Liontrust Responsible Capitalism Report 2024 - Flipbook - Page 82
Asset allocation
Strategic Asset Allocation (SAA) is the primary determinant of
suitability and long-term risk and returns for investors.
Tactical Asset Allocation (TAA) is used to enhance investors’
risk-adjusted returns while ensuring the funds and portfolios’
risk profiles are being met.
The team believes that active management of asset allocation
can add value for investors through exploiting mispricing in
the market and the subsequent return to pricing justified by
fundamentals.
DRIVERS OF RETURNS
The Multi-Asset team believes investment markets are inefficient to
varying degrees, with the most efficient being government bonds
and indices with low cross-sectional volatility or high concentration.
Sentiment can cause market prices to move away from their
fundamental value over the short term and revert to levels that are
justified by their fundamentals over the long term. Good active
management will, over the long term, outperform passive exposures
as they exploit inefficiencies and mispricing in investment markets.
Equity markets are the key driver of long-term real returns. Within
equity markets, factors such as growth, value, quality and size in
isolation are volatile. But when combined within portfolios, these
factors should outperform the broader index over time.
Strategic Asset Allocation (SAA)
Numerous studies have demonstrated that SAA informs the
majority of the risk and return of a portfolio 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 its suitability, which in
the context of target risk funds focuses primarily
on the investment risk preferences of investors.
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• 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 perceives there to be meaningful
departures of market pricing from fundamentals, they may decide
to exploit these mispriced securities through the Tactical Asset
Allocation.
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 sub-asset
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).