Ideal split of assets across all sectors

seacaitch

MarkCarnage wrote: »

Most of my equity exposure is global ... I have some small geographic positions in Japanese ITs but these are the only explicitly geographic allocations.

Geographic by market of listing has become increasingly irrelevant in the last 20-30 years especially, as the revenue and profit stream tend to bear little or no relation to the listing country in many cases.

Absolutely. As a result, for some time the (institutional) trend has been towards adopting global equity investment remits that reflect the globalization of economies and businesses themselves, as laid out in MSCI's 2010 research paper, "The ‘New Classic’ Equity Allocation" (mentioned here before):

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1708269

"Conclusion
Traditionally, institutional investors partitioned the global investment opportunity set to geographic building blocks. As a result of the continued evolution of global equity markets, institutional investors are increasingly adopting a more integrated global equity investment processes.

Our research suggests that global equity mandates, together with dedicated emerging market mandates and small cap mandates, may be emerging as the “new classic” structure for implementing equity allocation. Investors who need to maintain a home bias can manage the domestic portfolio separately."

One benefit, IMO, of the sensible multi-asset funds that are becoming popular is that they commonly construct their portfolios with a global remit per that MSCI paper, giving investors hassle-free access to institutional investment "best practice" at low cost.
⠀

MarkCarnage

If you don't mind me asking which Wealth Preservation IT's do you hold and why?

I currently hold Personal Assets Trust, Ruffer and RIT Capital Partners. The first I've known for a long time, and they are very clearly focused on the core remit, but have shown that they will change the asset allocation quickly and radically in the past when asset class valuations change significantly.They currently hold a lot of cash (well T Bills as a cash substitute) and a significant weighting in gold.

Ruffer hasn't done quite so well, though part of this has been down to changes in the discount/premium to NAV which is an occupational hazard. I am keeping a closer eye on it.

RIT isn't quite in the wealth preservation category in terms of its asset allocation, but the philosophy is, and it gives access to some interesting private equity/absolute return funds in it.

I also hold the BNY Mellon (formerly Newton) Real Return fund, which is the only fund I currently hold. It has performed well over the last year in absolute terms as well as relative, but I'm realistic that the rate of return over last 12 months won't continue, though I still expect it to be a solid defensive holding.

If equity markets had a significant setback, I would probably reduce my wealth preservation and cash holdings somewhat.

Clearly, I don't compare the WP element directly with the mainstream ITs as they are there for different reasons. Overall, the WP element has done quite well against a cash plus benchmark, but has lagged the global equity portfolio which in a bull market isn't surprising. Last 6 months, the performance has been quite similar though.

Linton

MarkCarnage wrote: »

....

Geographic by market of listing has become increasingly irrelevant in the last 20-30 years especially, as the revenue and profit stream tend to bear little or no relation to the listing country in many cases.
.....

Yes but.....
1)Different geographies can have markedly different sector allocations - eg US with its massive global software techs, Far East with tech manufacturing and UK with relatively little tech of any type at least amongst the largest companies. So you cannot simply ignore geographic allocation - sector allocation can be difficult other than tech and healthcare where a range of niche funds are available.
2) The decreasing relevance of geographic location is certainly the case for the large multinationals but is much less clear for small companies which tend to be more correlated with local economic conditions and less correlated globally.

bowlhead99

seacaitch wrote: »

One benefit, IMO, of the sensible multi-asset funds that are becoming popular is that they commonly construct their portfolios with a global remit per that MSCI paper, giving investors hassle-free access to institutional investment "best practice" at low cost.
⠀

What that particular paper was identifying was the trend for institutional investors to appoint their fund managers to acquire investments with a global mandate rather than farm out the various elements of the portfolio to different regional players, which would constrain the broader opportunity set for the managers entrusted with those mandates.

In the old way of doing things the managers appointed with a mandate might just look 'locally' for what they think would work in the region for which they'd been entrusted, and could miss opportunities. Such managers might be working in independent silos and not caring about correlation issues or cross risks with what was being bought by another regional manager, and they wouldn't be able to fully embrace certain themes due to running out of geographical remit. So that legacy method may not be the best way of doing it, and big institutions were allocating more money to global mandates instead.

As they note:

With the globalization of equity markets, institutional investors increasingly realize that the partitioning of the investment opportunity set into domestic/international or regional blocks is becoming artificial. In comparison, global equity mandates give managers a higher degree of freedom in making investment decisions. For instance, managers can apply their sector expertise or insights to select the best stocks in global sectors, regardless of the domicile of the companies.

Our observation is that developed markets are driven mainly by global industry and style risk factors and less by differences across countries or regions. Compared to a domestic/international structure, global mandates enable managers to pick stocks from a global opportunity set and accommodate investment bets on global sector and style exposures.

So, what is happening is the institutions are appointing managers to think globally in capturing themes /factors /styles etc within their expertise, rather than have a silo for each region.

When you refer to the 'sensible multi asset funds that are becoming popular, you are right that they ensure investors money is spread globally, which is positive, so the investors aren't just stuck with UK assets and a token bit of overseas exposure.

However, investors in the low cost mixed asset funds most commonly mentioned here (e.g. LifeStrategy or HSBC Global Strategy) are not appointing a manager to look globally to capture particular themes, industries/sectors, company factors, taking account of correlations between companies and so on within their equity allocation, as described in the MSCI research paper we quoted above.

The LifeStrategy product is instead 'the old way' of doing it: decide home/vs overseas ratio should be 25/75, then buy an underlying fund for each region and employ the exact same strategy in each of the regions - the strategy being "put most money into the biggest companies by free float market cap". Vanguard are not looking to capture a trend or theme or factor in a "without borders" kind of way. Instead they are giving you what you would get yourself if you just appointed six managers with regional mandates and told them each to allocate everything cap weighted.