Valuation, Allocation & Management
Allocation & Management
Dynamic – as market change – allocations change –
financial needs, plan in advance.
Reduce costs – sell high buy low.
Levels of allocatiom#
Portfolio between cashg, fixed and equiries given
Split given risk preferences.
Asset allocation influence by investment style, markets,
risk preferences and financial needs.
Valuartioin, allocation, adjusted for financial needs,
risk preferences and market valuation (initial
Management influence by markets, changing prices and
changing financial needs.
It is not statics
Valuation, allocation and management are the benchmarks
of portfolio management.
Valuation, Allocation and Management frameworks are used
to value, allocate, construct, distribute and manage
personalised equity portfolios and are integral to the
Frameworks incorporate an organisation’s views regarding
initial investment strategy, the valuation of global
markets and within markets the valuation of style,
sector and market cap, specific markets and their return
All allocation improperly managed, allocated and valued
will increase risk, costs and reduce returns. Global
allocation is no exception and, is a more complex
process than specific market allocation.
The framework for the management of allocation is
often more important than the allocation.
That blind allocation to global markets to gain the
risk reduction benefits of low or negative correlation
can increase risk and reduce return.
Your allocation framework therefore needs to incorporate
buying and selling disciplines. At what point do you
sell a highly valued market? At what point do you buy
into an under valued market?
Importantly, because absolute valuation means holding
back cash/currency for investment, it does increase the
number of investment decisions that need to be made
within any given portfolio.
Without a system to manage this and without an
integrated valuation and allocation framework, strategic
cash management is not possible .
Valuation is the single most important factor within the
asset allocation process and the portfolio management
process. Many portfolio allocation models separate
valuation from the construction and management of
A major reason for this is the problem of personalising
equity portfolio structure. The complexities and costs
of personally managing portfolios has focussed asset
management expertise on higher return, lower fixed cost
areas such as institutional, retail (mutual funds) and
mega high net worth clients.
The difficulty in personalising portfolio structure has
found succour in simple asset allocation arguments and
retail mean variance optimisers.
PROBLEMS OF PERSONALISATION
In order to personalise portfolios we need to integrate
the management of liabilities with the management of
assets over time and to adjust portfolio structure for
total risk preferences. To do this we need systems and
disciplines to manage the complexity of this
Even then, we cannot truly deliver personalised equity
portfolios without integrating valuation and allocation
within the portfolio construction and management
As soon as a portfolio is recommended, it becomes an
existing portfolio and its allocation deviates from the
Future capital inflows and outflows to and from the
equity portfolio represent future changes to allocation
which cannot be ignored.
The concept of the recommended portfolio is important,
since it is the recommended allocation for a cash
investment at time N0 and not the recommended allocation
for a previously invested portfolio at N-1. How do we
The margin of deviation from the recommended allocation
should cover all the following
Transaction costs; often the only consideration within
MVO constructs. In fact, if all the following are
addressed, transaction costs are covered, implicitly.
Valuation and valuation risks; an under valued but
rising asset will have a wider deviation from the
recommended allocation than an over valued and falling
asset. This deviation in allocation may be wider than
that recommended by a transaction cost alone.
The risks to contamination of return (see allocation
and return management for explanation).
Allocation within liability space; allocation
imbalances can be remedied by inflows and outflows to
the equity portfolio.
Without a valuation and allocation framework that feeds
directly into the construction process and the
management process, it is complex to manage valuation,
allocation and personalisation.
Indeed, these issues are far too complex to allocate the
necessary resources to have a personal portfolio manager
attempt to manage them. But they are by no means complex
if managed by a system and a business process structured
to deliver such . Only by managing complexity can you
create simple solutions to complex problems.
In fact, the ability to personalise equity portfolios
via valuation, allocation and management frameworks is
only made possible by the integration of asset and
liability management and the systems and disciplines to
do this. Without these systems to manage the interaction
of liabilities and assets, personalised equity portfolio
management at volume is inefficient, costly and overly