Asset Allocation Strategies
With most investment managers, asset allocation is based traditionally upon the long-term, historical characteristics of various asset classes. Assumptions regarding future asset class performance are typically derived by incorporating the historical averages related to risk, return and correlation of the asset classes. This traditional approach tends to be fairly static, usually involving lower levels of trading and turnover. Most of the time, adjustments tend to be related to rebalancing. The overriding posture is to stay on course, anticipating that each asset class will deliver performance similar to its long-term average.
At Confluence, our approach is more dynamic. We extend the traditional approach by incorporating forward-looking analytics that address changing opportunities and risks as we move through economic and market cycles. While we respect market history, we recognize that intermediate trends often diverge significantly from the long-term averages. Therefore, Confluence's asset allocation approach evaluates the investing landscape against the backdrop of the pending business cycle…a rolling time frame continuously looking forward at the next two to four years. We may adjust allocations in much shorter time frames, depending upon how our views of the marketplace and economy change. Alternately, we may continue for several quarters without making significant allocation adjustments if we believe that the existing posture remains optimal. We communicate our market and economic viewpoints to clients each quarter.
Confluence's asset allocation model also varies from the traditional approach in how we position portfolios to pursue investment objectives. Because the risk and return potential of the asset classes varies throughout the business cycle, we may at times increase our allocation to, or completely exit, an asset class, depending upon our forward-looking view. At times, this strategy may involve more concentrated allocations to a single asset class, paired with low volatility asset classes such as short-term bonds or cash. Our approach is not market timing. Rather, our intention is to remain within an acceptable risk profile, while changing the asset class mix to optimize return potential.
The final part of our process involves the selection of appropriate securities to implement the asset allocation strategy. The majority of the securities we utilize are passive instruments, like exchange traded funds (known as ETFs). In some instances, we may utilize ETFs that allow us to focus on or avoid particular industry sectors, bond maturities, commodities or countries. There are a vast number of ETFs in the marketplace today, and a thorough understanding of their nuances is an important part of successful portfolio management.
- Asset Allocation Quarterly - Second Quarter 2012
- Asset Allocation Quarterly - First Quarter 2012
- Asset Allocation Quarterly - Fourth Quarter 2011
- Asset Allocation Quarterly - Third Quarter 2011
The focus in the Income With Growth portfolio is oriented toward principal preservation, lower volatility and reliable income. Although the portfolio typically has the majority of its allocation in fixed-income asset classes, a smaller portion of the portfolio may include real estate, equities, commodities or other asset classes. This minority allocation provides an aspect of growth potential, along with diversification benefits. The profile is similar to that of a well-diversified bond portfolio, that includes a smaller proportion of equities.
The Growth & Income portfolio seeks to balance the objectives of growth and income. The growth allocation may include equity asset classes ranging from small cap to large cap, with both domestic and international equities. Commodities may be utilized for total return as well as diversification benefits. Fixed-income and real estate allocations will normally form the foundation to pursue income objectives. The profile is similar to that of a blend of stocks and bonds.
The Growth portfolio is positioned to pursue capital appreciation. The allocation may include equity asset classes ranging from small cap to large cap. International allocations may include both developed and emerging markets, while commodities, real estate and fixed income may be utilized for total return and diversification. The profile is similar to that of a diversified all-equity portfolio.
The Aggressive Growth portfolio is focused on capital appreciation and is designed for investors that can tolerate higher levels of risk. The allocation may include domestic and international equity asset classes, as well as commodities, real estate and occasionally, fixed income investments. At times, the portfolio may be more concentrated in asset classes with higher return potential, including those with higher levels of volatility. The profile is similar to that of an aggressively positioned, all-equity portfolio.