These approaches are designed to, for instance, limit the volatility of a balanced portfolio within a certain range over a given period. The modelling will also produce a range of likely returns that accompany the volatility range, from which long-term performance can be estimated and investment decisions made with the aim of ensuring clients achieve their desired goals.
Ideally, the assumptions that underpin the modelling will be regularly reviewed on the basis of the latest economic and asset class performance data.
Thousands of different scenarios will be modelled, from which the best combination of asset classes will be identified for delivering returns for a given level of risk or volatility. Such techniques are commonly used in the institutional investment sector but are, in some cases, also available in the retail or wholesale arenas.
Within the strategic asset allocations determined through this process, active management, in the form of fund or security selection, can be used to enhance returns and/or reduce risk relative to the long-term assumptions provided by the modelling and research process.
In order to add real value across asset classes from active management, a large and well-resourced team of investment professionals will typically be required. The amount of work that goes into – and resources required for – constructing investment strategies that align with client risk profiles is considerable and the above description is only a broad overview.
