Anchors, Diversifiers & Enhancers…
A Portfolio’s asset allocation policy is the primary determinant of returns – as identified by Nobel prize winning research.
Our first step is to determine the long-term capital market expectations of returns, volatilities and asset class correlation. This determines the strategic asset allocation of the fund.
The process is based on Black and Litterman’s portfolio theorem and uses a forward-looking return model. This is widely accepted among investment professionals as a primary determinant in the long-term performance of a fund.
Thus, our focus is on getting the asset allocation structure in place – with reference to the asset class definitions of Anchor, Diversifier and Enhancer attributes.
Simply put, for any individual portfolio, we change the principal allocation to these major asset classes depending on the performance objectives.
For example, a lower return portfolio will allocate more assets to anchor assets and fewer to enhancer assets and, by the same token, a higher return portfolio will hold more enhancer assets.
The Asset Types
Anchor assets form the cornerstone of risk control and are typically fixed interest instruments, which demonstrate low volatility and generate stable income.
Diversifier assets aim to achieve total returns and add a further layer of risk control by being uncorrelated to equity markets. Such equity investments are the traditional engine room of medium to long-term growth but are also more volatile in nature over the short term as they react to positive and negative influences in global markets.
Equities, whether public or private, developed economy or emerging markets are termed Enhancer assets.