Strategic Asset Allocation
Our process begins by working with our clients to decide the correct long term strategic asset allocation which means some clients have more, or less, equity or bonds in their portfolio. At this stage of the process consideration is given to whether the client wants (or needs) a GBP, USD or EUR base currency for their portfolio.
We match most of the client’s bond exposure to the base currency, but we are currency agnostic with respect to equities. In other words, because our equity exposure is global our clients own global currencies on an unhedged basis. More on this in the FAQ’s.
Tactical Asset Allocation
Tactically we shift clients into regions, countries or sectors which we think offer relative attractive value. Markets are not perfectly efficient and news flow relating to economic, geo-political or other news can result in regions, countries or sectors overshooting on the upside or downside. We are humble enough to know that adding tactical “alpha” is an arduous task and thus we do not over allocate to a particular idea capping any individual shift to 5% and in aggregate no more than 25% of the portfolio would be in these tactical opportunities. We are not traders, we are investors and our tactical views typically have at least a 6-month time frame and may be in place for several years.
We implement our asset allocation views using ONLY Exchange Traded Funds which have good liquidity, are physically backed by underlying shares or bonds and which have the most efficient tax status for our clients. The benefits of this approach are numerous.
OMBA does a combination of calendar quarterly (Jan, April, July, Oct) rebalancing coupled with Percentage of Portfolio rebalancing.
Importance of rebalancing:
- Keeps a portfolio at the appropriate level of risk.
- Creates an opportunity for better returns – systematically selling assets which have gone up and buying those which have gone down. Buy low, Sell high.
- When assets move to extremes there is a need to trigger a rebalancing trade that buys or sells the investment just before it “snaps back” and reverts towards its long-term average.
- Instils discipline in the investment process.
Important considerations for rebalancing:
- Rebalancing can be done too frequently. For instance, if an investment was about to have significant outperformance for a year, rebalancing monthly will trigger a considerable number of sales before the year’s gains have occurred, leaving upside on the table.
- Likewise, if the investment was about to decline in a year-long fall, rebalancing monthly into the falling investment will result in buying more to then experience the subsequent decline.
- Transactions costs, correlation of asset classes and the volatility of the asset classes impact timing and thresholds.
- Rebalancing will typically result in tax consequences, which should be considered.
- Rebalancing to within the target range or to the original target level needs to be considered.