Investment Philosophy Principle 1 – Asset Allocation Is The Key Driver Of Returns & Risk

Core Principle

Asset allocation has been the focus of much academic research and has been found in the vast majority of cases to have been the most significant driver of returns and by far the greatest influence on risk. Therefore, asset allocation is at the heart of our investment philosophy.

 

Diversification

“Ask five economists and you’ll get five different answers – six if one went to Harvard.”
Edgar Fiedler (US Assistant Secretary of the Treasury for Economic Policy, 1971 – 1975) 

Traditional portfolio construction involves an adviser selecting an off the shelf or in-house model asset allocation suitable for a client’s attitude to risk. But as Edgar Fiedler points out, there many opinions on the economic outlook and therefore many opinions the most appropriate investment mix. If you choose only one model, what if it’s wrong? What happens if the world changes overnight and a recalibration needs to take place? It takes a considerable number of skilled analysts to monitor and interpret the real-time economic data as the world changes on trade wars, consumer trends, government policy changes or even a tweet. It also takes a team of sufficiently qualified and experienced decision makers with the investment acumen to know what changes should be made, or indeed, if holding steady is the most prudent action.

Multi-Asset funds provide the ideal solution to the problem as they invest according to their own asset allocation model and have a team of dedicated professionals who can make the necessary changes in short order. Many advisers now research and select a multi asset fund for clients with smaller portfolios to ensure they continue to receive a quality investment service. However this does not address Edgar’s central point which is why we believe the best approach is to have a carefully selected spread of multi asset funds. Each one being selected on the basis of risk, performance, cost and, most importantly, offering an approach to asset allocation which differs from the others in the portfolio. We have found that this has consistently generated slightly higher than average returns in the good times and mitigated the losses slightly better than average through the bad times.