Liontrust Responsible Capitalism Report 2024 - Flipbook - Page 59
Process
STRATEGIC ASSET ALLOCATION (SAA)
Numerous studies have demonstrated that the SAA informs the
majority of the risk and return of an investment over the long term.
The SAA is essentially the default asset allocation should the fund
managers have no views about the relative attractiveness of different
asset classes. In determining the SAA, historical returns and volatilities
of a range of asset classes, as well as their correlations with each
other, and other market dynamics are collated and studied.
Each Multi-Asset fund and portfolio has its own SAA, which is a
function of the suitability, which in the context of risk profiled-funds
focuses primarily on investment risk preferences of investors. The
SAAs for the Liontrust Multi-Asset funds and portfolios are updated
annually and have a long-term (15 years) time horizon. Where
the Multi-Asset team perceive there to be meaningful departures of
market pricing from fundamentals, they may decide to exploit these
mispriced securities through TAA.
TACTICAL ASSET ALLOCATION (TAA)
TAA is the process through which the Multi-Asset team has an
overweight or underweight exposure to an asset class or subasset class when compared to the SAA. The TAA may increase or
decrease overall strategy risk depending on the Liontrust Multi-Asset
team’s view of the stage of the market cycle. Even if the Multi-Asset
team decides to adopt a neutral risk position, it is still possible to
express a view between asset classes and sub-asset classes without
meaningfully altering the overall portfolio risk from neutral to the SAA.
The Multi-Asset team refers to this as an Efficient Allocation (EA).
The TAA is reviewed and updated quarterly and follows these four
steps:
STEP 2: QUANTS
• Ahead of the TAA meeting, the team collates and digests a
range of quantitative inputs. These are designed to provide either
justifications for – or arguments against – the thrust of the views
expressed in Secret Scoring.
• The quants data cover a wide array of asset classes and sub-asset
classes and provide a quantitative perspective on, for example,
the relative attractiveness of an equity market both against other
markets and against its own history.
• The output and component parts of the quants are assessed in
the TAA meeting and are used as an objective complement to the
more qualitative inputs from Secret Scores.
STEP 3: TAA MEETING
• In the TAA meeting, the Liontrust Multi-Asset team collates all
of the inputs from the above two steps and debates alongside
other views expressed. Every team member is encouraged to
contribute.
• The output from the TAA meeting is the first cut of the team’s asset
class scoring grid, with each of the asset classes and sub-asset
classes allocated a score of between 1 and 5.
• The overall market environment is also scored out of 5.
STEP 4: INDEPENDENT INPUT
STEP 1: SECRET SCORING
• All the Multi-Asset team members provide a score for each asset
class, sub-asset class, the overall market environment and a
handful of other factors. The scores are between 1 and 5, with 1
being the most negative, 3 neutral and 5 being the most positive.
• Each Multi-Asset team member scores more than 20 different
categories and provides a justification for their scores. The
scores are collated ahead of the TAA meeting at which they are
debated.
• The Liontrust Multi-Asset team is acutely aware of the risks of
group think and of anchoring to the previous quarter’s scores.
• To reduce these risks of group think, the team comprises a group
of individuals with different backgrounds and experiences to
ensure there is a significant amount of cognitive diversity.
• To further combat the risks of group think and anchoring, the
Liontrust Multi-Asset team employs an independent consultant to
challenge the first cut of the asset class scoring.
• At the conclusion of the TAA process, scores that have stood up
to scrutiny are accepted and those that have not may be adjusted
modestly.
• The output from this meeting is the final TAA scorecard for the quarter.
• This scorecard informs the risk budget and the over and
underweights that the Multi-Asset team expresses through portfolio
construction.
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