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Home > Our Resources > Articles > The Analytical Approach to Asset Allocation

The Analytical Approach to Asset Allocation     April 17, 2013


Everyone agrees that asset allocation is an integral part of the investment process, but there are wide divisions on the methods to be employed, potential benefits and outcomes. In its most basic form, asset allocation describes how an investor splits up funds for investment into assets such as stocks, bonds, real estate, cash and other investment alternatives. History is replete with studies that have claimed that asset allocation alone accounts for a high percentage of portfolio returns, the level of risk, volatility of prices and variation of returns among portfolios.

This academic approach to asset allocation is based on research of historical relationships between asset class returns, volatility and future projections of returns and volatility over various time periods. The outcome claimed for using this approach is that the asset mix will predict and enhance future returns, reduce risk, and minimize volatility in the investor’s portfolio.

The application of such theoretical quantitative concepts to real-world investment management is limited by the fact that past returns, correlations, and volatility are not stable or predictable. Investor experience throughout the financial crisis and over the last five years is a vivid reminder that the allocation of funds for investment based solely on past correlations and future projections provide little protection from capital losses.

Whitnell & Co. managers invest client funds in a disciplined investment process with an objective to preserve and grow investment capital in real terms adjusted for inflation. In order to determine the most appropriate strategic asset allocation for each our client’s portfolio we first assess their unique goals and risk tolerances. Next we identify which investments are most likely to meet these objectives. The macroeconomic environment is in a constant state of change, so we develop our own perspective on the economy, fiscal and monetary policy and financial markets as inputs to the portfolio construction process.

For most clients their chief financial objective is to conserve and grow their funds to achieve a real total return after taxes over the long term. While risk aversion has kept some away from allocating more to equities, these investments usually provide the best characteristics to meet these goals and will normally represent the core investment position with other satellite investments added to help meet specific client goals.

We build portfolios for clients on an analytical basis for all investments giving weight to measures of quality, growth, cash flow and, most critically, valuation. Investments are diversified with allocations of individual securities, funds and separate managed accounts that we determine are the most appropriate to achieve client objectives. Our investment horizon is long-term, but portfolios must be reviewed and managed on an on-going tactical basis and adjusted as appropriate to reflect changes in the economy and financial markets.

Note: We have gathered the information contained in this report from sources we believe reliable; however, we do not guarantee the accuracy or completeness of such information. You should not assume that any discussion or information contained in this market commentary serves as the receipt of or as a substitute for personalized investment advice from Whitnell & Co. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission.


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mia erickson

“Today’s investors have more options and education than ever before. But learning doesn’t necessarily create wisdom. I enjoy leading our investment committee to create unique solutions that the guys on TV simply miss.”