This is the fourth article in my series of posts that look at the importance of asset allocation. Previously, I’ve discussed how asset allocation is the cornerstone of active portfolio management, provided an overview on the benefits of asset allocation and given you my thoughts on implementing tactical allocations in portfolios.
This article looks to answer – after deciding you want to implement asset allocation to increase the value-add to your investment portfolio – the question of “How do I implement this?”
There is no right or wrong answer here – there are a number of ways to implement asset allocation for your portfolio and it will be up to you to determine which works best for you and the specific asset class you are trying to gain exposure to. Some common methods might include:
- Buying direct shares, bonds or commodities in an overseas or domestic market
- Buying ETFs on the ASX that provide exposure to different domestic and global asset classes
- Investing in traditional unlisted active or passive managed funds for exposure to different domestic and global asset classes
The other point to make here is that these implementation methodologies are not mutually exclusive in any way. You can easily use direct shares, for say Australian equities and ETFs or managed funds for bonds and international exposure.
Or, alternatively, you could blend a broad market Australian and US focussed ETF for diversified exposure with a few high conviction direct shares both here and in the US for some additional “stock picking alpha”.
Why ETFs may be useful to you in implementing Asset Allocation
As mentioned previously, we would not expect, nor suggest, you use ETFs exclusively for your asset allocation, but we should highlight the benefits they can provide that make them attractive asset allocation tools. There is a reason why ETFs are so heavily used by offshore wealth managers and often comprise more than 35% of all value traded on the NYSE on a given day. Benefits of Australian ETFs include:
- They are quoted on the ASX like a share meaning that, irrespective of their asset class exposure, they can be purchased as simply as an Australian equity for clients
- They provide instant access to many asset classes including:
They can be bought or sold during the trading day, allowing potentially sizeable transactions into and out of an asset class with ease.
- They can provide instant diversification to an asset class or geographic region (although you may also choose to add some high conviction single stock positions for additional potential alpha).
- They are amongst the lowest cost investment tools available.
- They are vanilla instruments that are easily explained to clients and require no additional account set-up documentation over and above a standard equity account.
- They are highly transparent – Holdings are disclosed daily providing certainty over what exposure you hold. This benefit is shared by direct equity holdings but not by most traditional managed funds which may run opaque portfolios with holdings only reported quarterly in arrears.