Managing Risk using Asset Allocation ...

We aim to manage risk by using asset allocated portfolio modelling after appropriate discussions with our clients about their circumstances, objectives and attitude to risk.


Asset Allocation is simply the mix of underlying asset types held within an investment or portfolio of investments. The three key asset types in relation to stock market investing are bonds, equities and cash.


Each of these asset types behaves in a different way with cash providing low returns which are relatively stable and equities (i.e. shares) potentially providing higher returns in the long run but which are quite volatile. Bonds behave somewhere in between. Asset classes can be further divided into a number of other categories.


The trends in investment performance of each asset class over time are also important. The relationship between these trends (known as their Correlation) can help an investor reduce the variance of their overall portfolio. This is principally done by investing in more than one non-correlated asset classes such that as one is falling, the other is rising. This is known as diversification.


Many studies have shown that asset allocation is responsible for the majority of the variation in investment returns and as such is fundamental to a successful investment


Our research employs consensus models of Cautious, Balanced and Aggressive portfolios. The consensus models are based on Optimised Portfolio Modelling. The Asset Allocator is based on Modern Portfolio Theory. This means that asset allocations are determined by a mathematical model that attempts to work out which combinations of asset classes are "efficient". Theoretically efficient portfolios are those where the highest level of expected return is achieved by combining assets in the specific proportions. The Asset Allocator uses a mathematical model supplied by Towers Watson, a leading firm of actuaries and investment consultants.


The asset allocation is determined by using a sophisticated financial model. The model attempts to determine an optimal combination of different asset classes to predict the maximum mathematically expected return for your chosen level of risk. Such an advanced approach to building portfolios is not normally possible for retail investors and would typically only be done by institutional investors and pension fund managers.


The financial model is dependent on a set of economic assumptions advised by Towers Watson. The assumptions are built using a combination of past experience and forecasts of future economic conditions. Whilst no guarantees can be attached to these, Towers Watson believe that they represent as good a forecast of future economic assumptions as there are available today.


The portfolios are split into asset sectors and suitable funds chosen within these sectors. These criteria are used both in our selection of funds for new portfolios and in the review process for existing portfolios.


Our fund selection and review criteria have been developed over many years and are based on statistical analysis and rigorous mathematical principles.


Whilst past performance is no guarantee of future performance and fund prices can fall as well as rise, we believe that a wide spread of investments, including bank deposits, government securities, property as well as equity backed investment funds can provide a way of protecting accumulated wealth.