Zenith Investment Partners has instructed investment managers to take a dynamic asset allocation (DAA) approach which accounts for cyclical risks in the global economy.
Amid recent economic uncertainty, the firm explained that DAA considers the potential risk to portfolio positions and how markets may move over a horizon of three months to two years.
In comparison, Zenith noted that strategic asset allocation (SAA) typically reflects return and volatility assumptions over a longer time frame of five to 10 years.
“It’s about tilting a portfolio away from the underlying SAA — typically something fixed for a long period of time — in order to take into account major macroeconomic changes, policy developments and changes to asset valuations,” said Zenith head of asset allocation and strategy, Damien Hennessy.
According to Mr Hennessy, DAA has increasingly been recognised as a valuable option in portfolio construction because it seeks to enhance returns and smooth risk by altering short to medium-term weightings based on a number of factors.
These factors may include valuations, the business cycle, policy developments and a range of other major events.
“The other important thing to note with DAA is that investors shouldn’t be moving their actual portfolio positions outside of the range they would have expected from their SAA,” Mr Hennessy stated.
“If an investor is in a conservative portfolio, DAA does not involve taking positions that push them up into a balanced or a growth-type portfolio setting.”
With inflation at its highest level in decades, Mr Hennessy suggested that the longer-term drivers of disinflation as well as low and declining interest rates could be changing.
“Demographic changes, productivity trends, de-globalisation and geopolitics tend to shape the broad growth and inflation outlook over the long term,” he said.
“Central banks are trying to deal with rising inflation through higher interest rates. However, if they push too far too soon, there’s the possibility of recession risk. A DAA approach needs to be hyper aware of these risks when it comes to portfolio positioning.”
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.