Asset Allocation - Asset Classes and Strategies

Asset Classes and Strategies

There are many types of assets that may or may not be included in an asset allocation strategy:

• cash and cash equivalents (e.g., deposit account, money market fund)
• fixed interest securities such as Bonds: investment-grade or junk (high-yield); government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging markets; or Convertible security
• stocks: value, dividend, growth, sector specific or preferred (or a "blend" of any two or more of the preceding); large-cap versus mid-cap, small-cap or micro-cap; public equities versus private equities, domestic, foreign (developed), emerging or frontier markets
• Commodities: precious metals, broad basket, agriculture, energy, others
• commercial or residential real estate (also REITs)
• collectibles such as art, coins, or stamps
• insurance products (annuity, life settlements, catastrophe bonds, personal life insurance products, etc.)
• derivatives such as long-short or market neutral strategies, options, collateralized debt and futures
• foreign currency
• venture capital, leveraged buyout, merger arbitrage or distressed securities

There are several types of asset allocation strategies based on investment goals, risk tolerance, time frames and diversification: strategic, tactical, and core-satellite.

Strategic Asset Allocation — the primary goal of a strategic asset allocation is to create an asset mix that will provide the optimal balance between expected risk and return for a long-term investment horizon.

Tactical Asset Allocation — method in which an investor takes a more active approach that tries to position a portfolio into those assets, sectors, or individual stocks that show the most potential for gains.

Core-Satellite Asset Allocation — is more or less a hybrid of both the strategic and tactical allocations mentioned above.

Systematic Asset Allocation is another approach which depends on three assumptions. These are-

• The markets provide explicit information about the available returns.
• The relative expected returns reflect consensus.
• Expected returns provide clues to actual returns.