Asset Allocation Before Portfolio Construction

“Alice: Would you tell me, please, which way I ought to go from here?

The Cheshire Cat: That depends a good deal on where you want to get to.

Alice: I don’t much care where.

The Cheshire Cat: Then it doesn’t much matter which way you go.

Alice: …So long as I get somewhere.

The Cheshire Cat: Oh, you’re sure to do that, if only you walk long enough.”

— Lewis Carroll, Alice in Wonderland

Not to be too facetious, but very often this is how a conversation between a financial advisor and a client goes. If one doesn’t quite know where one is going, one is likely to take meandering paths and walk for a very very long time. Too often, we put the cart before the horse.

It is widely recognized that the majority of investment returns come from taking long term strategic asset allocation decisions. The how much to allocate to different asset sub-classes question. This simple, boring, yet extremely powerful insight is unfortunately often glossed over in obsessive search for ‘best investment products’ or the next hot fleeting investment theme.

The long term strategic allocation is about figuring out WHERE to go. The roads that get one there then become subsequent choices between a myriad of investment products.

The asset allocation module within helps set direction, analyzes and then optimizes on what a client already owns. In seconds it dissects a client’s aggregate portfolio, does a risk-return analysis, generates forward looking numbers and metrics and makes recommendations to reallocate asset classes to improve portfolio characteristics. In other cases, it suggests the addition of alternative and illiquid investments (when permissible) to complement and enhance existing holdings.

Only after getting the long term strategic asset allocation right,  ought one to worry about portfolio construction and fund manager selection.

Put the horse before the cart with

Alice would approve. As would the Cheshire cat!


Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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