Asset allocation

Asset allocation process

The aim of an asset allocation process is to create portfolios that should behave in line with an investor’s expectations. By matching overall portfolio volatility with the investor’s attitude to risk, asset allocation aims to minimise the chances of downside risk that is greater than the investor is prepared to tolerate.

But how do you ensure that the different mix of assets in your client’s portfolio is the one most likely to produce the optimum mathematically expected returns for your client? The answer is simple; with Skandia you can.

Optimised asset allocation

Our asset allocations take into account a set of economic, expense and tax assumptions that are reviewed periodically.

Using our online tools, you can measure a client’s attitude to risk, and match their ‘risk score’ to portfolios that are designed to deliver the right performance within those risk parameters.

Of course, the appropriate asset allocation will vary from investor to investor. That is why our portfolio construction tools provide you with an asset allocation that aims to maximise returns at their chosen risk level.

Our asset allocations are produced by a mathematical and scientific investment model based on Modern Portfolio Theory.

What is Modern Portfolio Theory?

Modern Portfolio Theory aims to build portfolios that, for each given level of risk, have the highest expected return; these are considered ‘efficient’ portfolios. Once identified, these efficient portfolios can be graphically represented (in terms of risk and return) to demonstrate the Efficient Frontier.

Modern Portfolio Theory states that portfolios that do not lie on the Efficient Frontier are inefficient (as otherwise you can get higher returns for the same risk). Hence, the asset allocation process should first establish the level of risk to which clients are prepared to expose their investment, and then determine a portfolio that lies on the Efficient Frontier.

This forms the basis of the Skandia approach to portfolio building.

Although nobody can forecast the future, you can eliminate much of the uncertainty by following a strategic approach to asset allocation. Backed by robust economic data, you can build a portfolio that has a greater probability of matching your clients’ expectations.

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Investment: a strategic approach.