Asset Allocation Strategy

Overview

The asset allocation strategy specifies the tactics used by the fund manager to maximize the fund performance. It may specify how the manager actively weights the asset classes, as well as tactics to avoid paying taxes.

Allocation Strategies

• Long Term Expectations - long term expectations can be based on the long run average growth rates or on manager based forecasts.
• Tactical Short Term Expecations - tactical short term expectations use short term forecasts or technical signals such as trends to formulate a short run forecast. Many tactical forecasts are based on macro fundamentals such as cycles or macro trends.
• Equal Weighting - equal weighting strategies will equally weight the asset classes, or factors, in a portfolio and specify a re-balancing criteria for re-balancing back to the equal weights as they drift.
• Factor Based Allocations

Managing Taxes

Whenever an asset is sold, it incurs taxes. Holding an asset will not in general generate a tax bill, except any interest payments or dividends paid may incur taxes.

Tax strategies general follow the following guidelines

• Defering taxes to the latest possible time - The net benefit comes from two factors
  • The time value of money means that paying taxes now rather than later has a real cost
  • Taxes on capital gains is often less if the holding period is longer. (short-term vs long-term capital gain)
• Netting losses against gains in the same year.