Dynamic Asset Allocation and Fund Governance


It is increasingly widely recognized that the industry’s best practice model of the last three decades has not served us well and is arguably not fit for purpose. But while it has been easy to pick holes in the current model, many, if not most funds, carry on regardless because no new model has emerged to take its place. 

This short paper seeks first to revisit the reasons for questioning today’s best practice, and then moves on to propose a practical alternative. A feature of the alternative proposed is that it naturally takes account of a fund’s individual characteristics, its regulatory environment and its risk preferences. The main difference between the proposed model and today’s is a more dynamic approach to asset allocation where asset allocation is driven by valuation (price of risk assets, risk premia) and wealth. While I think we can all agree (provided we can overcome our behavioral biases!) as to how we should respond to changing risk premia, there is no single answer as to how we should respond to shifting wealth. However, we can demonstrate that there are some unavoidable consequences to different wealth driven utility functions.

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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.