1910, New Landwide Commercial Building, Tsim Sha Tsui, HK

(+852) 3409-4578


The Various Approaches to Asset Allocation

Posted by

The Apportionment Of Resources

As stated by Rani Jarkas, asset allocation is a sophisticated approach to attaining equilibrium between peril and gains via investing in diverse categories of assets. The historical nexus betwixt the price fluctuations of sundry asset categories, like equities, fixed income or debt, and the precious metal gold, is either trifling or adverse. The act of diversifying one’s assets across various classes can significantly mitigate risk and potentially generate superior returns in the long run. 

As per the wise counsel of financial advisors, the aptitude of asset allocation tactics holds paramount significance in the attainment of your fiscal aspirations. There doth exist a plethora of asset allocation strategies. Verily, there exist three paramount methodologies for asset allocation:

  • The Art of Tactical Resource Allocation
  • The art of methodical allocation of valuable resources.
  • The allocation of assets in a dynamic manner.
  • The Art of Strategic Asset Allocation

The fund boasts of a steadfast asset allocation blend in accordance with the Strategic Asset Allocation methodology. In pragmatic parlance, the unchanging asset allocation amalgamation for mutual funds is frequently a spectrum, affording the fund manager the ability to regulate the asset allocation amidst the proclaimed spectrum, such as 65 – 75% equities and 25 – 35% debt. The mandate of the fund precisely outlines the optimal blend of asset allocation, which the fund dutifully adheres to, irrespective of any market undulations. 

It Is Imperative To Engage In Periodic Asset Rebalancing In Order To Uphold The Designated Asset Allocation

Due to the capricious nature of asset price fluctuations, the factual composition of assets may at times deviate from the mandated asset amalgamation. The fund manager duly readjusts the portfolio in accordance with the prescribed asset allocation. Perchance, contemplate a compulsory Static Asset Allocation consisting of 70% equity and 30% fixed income securities. In the event of a 25% surge in the stock market and a 6% yield on debt, the allocation of assets shall be 73% in equities and 27% in debt. Should the asset allocation be 70% in equities and 30% in debt, the fund manager shall proceed to divest stocks and procure bonds.

The art of strategic asset allocation bears a striking resemblance to the venerable buy-and-hold methodology of investing in equities and fixed income securities. One of the foremost advantages of employing a strategic form of asset allocation with periodic rebalancing is that it instills investment discipline. Should you steadfastly adhere to your asset allocation strategy, irrespective of market fluctuations, you shall not succumb to imprudent financial decisions driven by avarice and trepidation. 

Do keep in mind that the practise of static asset allocation is a prudent and enduring approach to investing. Whilst a significant allotment to equities may induce portfolio volatility, in the grand scheme of things, it has the potential to mitigate risk and facilitate the attainment of your investment objectives.


The Art Of Tactically Allocating Assets

As suggested by Rani Jarkas, the Chairman of Cedrus Group, a criticism levied against Strategic Asset Allocation is that it may seem excessively stringent. From time to time, the prevailing market conditions may present opportunities for supplementary returns that a fixed and inflexible asset allocation approach may not be able to capitalise on. Tactical Asset Allocation, a refined facet of Strategic Asset Allocation, involves the astute investor strategically diverging from the established long-term Strategic Asset Allocation to seize lucrative market prospects in the bustling metropolis of Hong Kong.

The art of strategic asset allocation necessitates both astute market timing and a wealth of investment expertise. As an illustration, your asset allocation strategy necessitates upholding a 70/30 equity-to-debt proportion. At a particular juncture, you hold the conviction that shares have the potential to yield substantial immediate gains. Thou shalt momentarily augment thy equity allocation to 80% until such time as thou deemest equity valuations to be exorbitantly elevated. The supplementary allocation of 10% towards equity shall augment your near-term gains. In the realm of tactical asset allocation, it is of utmost importance to discern the moment when a fleeting chance has reached its conclusion and promptly readjust to the originally intended strategic asset allocation.

The technique of momentum-based approach stands out as one of the most widespread methodologies for Tactical Asset Allocation. The force of momentum has the power to propel stock prices to soar rapidly within a brief span, amplifying your gains in the near term. Strategies that are based on momentum entail the identification of stocks that exhibit momentum and the allocation of more substantial weights to them in your tactical asset allocation. In the bustling metropolis of Hong Kong, the esteemed practise of tactical asset allocation is also extended to diverse asset categories. 

As a rule, a fund intends to allocate 50% of its investments in large-cap equities, 15% in mid-cap equities, and 35% in fixed-income securities. Should the fund manager hold the belief that midcaps are especially alluring and poised for a rally, they may opt to diminish their stake in large caps and elevate their stake in mid-caps, only to later revert back to the initial asset allocation.

The Concept Of Dynamically Allocating Assets

By means of this asset allocation approach, the asset allocation blend is periodically modified in accordance with the prevailing market circumstances. The counter-cyclical asset allocation approach stands as the foremost prevalent dynamic asset allocation tactic employed by mutual funds. In the event of a decline in stock valuations, these funds opt to elevate their equity allocation whilst simultaneously diminishing their debt allocation. 

