It is recognised that asset allocation is a key driver of long term investment results.
This means asset allocation may be the most important decision an investor can make.
Asset allocation is the process that determines the different asset class distribution within an investor’s portfolio. This process balances the risk and return across a combination of asset classes within a portfolio. Assets can be categorised as growth or defensive. Growth assets are investments that tends to carry high levels of risk, but also offer potential for higher returns over time. Whereas, defensive assets carry lower levels of risk, and typically lower returns. Equities are an example of a growth asset, whereas fixed income and cash are examples of defensive assets.
Asset classes perform differently in different market cycles, therefore, investors are encouraged to employ a diversified approach in their asset allocation process. Combining asset classes where the performance is relatively uncorrelated, so that when one asset class underperforms, this is offset by the performance of another asset class.
There are three common approaches to asset allocation:
Strategic asset allocation (SAA) is constructed on the basis of long term asset class forecasts with targets to maintain a set combination of asset classes
Dynamic asset allocation (DAA) is an active strategy that adjusts the allocation of assets based on medium term views.
Tactical asset allocation (TAA) is also an active asset allocation strategy, whereby the allocation is adjusted to take advantage of short term market opportunities.
Investors should be aware that the more active asset allocation strategies typically incur active fees or higher management costs.
Given SAA is constructed on the basis of long term asset class forecasts, this approach is considered appropriate for investors that won’t require access to their portfolio for at least the next five years. The investors time horizon, risk tolerance and investment objective are taken into consideration when selecting the appropriate SAA strategy. From an industry perspective, SAA strategies are commonly labeled to reflect the investors risk tolerance. Labels include moderate, balanced and growth. Below are examples of Hypothetical Model Portfolio Allocations for the State Street ETF Model Portfolios
The forecasts driving a portfolios' asset allocation will evolve over time to align with fundamental, structural and market changes. Therefore, it’s important to continually review and monitor asset allocation forecasts to ensure they align to the risk and return objectives of the SAA strategy. The State Street ETF Model Portfolios are founded on an SAA framework. The portfolios asset allocation is reviewed and updated annually and reflect our portfolio management team, the Investment Solution Group’s (ISG), long-term capital market assumptions and qualitative insights.
Reflective of asset class forecasts, the portfolio's actual allocations will also fluctuate over time. All else being equal, assets that have performed well will consume a bigger share of that portfolio's value and assets that have done poorly will decrease from their initial asset allocation. ISG believes that strategic portfolios should be rebalanced to the annual reconstitution weights on a quarterly basis.
SAA provides investors with a longer-term investment horizon, a disciplined and diversified asset allocation regime and is therefore utilised as an asset allocation strategy for the State Street ETF Model Portfolios. It is no surprise many investors have chosen to include these strategies as part of a core satellite approach.
The views expressed in this material are the views of the ETF Model Portfolio Team through 15 February 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
All asset allocation scenarios are for hypothetical purposes only and are not intended to represent a specific asset allocation strategy or recommend a particular allocation. Each investor's situation is unique and asset allocation
decisions should be based on an investor's risk tolerance, time horizon and financial situation.
An investment in a model portfolio carries a number of standard investment risks; these risks are outlined in each Provider’s PDS which should be read in full and understood by the potential investors.
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General Risks ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. Asset Allocation is a method of diversification which positions assets among major investment categories. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. An investment in the model portfolio carries a number of standard investment risks; these risks are outlined in each Provider’s PDS which should be read in full and understood by the potential investors.
Implementation Risk State Street does not manage the accounts of retail investors pursuant to the model portfolio strategies and the strategies are only available to retail investors through various Providers that offer account management and other services to retail investors. The actual results of accounts managed by a Provider that receives access to the strategies may differ substantially from the hypothetical results of the State Street ETF Model Portfolios for a variety of reasons, including but not limited to:
i. the fees assessed by the Provider and other third parties;
ii. the Provider’s decision to exercise its discretion to implement a given strategy in a way that differs from the information provided by State Street;
iii. the timing of the Provider’s implementation of strategy updates; and
iv. investor imposed investment restrictions; and the timing and nature of investor initiated cash flow activity in the account.
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