Valuation, 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 financial needs.
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 investment).
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 following.
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 management strategy.
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?
INITIAL ALLOCATION
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 .
ALLOCATION MODELS
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 allocation.
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 integration.
Even then, we cannot truly deliver personalised equity portfolios without integrating valuation and allocation within the portfolio construction and management process. Why?
 As soon as a portfolio is recommended, it becomes an existing portfolio and its allocation deviates from the recommended.
 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 manage change?
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 complex.