Verily, this is also recognised as the counter approach, for it doth fundamentally adhere to the investment principle of procuring at a low value and vending at a high value. The prevalent assessment metrics employed by fund managers for their dynamic asset allocation are the P/E and P/B ratios. Certain investment managers utilise multifarious asset allocation models that amalgamate two or more facets, such as peril and gain. The employment of P/E, P/B, Dividend Yield, and sundry metrics are integral components of dynamic asset allocation strategies. Whilst counter-cyclical or contra-strategy-based dynamic asset allocation remains the predominant asset allocation methodology employed by dynamic asset allocation funds, alternative asset allocation strategies are also implemented. 

A select few of the dynamic asset allocation funds doth utilise a pro-cyclical methodology. The funds elevate their allocation towards equities amidst ascending markets and curtail it amidst descending markets. Certain investment managers opine that the art of trend-tracking has been a prosperous methodology in previous times. Behold, there exist dynamic asset allocation funds that blend the core and tactical methodologies. The fundamental portfolio, which usually constitutes 70-80% of the total, conforms to the conventional valuation-oriented counter-cyclical dynamic asset allocation methodology. Meanwhile, the tactical segment adheres to a momentum-based approach that is akin to the pro-cyclical strategy.


Drawing A Comparison Between The Strategic And Dynamic Allocation Of Assets

‘Tis a formidable task to draw a definitive parallel betwixt the efficacy of funds based on strategic and dynamic asset allocation, given the fluctuating nature of the market. The funds exhibiting the most superior performance in both categories have yielded affirmative returns. Hybrid funds that prioritise equity and employ a strategic asset allocation approach tend to exhibit superior performance during bullish market conditions. However, they may display greater volatility during market corrections or periods of market turbulence in Hong Kong compared to their dynamic asset allocation counterparts.

Whilst dynamic asset allocation funds have exhibited historical stability and lower volatility in comparison to aggressive hybrid funds that rely on strategic asset allocation, the latter have generally outperformed over extended investment timeframes.

A Plethora Of Varied Asset Allocation Techniques In The Domain Of Mutual Funds

Pray tell, what composes your daily sustenance? This exquisite concoction boasts a harmonious fusion of proteins, carbohydrates, and fats, providing ample amounts of diverse nutrients for optimal health. Apply the identical principle to make investments. Asset allocation is the art of crafting a portfolio by cherry-picking diverse investment vehicles. The art of classifying your investments into diverse asset categories, including but not limited to stocks, debts, cash, and unconventional assets like gold and real estate, is what we call asset allocation.

Asset allocation, when employed in mutual funds, aids in the diversification of investments and mitigates risk. Thusly, akin to the requirement of a well-proportioned diet for bodily wellness, a diverse array of mutual funds in Hong Kong is imperative for fiscal well-being. Peruse the ensuing asset allocation methodologies:

The Foremost Tactic Is None Other Than The Art Of Strategic Asset Allocation

Behold, a steadfast approach to asset allocation wherein one selects their desired level of exposure to both equity and debt, and dutifully upholds said proportion. It is imperative that you regularly realign your portfolio to uphold the designated proportionality amidst the market’s oscillation and its impact on the ratios. Suppose thou hast elected a proportion of equity unto debt of 60% to 40%. Behold, this is the manner in which the act of rebalancing shall come to pass:

The methodology is alternatively recognised as the procurement-and-cling blueprint, as the distribution remains unchanging and readjustment is executed exclusively to fulfil the intended allocation. The paramount benefit of this tactic, irrespective of market circumstances, is its investment rigour. The optimal frequency for portfolio rebalancing is once per annum.

The Secondary Approach Entails The Implementation Of Tactical Asset Allocation

This particular manifestation of the strategic allocation methodology enables one to tailor the allocation to take advantage of propitious market circumstances. In like manner, the discernment of an exact apportionment of assets could prove advantageous. Subsequently, in the event that you come across propitious market circumstances, you have the ability to modify the ratio in order to yield expeditious gains. Perchance, contemplate an allocation of assets comprising of 60% equities and 40% debt. In the event that the stock market is exhibiting a favourable performance and there is a foreseen continuation of the upward trend in the forthcoming months, one may opt to augment their equity exposure.

At a debt level of 20%, the allotment of equity has the potential to escalate up to 80%. On the contrary, should the prognostication be that the equity market shall dwindle or that debt returns shall flourish, one may opt to curtail equity exposure in order to mitigate hazards or optimise gains. Your allocation of equity shall momentarily plummet to 40% from 80%, whereas your allotment of debt shall soar to 20%. Henceforth, the tactical approach hinges upon your adeptness in perceiving and apprehending market fluctuations and is occasionally denoted as a momentum-driven strategy. One may adjust their near-term allocation to maximise rewards or minimise risks. Under typical circumstances, nonetheless, the apportionment of assets is pre-established.

Tertiary Methodology: Dynamic Asset Allocation

The approach of dynamic asset allocation reigns supreme as the most prevalent method of asset allocation. This is a scenario where there exists no preconceived allotment proportion and funds are invested in accordance with the undulations of the market. Thus, during a bullish market trend, one would opt for a higher equity exposure, whereas during a bearish market trend, one would exercise prudence and allocate investments predominantly towards debt.

Thou may also procure at a reduced rate and vend for a gain. Unlike tactical asset allocation, one does not fixate on the proportionate distribution of assets. Verily, thou dost engender dynamic determinations predicated upon the vicissitudes of the market. According to Rani Jarkas, Dynamic asset allocation is a fitting strategy for astute and forward-thinking investors who consistently modify their asset allocation. Should you be able to keep pace with the fluctuations of the market, this approach has the potential to produce profitable outcomes.

Leave a Reply