Asset Allocation - Strategic and Tactical Asset Allocation

What is Asset Allocation

Asset allocation is where an investor's fund is allocated into different major classes of assets.

It is a very important part of the investment management process and many studies have shown that good performance of investments was very much influenced by effective asset allocation decisions.

Types of Asset Classes

The major classes of assets are:

Equities
Debt Securities
Money Market Instruments
Properties
Commodities
Currencies
Gold

Let's look briefly at each major classes' characteristics:

a) Equities

Equity investments, such as shares of companies, are securities that come with a "claim" on the earnings and/or assets of the issuing company.

Ordinary shares, as traded on most stock markets, for example, the Bursa Malaysia Securities, is the most popular equity investments.

The stock market can be volatile, with rapid changes in share prices.

Share price can swing due to

company performance
political issues
social issues
governmental issues

Types of equity investments:

Ordinary Shares
Preference Shares
Convertibles
Warrants

Due to the recent Covid-19 pandemic, the stock market all around the world has dropped more than 30% (Dow Jones) in March 2020 from is high in Jan 2020.

The volatility is very high for equities.

However, using the right strategies, one can reduce the negative impact, in fact many are able to take advantage of it as well.

Buying the shares of good fundamental companies at a discount can accelerate the returns of the portfolio.

Malaysia KLSE Performance

US S&P 500 Performance

b) Debt Securities

It is sometimes called

Debentures
Bonds
Notes or Commercial paper

It depends on the maturity and certain other characteristics.

Both government and private sector businesses issue debt securities for financing purposes.

The holders of debt securities are typically entitled to the payment of principal at maturity and interest at regular intervals.

Debt securities are issued for a fixed term and redeemable at the end of the term.

Types of debt securities

Protected by Collateral
Unsecured

The reason people invest in debt securities

Price Stability
Periodic Income

Personally, I do not really invest so much in bonds.

It only consists of a very small percentage of my portfolio.

Malaysia 10 Year Bond Price

c) Money Market Instruments

This is short term debt instruments that may have characteristics of deposit accounts, such as

certificates of deposit
bills of exchange

Normally the return is low, but it is safe.

It is very liquid and normally this is for a short term.

It is important for investors to understand each asset class properly before investing in it.

You will be exposing yourself to high risk because you do not know what you are investing in.

d) Properties

This is one of the popular investments of Malaysians.

i) Direct investment

Investors acquired the whole or part of physical properties (residential or commercial).

This requires a higher capital and take longer time.

The price of properties are less volatile than shares.

But it is less liquid than shares.

Generally, investing in properties is perceived to be a lower risk than investing in shares.

This is why banks are willing to lend you a huge amount of money for you to buy a property.

Property investment return comes from

Rental Income
Capital Gain

ii) Indirect Investment

You can invest through:

Real Estate Investment Trusts (REIT)

E.g Sunway REIT, IGB REIT, Pavillion REIT

Property related shares

E.g Gamuda

Malaysia REIT Index Performance

Malaysia Property Index:

Malaysia House Price Index YoY Change

Sample of Asset Allocation Percentage

Asset Classes	Allocation Range
Equity	50% - 70%
Bonds	25% - 35%
Money Market	5% - 25%

The allocation range is not static.

It depends on economic and market conditions.

If the share market is on a bull run, a higher percentage can be allocated.

Strategies of Asset Allocation

a) Strategic Asset Allocation

To create a portfolio with asset mix with optimal balance between expected risk and return for a long term investment horizon.

Typically rebalanced yearly or quarterly basis.

This is more to a buy and hold strategy.

Diversification is the keyword here.

b) Tactical Asset Allocation

More of an active approach, so that the portfolio can be positioned into various assets, sectors, or individual shares that show the most potential for gains.

Below are some of the considerations for tactical asset allocation: