In her article Building Better Portfolios Ms Alliston argued that portfolios comprising of multiple asset classes allow exposure to stronger areas while mitigating the impact of weaker segments.
“Alternative asset classes such as infrastructure, absolute return strategies and private equity offer important diversification benefits given their low correlation to mainstream asset classes such as equities and bonds,” said Ms Alliston.
She said the inclusion of these types of assets in a portfolio lowers overall risk and improves the consistency of returns.
Ms Alliston said the continued volatility of markets provides opportunities for fund managers.
By varying the asset mix from its long-term strategic asset allocation settings managers can add value or reduce risk according to Ms Alliston.
She said even minor alterations to the asset mix can generate a better return outcome or lower overall risk.
“This is why active management of asset allocation plays such an important role in portfolio management, particularly in terms of seeking to preserve capital when markets are falling.”
The importance of constructing portfolios that reflect client needs was another key point raised by Ms Alliston.
She said it was vital for portfolio managers to develop a deep understanding of the client’s investment objectives as well as their tolerance to risk to determine the most appropriate long term mix of assets.
“Asset allocation is all about carefully balancing the expected returns and potential risks of each asset class to build a portfolio that has a strong probability of meeting the investor’s long-term objectives with the lowest risk profile,” she said.
Ms Alliston said while stock selection and manager selection may add value to a portfolio, their overall impact on performance is marginal compared to the impact of the asset allocation decision.
