Asset allocation

It is clearly understood by most investment managers that asset allocation decisions (being in the right place at the right time) are important. A number of widely cited studies on this issue have been conducted, almost all of which have reached similar conclusions.

A widely respected study by Roger Ibbotson and Paul Kaplan is titled "Does asset allocation policy explain 40%, 90% or 100% of performance?" The study used 10 years of data from the United States on the performance of balanced mutual funds (those invested in different combinations of bonds and stock).

Ibbotson and Kaplan ranked the importance of the three major determinants of portfolio performance, with asset allocation being the clear winner over time, as follows:

·       Asset allocation - 91.5%
·       Security selection - 6.7%
·       Market timing - 1.7%

Our Approach

Our Strategy Group is charged primarily with asset allocation. It aims to agree house forecasts for short and long-term returns from investment in all available asset classes. These forecasts are derived from both global, macro economic data and asset class specific research. This process is both disciplined and repeatable.

Once the available asset classes have been fully reviewed and their pros and cons assessed, the asset allocation process aims to highlight areas of greatest opportunity for our clients. This then shapes future investment strategy.  Risk monitoring also plays a key role in our investment and asset allocation system.  We use risk measurement software to validate our asset allocation process and to model portfolio risk.

The following chart illustrates the current asset allocation positions for our endowment, balanced, absolute return and income models.

(Produced 30 June 2008)

Investment Decision Making Process

The following chart details our investment decision-making process from asset allocation all the way down to security selection. On the left you will see the frequency with which the various committees and groups meet and on the right, the information they consider.

The resultant asset allocation decisions are then implemented by the investment management teams.