ASSET

ACQUISITION /
ALLOCATION
Session Objectives
What is asset allocation?
●
Strategic Asset Allocation
●
Tactical Asset Allocation
●
Core Satellite Asset Allocation
●
Systematic Asset Allocation

Asset Allocation Strategies

Diversification

Asset Allocation Decision

Factors Affecting Portfolio Composition

Case Studies
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Asset Allocation is the Key

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What is asset allocation

Asset allocation This strategy An asset portfolio

is an can be
is based on: constructed by
investment The investor’s carefully choosing
strategy that goals the assets that the
Aim: To tries to investor wishes to
The investors’
balance risk minimise risk invest in and
and maximise risk tolerance allocating
and reward
reward by and appropriate
The time percentage of the
balancing the total invested
assets in a frame that he funds to each
portfolio. is looking at. asset.

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What asset allocation should not
be

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Asset allocation strategies
Strategic Asset Allocation:

●
This type of asset allocation tries to create an optimal asset mix balancing between risk and return. This is a long term asset
allocation strategy.

Tactical Asset Allocation:

●
Here the investor is more active and risk tolerant. He tries to invest in assets that can give maximum income and gain.

Core-Satellite Asset Allocation:

●
This is a mixed strategy. It combines the approach of both strategic allocation and tactical allocation methods.

Systematic Asset Allocation:

●
This method works on certain assumptions. The first is that there is enough information about the available returns of various asset
classes. There is a consensus in the expected returns in the market. The expected returns provide the basis for the actual returns.
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Strategic Asset Allocation

Involves setting target allocations for various asset classes

●
investor’s risk tolerance,
●
time horizon
●
investment objectives

Periodically rebalancing the portfolio back to the original allocations when they deviate
significantly from the initial settings

Target allocations depend on a number of factors –

May change over time as these parameters change.

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Tactical Asset Allocation

Moderately
active strategy
Allows to create as managers
In order to take
Rebalances the extra value by return to the
advantage of
percentage of taking portfolio's
market pricing
assets held in advantage of original
anomalies or
various certain strategic asset
strong market
categories situations in the mix when
sectors.
markets desired short-
term profits are
achieved

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Strategic Vs Tactical Asset
Allocation

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Core-Satellite Asset Allocation

Provides an
Designed to opportunity to
minimize costs, tax outperform the
liability and volatility broad stock market
as a whole

Additional positions,
Core of the portfolio
known as satellites,
consists of passive
are added to the
investments that
portfolio in the form
track major market
of actively managed
indices
investments

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Systematic Asset Allocation

Use a quantitative investment model to systematically exploit inefficiencies or

temporary imbalances in equilibrium values among different asset classes.

They are often based on known financial market anomalies (inefficiencies) that
are supported by academic and practitioner research.

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 The Risk-Return relationship
Risk and investing go hand in hand

Risk can be defined as the chance one takes that all or part of the money put into an
investment can be lost

Investing risk comes with the potential for investing reward

The bigger the risk is, the bigger the potential payoff

Even seemingly “no-risk” products such as savings accounts and government bonds
carry the risk of earning less than the inflation rate

If the return is less than the rate of inflation, the investment has actually lost ground because your
earning aren’t being maximised as they might have been with a different investment vehicle.

Always check the potential risks when quoted returns are unusually high.
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Diversification
Diversification is the key to a successful asset allocation strategy.

Diversification means investing in different types of assets with different risk-reward

profiles, in order to set off risks associated with one type of asset with that of another.

Diversification can happen across asset categories and also within the asset categories

Don’t put all your eggs in one basket – if it falls or spoils, all eggs get affected!!

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Asset Allocation Decision

Preserving Generation of
Capital Income

Growth of
Balanced
Investment

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Preserving Capital

Capital preservation
This cash could be
takes importance when
required for Normally the assets here
capital is required in a ●
education, would be cash and
year or so for specific ●
marriage, equivalents like bank
use and the investor ●
purchase of asset, deposits, etc.
does not want to lose ●
starting a business
any of it.

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Generation of Income
￮ This portfolio is made in such a manner that the investment generates income for the
investor regularly.
￮ Mostly fixed income securities and blue chip stocks that generate dividends regularly are
included in the portfolio here.

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Growth of Investment
Ideally, salaried people at the
beginning of their careers prefer this
This is for the people who want to
model as they are earning and would
grow their investments.
like to build a corpus and keep adding
to it.

The assets may or may not generate Mainly equities are preferred by these
income immediately. investors.

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Balanced maTdheus, while
r o m ise is some
p h is
A com een growt inces kept for ear money
a
i be t w iti
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edseceurities like ecusriti teassid e balance
e
m s to is
v ia coamnd incomedebt. add to a cobruild and
.
s a in h lik
e pus.
i n t
is ee ow
Th etw gr
b and

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Drawbacks of Asset Allocation

Prediction of investors risk tolerance is difficult and sometimes not known at all. It then
becomes difficult to decide on asset allocation.

Once the asset class is decided on, the selection of security within the asset class may not
move on par with the generic asset class in terms of risk profile.

The long term and short term performance of the asset classes are normally not similar.

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Factors Affecting Portfolio
Composition

Goals of Investor

Time Frame of Risk Tolerance of

Investment Investor

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Goals of Investor

Goals can be for specific things or generic, reflecting the expectations of every investor.

These goals must be kept in mind while deciding the portfolio.

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Risk Tolerance of Investor
Some investors are risk averse.

They prefer to invest in safe and regular income

securities, even if income is less.

Some love to take risks.

They prefer to invest in high yielding securities, even if

there is risk of no or less income or loss or reduction in
capital.

Some investors like a mix of both.

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Time Frame of Investment

Time horizon is long term if you plan for retirement early, or child education early, etc.

Time horizon is short if you are looking to make money in the short term.

A longer time frame investor can look at riskier options and the reverse for a short time
frame investor.

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 Case Study 1

A young investor in late 20s having got a new job, wants to invest for capital growth.

Wants to invest lump sum when bonus is given.

Recommended investment?

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Case Study 2

Housewife saves money every month.

Wants to invest for children’s education.

Recommended Investment?

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Case Study 3
A couple in middle age.

Both are earning.

Have saved some money from their earnings.

Want to invest for buying a house in five years.

Investment recommendation?

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Case Study 4

A young couple with both earning.

Want to go on a world tour in a year’s time.

Saving money for that.

Recommended Investment?

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Case Study 5

Earning member of family.

Supports full family.

Wants to provide for family in case of death.

Recommended Investment?

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THANK YOU