. Section B: Philosophy andProcess for Dynamic Asset AllocationThe investment philosophy is built on three core capabilities: Dynamic Asset Allocation Fund Selection – best of breed fund solutions Portfolio Construction
  9. 9. Section B: Dynamic Asset Allocation Different asset classes such as equities, bonds and cash have different performance characteristics meaning that they respond differently to changing economic scenarios. These differences create a need for complementary asset allocation combinations with appropriate risk and return profiles. The portfolio manager’s skill is in altering asset weights tactically in order to create combinations of asset classes that can produce differing risk and return outcomes. The Harmony Portfolios have strategic (long- term) asset allocations that are reflective of the different benefits of these asset classes. By tilting a portfolio’s exposure between different asset classes at different times there is value to be earned: this is the premise behind tactical asset allocation.
  10. 10. Section B:Dynamic Asset AllocationSource: Momentum Global Investment Management Limited - January 2011
  11. 11. Section B: Dynamic Asset AllocationRisk & Return Modelling
  12. 12. Section B: Dynamic Asset AllocationPerformance Benchmarks: An appropriate benchmark for each of the portfolios tells us as much about the return expectations of the typical investor in the portfolio, as it does about their appetite for risk. It allows us to continuously compare and contrast the investment manager’s performance.Asset Allocation Benchmarks: It includes a 20% global exposure to complement the 80% exposure to specific geographically / Currency focused asset classes. Expanding the benchmark’s asset class set is strategic asset allocation.
  13. 13. Section B: Dynamicclasses are rescaled to be consistent withHistorical returns for asset Asset Allocationexpectations for the future. This allows the distribution to maintain the sameshape (same number of outliers, etc) with the mean return adjusted.Source: Momentum Global Investment Management, Lipper, Historic figures are % p.a. January 2000 – December 2010.Indices used for historic returns: Credit Suisse Tremont Multi Strategy Hedge Fund, FTSE EPRA/NAREIT Global Property, JPMorgan Global Bonds, JPMorgan US Bonds, LIBOR USD3m, MSCI World, S&P 500, Credit Suisse High Yield Bonds. Past performance is not indicative of future returns.
  14. 14. Section B: Fund SelectionFunds / Managers SelectionActive investment approaches reward investors across inefficient asset classes (e.g. US small cap equity). Passive investment styles (e.g. index tracking) may be appropriate in efficient markets such as US Treasuries.Specialists create pockets of excellence in their key areas of focus.No single fund manager can create a monopoly of quality across the spectrum of products on offer and the ability to invest with different specialists across the world is essential.It is therefore congruent to seek out Independent Financial Advice.
  15. 15. Section B: Fund SelectionAsset Class ResearchWhere active management works.Percentage of fund managers who underperform various performance hurdles Index +1% +2% +4%Efficient Domestic Bonds* 84 Efficient Global Bonds 66 77 UK Equities 67 77 US Equities 65 71 75 Semi-Efficient Global Equities 69 75 81 European Equities 53 66 75 EM Equity 59 67 73 Japanese Equity 48 57 65 75 Inefficient Small Cap* 49 54 59 67 Inefficient
  16. 16. Section B: Fund SelectionManager research and selection  Assets under management Asset class screening / initial research  Investment style  High alpha Quant analysis  Returns based style analysis  Risk/attribution analysis  Philosophy Due diligence  Process Re-evaluation of  People existing  Evidence managers Selection  Check consistency through time  Ongoing monitoring
  17. 17. Section B: Fund SelectionUsing the best talent from around the world London: Chicago: M&G Driehaus RWC Timpani Schroders Tokyo: Threadneedle Tiburon Paris: Comgest Connecticut: San Francisco: Lapides Artisan AXA IM New York: American Century Arizona: Pzena ING Muzinich Wilmington: Marvin & Palmer Sydney: Aberdeen
  18. 18. Section B: Portfolio ConstructionCore & Satellite Strategy
  19. 19. Section B: Portfolio Construction BRICS commodities The Core Alternatives Asset Allocation
  20. 20. Section B: Portfolio ConstructionDynamic Asset Allocation over time 100% Cash Cash Cash 1.0% 4.0% 8.0% Commodities Cash Cash Cash Cash 12.0% 12.0% Cash 12.0% Property Cash 13.5% 15.0% 15.0% 90% 11.0% 17.2% Property 11.0% Property Property Property Property Alt. Investments Property 9.0% 4.0% 9.7% Property 6.0% 9.5% 80% 14.0% Property Alt. Investments 10.0% 8.6% Alt. Investments 2.5% 3.9% Alt. Investments Alt. Investments Alt. Investments 70% Alt. Investments 16.0% Alt. Investments 6.0% 6.9% 24.0% 25.0% 60% Fixed Income 34.7% Fixed Income 48.0% Fixed Income Fixed Income 40.0% 45.0% 50% Fixed Income Fixed Income 42.0% 41.5% Fixed Income Fixed Income 40% 31.0% 41.0% Fixed Income 34.0% 30% Equity 20% 41.2% Equity Equity Equity 33.1% Equity Equity 31.0% Equity 30.0% 26.0% Equity Equity 26.0% 25.7% 10% 21.0% 22.0% 0% Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 May-11 Benchmark
  21. 21. Dynamic Asset Allocation• Controlling Risk• Controlling Volatility• Controlling investment returns• Looking to explore how Dynamic Asset Allocation can benefit your investments• Then please contact us, we look forward to talking with you soon