The case for strategic asset allocation

06 January 2017 | Portfolio construction


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Investors face many decisions. What strategies should they use? Where should they invest? What funds should they choose?

My name is Brian Wimmer, and I'm a senior investment strategist at Vanguard.

Today, let's talk about one of the most important decisions you can help your clients with – determining their strategic asset allocation.

When we talk about a portfolio's strategic asset allocation, we mean the proportion invested in the different asset classes over the long term – usually equities and bonds. So, for example, a balanced portfolio could be invested 60% in shares and the remaining 40% in bonds. Maybe the split is 70-30. That split or mix is the fund's strategic asset allocation.

We revisited some findings from academic research back in the 1980s and 90s that showed how influential strategic asset allocation is on a portfolio. We wanted to see if the findings still hold true, and if they hold true in different markets.

We analysed over two and a half thousand balanced mutual funds in the US, UK, Canada, Australia and Japan over a fifteen-year period. Focusing just on the UK, we looked at 743 balanced funds.

We compared the variation in actual returns with the returns determined by the fund's asset allocation strategy. We found that, on average, 81% of a fund's actual return variation was explained by the strategic asset allocation.

The figures were also high in the other markets. As much as 91% in the US.

So what does this tell us? This tells us strategic asset allocation is important. But what it also tells us is that other investment decisions – such as individual security selection and trying to time the market within a balanced portfolio – have relatively less impact.

So, our main conclusion is that most of the return variability of a broadly diversified portfolio is due to its underlying strategic asset allocation.

Why is this important for advisers and their clients? Well, with asset allocation having such a large impact, it is key to managing the range of variability – or volatility – of a portfolio's returns.

That means: working with clients to understand their long-term goals; developing the appropriate strategic asset allocation; and staying focused on the long term.

Thanks for watching.

Important information:

This video is directed at professional investors and should not be distributed to, or relied upon by, retail investors.

This video is designed for use by, and is directed only at, persons resident in the UK. It is for educational purposes only.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

The opinions expressed in this article are those of the individual speaker and may not be representative of Vanguard Asset Management, Ltd.

Issued by Vanguard Asset Management, Ltd, which is authorised and regulated in the UK by the Financial Conduct Authority.



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