Research shows that the majority of a portfolio’s returns over time come from asset allocation decisions rather than individual security holdings and that managers erode value on average when they make too many short-term asset allocation tilts. In other words, it is more important to be invested in equities when they experience a run than to be invested in specific equities. With this in mind, we keep a clear long-term return objective in mind when we allocate assets so that we are not tempted to make unnecessary changes in the short-term and can be confident that we will achieve our desired outcomes.
Our portfolios have CPI + targeted returns and we construct Strategic Asset Allocations (SAAs) based on these targets. By using a building block approach to asset allocation, we maintain strict control of our asset exposures and can rebalance when it is necessary to do so. This means that we can deviate from our SAA when a specific asset class, or a combination thereof, allows us to achieve our desired long-term returns at a lower risk than normal while remaining diversified.
We aim to provide holistic portfolio solutions to our clients, so we try not to deviate too far away from our SAA as we want to minimise the tracking error our clients experience against the benchmark. This does not mean that we cannot significantly outperform our benchmark over time, it just means that we will track the general direction of the benchmark in the short-term. There is a behavioural element to this as portfolios that have large tracking errors are usually invested into and divested out of regularly, meaning that the real-world experience of the client is different from the actual return of the portfolio.