rda - investment planning - asset allocation

Tailored Financial Planning


			Asset Allocation Theory: We recognise that efficient Asset Allocation is key determinant in the variation of returns in a client’s portfolio. In 1952 Professor Harry Markowitz published his Doctoral Thesis “Portfolio Selection,” marking the introduction of what we know us Modern Portfolio Theory (MPT). Professor Markowitz established that for any given level of risk it was possible to construct an investment portfolio that mathematically delivers the maximum possible investment returns. That portfolio is said to sit on the “efficient frontier.”
			Modern Portfolio Theory states that any portfolio that does not sit on the efficient frontier is inefficient as the portfolio is not maximising the returns for that given level of risk. Hence we use the attitude to risk questionnaire to first establish a clients’ acceptance of risk, before we then find the portfolio on the efficient frontier for that level of risk. More Recent Research by Brinson Singer Beebower (Brinson, Singer & Beebower, "Determinants of Portfolio Performance II: An Update," 1991.) indicates that Asset Allocation is by far the dominant determinate (91.5%) in the variability of returns in a portfolio. (Market timing being 1.8% and Stock Selection 4.6%). Further more the Myners report of 2001, clearly states the significance of asset allocation & goes so far as to state that clients should pay more in order to receive advice on asset allocation. Choice of Asset Allocation Tool: We have made a decision to use a deterministic asset allocation tool provided by Skandia / Watson Wyatt. One of the key reasons for choosing the Skandia tool is that Skandia do not amend the economic output in any way. We believe that providers who amend the output of their models are creating a conflict of interest. In addition, the Skandia Asset Allocation tool is the only model which takes into account the impact of the different tax wrappers – i.e. the impact of a gross or net yielding environment on the performance of the underlying asset classes. This means that for any given attitude to risk there may be a difference in the asset allocation recommended for an investment into a gross yielding wrapper and a net yielding wrapper. Asset allocating within Sectors: The Skandia Asset allocation tool provides us with the recommended asset allocations into the following sectors. UK Equity UK Fixed Interest Property International Fixed Interest European Equity US Equity Global Specialist Global Emerging Markets Far East Excluding Japan Japan Contact us today