Begin with objectives and constraints

The strategic asset allocation should not be considered in isolation. It follows from the investment purpose, the resources available, the investor’s circumstances, and the constraints that need to be respected.

CFA Institute describes the investment policy statement as a written document that captures objectives and constraints, with strategic asset allocation as an early step in portfolio construction.

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Further reading: CFA Institute — Basics of Portfolio Planning and Construction

A five-stage sequence

02. Make constraints visible

Consider liquidity, time horizon, tax, legal, regulatory, responsible-investing, currency, concentration, and other circumstances that may affect the design.

01. Define the objective

Clarify what success means for the capital: preserving purchasing power, meeting spending needs, funding a liability, supporting a project, or transferring wealth.

03. Translate into risk questions

Ask which kinds of volatility may be tolerable, which may be unacceptable, and how risk capacity differs from the emotional comfort with risk.

04. Examine allocation

Assess how asset classes and exposures may behave across market environments, and how the allocation relates to the objectives and constraints.

05. Review implementation

Compare products, managers, providers, costs, responsibilities, monitoring, and review points. The process remains open to revision as circumstances evolve.

Begin with objectives and constraints

The strategic asset allocation is a way to express the intended structure of the portfolio over the relevant investment horizon. It does not eliminate uncertainty and it does not forecast the next market regime. Its value is that it makes the portfolio’s broad exposures and trade-offs discussable before the attention turns to individual securities or products.

A portfolio may hold many investments and still be exposed to common drivers. Correlations among assets, together with their risk and return characteristics, are important determinants of portfolio risk. Diversification therefore requires examining the sources of exposure, not simply counting holdings.

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Further reading: CFA Institute — Portfolio Risk and Return, Part I

A written framework

An investment policy statement can organize objectives, constraints, responsibilities, as well as monitoring, and review processes. A robust document should be understandable to the people responsible for governance and implementation, and portable enough to remain useful when responsibilities or providers change.

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Further reading: CFA Institute — Four Considerations for Strong Investment Policy Statements

Illustrative questions

• What is the investment capital intended to achieve?

• Which constraints are binding?

• How much liquidity is required and when?

• Which time horizons coexist?

• Which asset-class exposures support or conflict with the objectives?

• Which costs and responsibilities are visible?

• What would trigger a review?

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This page provides diagnostic questions and only an informative review lens.

Explore the portfolio review lens

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For informational purposes only. Our insights are not and should not be interpreted as investment advice or personal recommendations or any other form of advice.