Asset Selection

Overview

The first step of any asset allocation is to select the asset classes that the fund is willing to invest in, and limits to the size of those investments. As a general rule, investors should seek to diversify as much as possible, however, investors also want transparency in their investments, and risk guidelines that will constrain their fund manangers

Asset Selection Considerations

Asset selection is often limited by the investment parameters establised for the fund and would include:

• Fund Objectives and Horizon : the primary constraint on choosing the asset classes to include a given fund are its objectives and horizon. When the objective of the fund is to reduce risk and maintain consitent income, for instance, a more fixed income tilt is more appropriate. If the fund seeks to maximize returns, or has a long horizon, then equities or something riskier could even be required.
• Constraints : can be used to limit the assets that a fund invests in. For instance, if the client is uncomfortable with derivatives, the investable assets should be edited to preclude investing in derivatives.
• Diversification : is the primary goal when adding asset classes to a fund mix. Not only does diversification reduce the risk of the fund versus its expected returns, but through rebalancing, the fund can increase its compounded returns over time.
• Expected Performance : .