Allocation is the process of dividing the portfolio by chosen classification, such as asset class, country, currency, sector etc. Individual securities are then selected within chosen segments.
Allocation effect in portfolio attribution corresponds to the difference in allocation between the portfolio and the benchmark, while selection effect corresponds to the choice of specific securities.
For example asset allocation mutual funds come in many varieties. A “balanced fund” implies a fixed mixed of stocks and bonds, such as 75% stocks and 25% bonds. “Life-cycle” or “target-date” funds, often used in retirement plans, usually have a mix of stocks, bonds and cash equivalent securities that start out with a higher risk-return position and gradually become less risky as the investor ages and/or nears retirement. So-called “life-style” or actively-managed asset-allocation funds provide the active management of a fund’s asset classes in response to current market conditions.
There is no magic formula that can find the correct asset allocation for every investor. However, it could be said that asset allocation is one of the most important decisions investors make i.e. selection of individual securities is secondary to the way investment in stocks, bonds, cash etc. is allocated, which will be the principal determinants of your investment results.
Dynamic asset allocation is a portfolio management strategy that involves rebalancing a portfolio and attempting to bring the asset mix back to its long-term target. This involves reducing positions in the best-performing asset classes and adding to positions in underperforming assets. The aim is to reduce the fluctuation risks and achieve returns that exceed the target benchmark.
Asset allocation analysis with StatPro Revolution
StatPro Revolution is a cloud-based portfolio analysis service giving you the analytics and reporting you need at a price you can afford. It will transform you communication, help you win new clients and retain existing ones.
The asset allocation dashboard within StatPro Revolution shows an intuitive, visual breakdown of the assets in your portfolio. You can see both absolute and relative allocation, as well as allocation trends over time. The table view provides additional statistics, such as long and short exposures and leverage.
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