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Über dieses Buch

This book covers each step in the asset allocation process, addressing as many of the relevant questions as possible along the way. How can we formulate expectations about long-term returns? How relevant are valuations? What are the challenges to optimizing the portfolio? Can factor investing add value and, if so, how can it be implemented? Which are the key performance drivers for each asset class, and what determines how they are correlated? How can we apply insights about the business cycle to tactical asset allocation?
The book is aimed at finance professionals and others looking for a coherent framework for decision-making in asset allocation, both at the strategic and tactical level. It stresses analysis rather than pre-conceived ideas about investments, and it draws on both empirical research and practical experience to give the reader as strong a background as possible.

Inhaltsverzeichnis

Frontmatter

Foundations

Frontmatter

1. Introduction to Asset Allocation

Abstract
This is the first of the three foundational chapters of the book. We start off by defining asset allocation and asset classes in Sect. 1.1. We then move on to examine the asset allocation process in Sect. 1.2, the division between strategic asset allocation (SAA) and tactical asset allocation (TAA) in Sect. 1.3, and the investment process in Sect. 1.4. We finish with an analysis of rebalancing strategies and their implications in Sect. 1.5.
Henrik Lumholdt

2. Performance Evaluation

Abstract
In this chapter, we address the following questions. Which benchmark should be used to assess the performance of active managers? How can we measure the risk-adjusted performance of portfolio managers? Finally, how do we measure how an active manager achieved a given return?
Henrik Lumholdt

3. Strategic Versus Tactical Asset Allocation

Abstract
In this chapter, we will evaluate the merits of using the SAA as a stand-alone approach versus combining it with TAA decisions. We will begin with a discussion of the nature of the SAA as an investment decision. This is followed by an examination of the concept of macro-inefficiency and how this relates to asset allocation and a review of some of the empirical research on the importance of asset allocation. We finalize with a discussion of the controversial concept of time diversification, the question of whether a longer time horizon warrants a greater exposure to risk assets, favoring the SAA alone approach.
Henrik Lumholdt

Strategic Asset Allocation

Frontmatter

4. Long-Term Return Expectations

Abstract
How do we formulate expectations for long-term returns on the asset classes involved in the SAA? One approach would be to rely exclusively on the historical record. We will look at this in the first section. Another approach is to base our expectations on more forward-looking indicators such as longer-term macro-fundamentals, models of return and valuations. We will look at how this applies to risk-free government bonds, credit and equities in the subsequent sections.
Henrik Lumholdt

5. Optimizing the Strategic Asset Allocation

Abstract
In the previous chapter, we discussed different approaches to forming expectations about future returns of the main asset classes but made only casual reference to the question of risk. In this chapter, we examine the issue of integrating risk and return, that is, optimizing the SAA. The mechanics of standard mean-variance optimization (MVO) are outlined in the Appendix to the book. Here we will focus on some of the challenges when applying MVO, possible remedies and alternative approaches.
Henrik Lumholdt

6. Factor Investing I

Abstract
So far, we have discussed investments from an asset class point of view. In this and the following chapter, we will zoom in on certain characteristics of segments of asset classes which have been shown to earn excess returns. This is the topic of factor investing. This type of analysis is not new. But the idea of making such factors directly investable through specialized vehicles is a relatively recent innovation which is causing a minor revolution in the asset management industry. The chapter is structured as follows:
Henrik Lumholdt

7. Factor Investing II

Abstract
This chapter continues the analysis of factor investing, focusing on two main questions. Firstly, what gives rise to factor returns and are these returns likely to be persistent? Secondly, which are the key issues to be considered in the practical implementation of factor investing?
Henrik Lumholdt

Tactical Asset Allocation

Frontmatter

8. Tactical Macro-Drivers

Abstract
In this chapter, we lay the foundation for a business cycle approach to TAA which will be elaborated further in Chap. 9. Section 8.2 first outlines standard business cycle analysis and the dating of business cycles. We will then shift our attention to the concept of the output gap and its evolution over time, giving rise to four separate phases for the economy. Section 8.3 discusses the relevance of this to monetary policy and examines how changes in policy rates are reflected in the yield curve.
Henrik Lumholdt

9. The Four Phases Framework

Abstract
In the previous chapter, we demonstrated the importance of the business cycle and argued in favor of understanding it in terms of the output gap. But we said only a little about asset class returns over the cycle. This is where macro meets the markets and is the focus of this chapter.
Henrik Lumholdt

Backmatter

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