Dynamic Portfolio Allocation
Asset allocation refers to the decision regarding the proportion of assets invested in the main asset classes (equities, bonds or money-market instruments from different geographical areas). A number of academic studies have shown that asset allocation plays a central role in determining a portfolio’s performance. Conversely, the choice between securities from the same asset class (e. g. Renault shares vs. Volkswagen shares) also known as “stock-picking” has far less impact upon performance. Indeed, as prudent investors diversify risks away, they usually invest in a large number of securities from each asset class. Consequently, their returns are close to the asset class performance over the long run.
However, in order to be an effective driver of a portfolio’s performance over the medium to long run, asset allocation must be a dynamic process, which adjusts to evolving market conditions. Too often, asset allocation is infrequently revised and fails to take into account how changing market valuations make an asset class more or less appealing to long-term investors. At DPA Invest, asset allocation is based upon both our estimates of the long-term expected returns for the various asset classes and upon short-term considerations.
Therefore, the asset allocation for the funds we advise (e.g. LFP Allocation) or manage directly (e.g. DPA Gestion Privée) follows a transparent two-step process. The first step is a value-driven « strategic allocation », adjusted for market valuation changes; the second step is a « tactical overlay », reflecting our analysis of short term views on financial markets.
This rigorous and dynamic approach has been successfully tested over the past few years under varied market conditions.
