Asset Allocation

Following on from the Portfolio Construction, Asset Allocation will address how much of the clients total portfolio capital to be invested across the available asset classes. The main decisions to be made include:

• What percentage weight will be allocated to each asset class; and
• What percentage weight will be assigned to each individual product or security within each asset class.

The weights assigned to each asset class will be determined partly by the clients Risk Profile and partly by the asset class risk and return characteristics. For example:

Asset Allocation	Low Risk Taker	Medium Risk Taker	High Risk Taker
GROWTH ASSETS
Australian Shares	10%	25%	40%
Global Shares	5%	15%	30%
Australian Property	3%	5%	5%
Global Property	2%	5%	5%
Alternative Growth Assets	0%	0%	0%
Sub-Total Growth Assets	20%	50%	80%
DEFENSIVE ASSETS
Australian Fixed Interest	20%	12.5%	5%
Global Fixed Interest	20%	12.5%	5%
Cash	40%	25%	10%
Alternative Defensive assets	0%	0%	0%
Sub-Total Defensive	80%	50%	20%
TOTAL PORTFOLIO	100%	100%	100%

Each asset class weight reflects the expected growth and Income returns for the portfolio overall. These weights are based on a number of factors including the volatility of the security prices, as well as, the volatility of earnings and resultant dividends. These factors are important components when attempting to achieve the return objective of the Investment strategy. Part of the puzzle in achieving this return objective is also getting the right mix and weight of each Product or Security Weight within each asset class. This breakdown is very much determined by background factors such as:

• The Economic cycle;
• Developing Trends;
• Product or exposure availability; and
• Market Outlook.

Other factors for discrete holdings also would typically include: Market capitalisation bias, Industry focus, Earnings expectations, liquidity situation, debt, recent Profit & Loss statements and the strength of the Balance sheet. An example of an Australian Share Portfolio strategy within a diversified portfolio using Managed Investment Schemes may look like the following: Key assumptions: – Weak economic climate; and – A poor outlook for corporate earnings and the share market overall.

Core Holding:

• 10% – Active Growth fund
• 35% – Benchmark aware Style Neutral fund or Index fund
• 25% – Active Value fund

Satellite holding:

• 15% – Equity Income fund
• 10% – Small Companies fund
• 5% – Micro Cap Companies fund

100% – Total Australian Equities asset allocation

The allocation is diversified by market capitalisation and tactically biased towards value and income seeking fund managers who typically look for stocks that produce sustainable dividends with mild growth prospects throughout the economic cycle. The balance of the portfolio is only marginally exposed to the growth stocks just in case markets quickly turn. This assumes that the neutral fund manager will hold similar levels of both, growth and income stocks in the fund. An example of an Australian Share Portfolio strategy within a diversified portfolio using direct holdings of Listed Investments to tactically re-weight a clients holdings within the Global Industry Classifications (GIC’s) that typically make up an Australian Index:

Global Industry Classifications	S&P/ASX Index Weights	Tactical Tilts	Portfolio Weights
Consumer Discretionary	3.16%	(3.00%)	0.16%
Consumer Staples	9.20%	0%	9.20%
Energy	6.56%	(2.0%)	4.56%
AREIT-Financials	5.89%	0%	5.89%
Financials	33.53%	0%	33.53%
Health Care	3.07%	5%	8.07%
Industrials	6.61%	5%	11.61%
Information Technology	0.58%	0%	0.58%
Materials	26.18%	(10%)	16.18%
Telecommunication Services	3.70%	3.0%	6.70%
Utilities	1.53%	2%	3.53%

This is only an example of a re-weighting of the industry exposures and not to be taken as a recommendation to invest in structures like these.