Zenith Investment Partners has instructed investment managers to adopt a dynamic asset allocation approach (DAA) that takes into account the cyclical risks of the global economy.
Amid recent economic uncertainty, the company explained that DAA considers the potential risk to portfolio positions and how markets may move over a three-month to two-year horizon.
By comparison, Zenith noted that Strategic Asset Allocation (SAA) generally reflects return and volatility assumptions over a longer period of five to 10 years.
“It involves tilting a portfolio away from the underlying SAA – usually something fixed for a long period of time – in order to take into account major macroeconomic changes, political developments and changes in asset valuations” , said Zenith’s head of asset allocation and strategy, Damien Hennessy.
According to Mr. Hennessy, the DAA is increasingly recognized as a valuable option in portfolio construction as it seeks to enhance returns and smooth out risk by altering short- and medium-term weightings based on a number of factors.
These factors can include valuations, the economic cycle, political developments and a range of other major events.
“The other important thing to note with DAA is that investors should not move their actual portfolio positions outside of the range they would have expected from their SAA,” Hennessy said.
“If an investor is in a conservative portfolio, the DAA does not involve taking positions that push them toward a balanced or growth-type portfolio.”
With inflation at its highest level in decades, Hennessy suggested that the long-term drivers of disinflation as well as low and falling interest rates could be changing.
“Shifting demographics, productivity trends, de-globalization and geopolitics tend to shape the overall outlook for long-term growth and inflation,” he said.
“Central banks are trying to deal with rising inflation by raising interest rates. However, if they push too far too soon, there is the possibility of recession risk. A DAA approach must be hyper aware of these risks when it comes to portfolio positioning.
The Reserve Bank recently indicated that it would take further steps in the process of normalizing monetary conditions while keeping the economy “in balance”.
Jon Bragg is a reporter for Investor Daily from Momentum Media, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.