SCHEME ASSET ALLOCATION

THE CHALLENGE

How can I keep better control of my portfolio outcomes?

A complex portfolio does not always make the best portfolio.

In many cases, a portfolio with many different positions can result in a lack of understanding of portfolio risks and exposures, and consequently the potential to miss out on required return targets.

Knowing the main drivers of risk and return behind the portfolio is fundamental to ensuring that portfolios meet their investment objectives.

THE ACTION

BlackRock performed a risk factor analysis on the client portfolio. The study showed that only 20% of the securities captured about 95% of the portfolio VaR (Value at Risk), meaning the portfolio contained redundant holdings.

Leveraging the BlackRock Investment Institute (BII) capital market assumptions (CMAs) to generate a forward-looking risk return estimate on the portfolio we identified that the client's strategic asset allocation was estimated to generate a 2.1% annual return over a 10-year basis, short of its 3.5% required return.

CMA Optimisation

CMA Optimisation

Source: BlackRock, as at May 2020.
For illustrative purposes only. Time Period is May 2015 - May 2020.

THE OUTCOME

A mean variance optimisation was run using CMAs, which showed that a 3.5% return could be achieved by increasing the allocation to diversified infrastructure and convertibles which also had low correlation to the rest of the portfolio.

WHY INDEXING?

By restructuring the portfolio to add greater use of indexing vehicles within public market exposures, the client was able to free up risk and fee budget to deploy to alternative sources of risk/return that can potentially help improve risk-adjusted returns in the long term.

Risk: Diversification and asset allocation may not fully protect you from market risk.

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