Introduction to Asset allocation (2.Investment governance background to…
Introduction to Asset allocation
Approaches to asset allocation
Relevant risk concepts
Modeling asset class risk
Rebalancing: Strategic considerations
Framework for rebalancing
Strategic considerations in rebalancing
Investment governance background to asset allocation
-is the structure that is expected to ensure that assets are invested to achieve the asset owner’s investment
objectives within the asset owner’s risk tolerance and constraints and in compliance with all applicable laws
Allocation of rights & responsibilitiess
Investment policy statement
Articulation investment objectives
- A return requirement is often considered the essence of an investment objective statement, but for that portion of the objective statement to be properly understood requires additional context, including the obligations the assets are expected to fund, the nature of cash flows into and out of the fund, and the asset owner’s willingness and ability to withstand interim changes in portfolio value. The ultimate goalis to find the best risk/return trade-off consistent with the asset owner’s resource constraints and risktolerance.
Asset allocation & rebalancing policy
•Where are we now?
•Where are we relative to the goals and objectives?
•What value has been added or subtracted by management decisions?
The governance audit
Effective investment governance ensures the durability or survivability of the investment program
Strategic asset allocation
Economic balance sheet & asset allocation
-An economic balance sheet includes conventional assets and liabilities as well as additional assets and liabilities—known as extended portfolio assets and liabilities—that are relevant in making asset allocation decisions but do not appear on conventional balance sheets.
For individual investors, extended portfolio assets include human capital (the present value of future
earnings), the present value of pension income, and the present value of expected inheritances. Likewise,
the present value of future consumption is an extended portfolio liability.
Passive/Active management of allocation to asset classes
Risk budgeting perspectives in asset allocation & implementation
Passive/Active management of asset class weights
Importance of Asset allocation in investment management
-Asset allocation is widely considered to be the most important decision in the investment process. The strategic asset allocation decision completely determines return levels