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Asset allocation Issues

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Asset allocation Issues

Asset allocation Issues
Strategies vs Tactical

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Asset allocation Issues Asset allocation Issues Presentation Transcript

  • Asset Allocation Issues Strategic VS Tactical Trading Software and ProgrammingAcedo  Fabia  Reyes  Sorbito  Vidamo
  • Strategic Asset Allocation• A strategic asset allocation specifies the proportion of various asset classes in a portfolio designed to provide an investor with an appropriate risk/return profile over a longer period of time.• A strategic asset allocation framework will specify a range of allocations appropriate for various levels of risk tolerance.• Calls for setting target allocations that adheres to the "base policy mix" and then periodically rebalancing the portfolio back to those targets as investment returns skew the original asset allocation percentages.• The concept is akin to a "buy and hold"/"passive" strategy, rather than an active trading approach. But the allocation may change overtime as to the needs and constraints of the clients.
  • Tactical Asset Allocation• Periodic “tilts” to baseline portfolios in response to market conditions with the object of increasing return and/or reducing risk• constantly adjusts the asset class mix in the portfolio in an attempt to take advantage of changing market conditions• temporary overweighting or underweighting of components of the strategic asset allocation can help enhance performance over time. This includes not only overweighting those asset classes or sectors that may provide better near-term return prospects, but also underweighting those that appear overvalued or are vulnerable to near-term event risk.
  • Tactical Asset Allocation• How frequently the investor chooses to adjust the asset class mix in the portfolio will depend on several factors – general level of volatility in the capital markets – the relative size of the equity and fixed-income risk premiums – changes in the fundamental macroeconomic environment)• an inherently contrarian method of investing. The investor adopting this approach will always be buying the asset class that is currently out of favor—on a relative basis, at least—and selling the asset class with the highest market value.
  • Strategic Asset Allocation Tactical Asset Allocation Strategic Tactical How much market or systematic How much active risk versus theMain Decision risk? policy benchmark? Historically, this has been the Historically, this has been a Importance dominant source of risk in most small part in the most institutional portfolios institutional portfolios Investing in the benchmark Outperform the benchmarkImplementation portfolio portfolio Short-term: several months (trading ideas) Time Horizon Long Term Medium-term: six months to two-three years (thematic ideas) Valuation, Risk and return expectations of cyclical analysis (economic, Key Drivers various asset classes earnings) timing, market sentiment
  • Strategic Asset Allocation Tactical Asset Allocation Strategic Tactical Cheap (low fees) and does not Expensive (fees and cost of Costs require much skill infrastructure) and skill is criticalMeasurement Total return of the benchmark Excess return over benchmark Equities: Equities : 20% 80% Large Cap 15%-25% 70-90% Large Cap 20% Growth 10%-20% Growth Cash and cash Cash and cash 20% 15%-25% Example equivalents equivalents Fixed Income: Fixed Income: 60% 50% GS 50%-70% 40%-60% GS 50% AAA CB 40%-60% AAA CB 100% Total Portfolio 100% Total Portfolio
  • References• http://www.seasholes.com/files/UBS_SAA_vers us_TAA_2009-01.pdf• http://www.investopedia.com/exam- guide/series-65/portfolio- management/strategic-tactical-asset- allocation.asp• http://www.investopedia.com/articles/04/0317 04.asp