Fin 226 topic 4 asset allocation 2013 extract only

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Presentation for Kaplan Professional Master of Applied Finance - Extract Only

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Fin 226 topic 4 asset allocation 2013 extract only

  1. 1. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com Topic 3: Asset Allocation Presenter : Jeremy Oorloff FIN226 Investment Management
  2. 2. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com 2 • Concept of active and tactical asset allocation • Testing models ability to meet investment objectives • Strategic Asset Allocation • Aspects of portfolio construction • The issues reviewed in this topic are: Topic’s Objectives:
  3. 3. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com 3 - Cash (domestic and international) - Fixed interest (domestic and international) - Property (domestic and international) and will include real property and real estate investment trusts (REITs) - Shares or Equities (both domestic and international) - Indexed bonds - Alternative assets • Typical asset classes are Asset classes Asset allocation in portfolio construction
  4. 4. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com 4 • SAA is a risk control measure established as part of the investment strategy to achieve an investors long-term investment objectives • Key objective of the strategic or neutral asset allocation is to provide the investor with a return commensurate with a known risk-return profile • Benchmark asset allocation for each class may include tolerance ranges around the benchmark which define acceptable levels of risk • SAA is reviewed infrequently unless there is a major change in circumstances such as a radical shift in expected long-term returns e.g. GFC Mark 1 Strategic asset allocation (SAA)
  5. 5. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com 5 • Introducing alternative asset classes can also enhance overall returns from a portfolio • A common example of this is to invest the overseas shares portfolio in investments in emerging country share markets (called ‘emerging markets’) e.g. China or India • A critical benefit of investing in emerging markets is that their returns have not been strongly correlated with the returns in the developed markets Role of alternative asset classes
  6. 6. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com 6 - The cash sector expected return is directly related to the inflation outlook and the expectations for monetary policy. - The domestic fixed income sector expected return will reflect a broader range of factors, primarily the inflation outlook and expectations for real rates. Real rates may widen or narrow to accommodate changing levels of uncertainty on, for instance, the current account or budgetary positions. • Expected returns per asset class can be defined: Expected returns and valuation signal
  7. 7. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com 7 - For a given level of confidence in the valuation signal, a bigger mis-valuation (i.e. a bigger return differential between two asset classes) will generally suggest a bigger shift away from the neutral • Extent of mis-valuation identified - The decision to overweight or underweight an asset class depends on the confidence the asset allocator has in the forecasts • Level of confidence in valuation signals Interpreting the opportunities
  8. 8. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com 8 - the use of active and/or passive managers, - the mix of balanced managers (i.e. managers who cover multiple asset classes and the weightings between them) and specialist managers (managers who cover only a single asset class), - internal management versus external management, - and arrangements for the management of any overseas component • Decisions which are typically made in this step include: Implementing asset allocation
  9. 9. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com 9 - involves actions to bring the actual asset allocation into line with the SAA so that the asset allocation does not drift over time away from the desired strategic position • Rebalancing - it could be implemented with a configuration of specialist managers supported by a rebalancing policy and value is added principally by the specialist managers in selecting individual securities • Passive approach Passive v active management
  10. 10. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com 10 - Brokerage, futures exchange and clearing fees on an SPI contract amount to less than 0.01% of the value of the contract. This compares to the transaction costs on physical shares of generally more than 0.50% of value (excluding ‘market impact’) • One approach to minimising costs is to utilise derivatives • Futures contracts on 3 and 10-year government bonds and the S&P/ASX 200 index are the most commonly used • A purchase of Share Price Index (SPI) futures contracts provides the fund with an exposure to movements in the S&P/ASX 200 index at a fraction of the cost of buying a portfolio of securities Use of derivatives
  11. 11. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com 11 • Monitoring should be undertaken on a regular basis (preferably quarterly) to ensure that problems are detected and acted upon as early as possible • The investment objectives and investment strategy should be reviewed on say either annually or every three years to ensure that they remain suited to the fund’s circumstances • Any study should consider the taxation status of the fund, any government regulations which inhibit investment alternatives, the availability of investment products in which to invest, assumptions with respect to the state of various markets, and so on Monitoring strategic asset allocation
  12. 12. PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com Topic 3: Asset Allocation Presenter : Jeremy Oorloff FIN226 Investment Management

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