The Process: Asset Allocation

The Process

Focus on the Big Picture

The LPL Financial Research asset allocation process is a multi-disciplined, collaborative effort. Each week potential investment opportunities are discussed with the goal of augmenting and refining shorter term asset allocation, while still ensuring a focus on the "big picture" investment environment.

As part of the asset allocation process analysts focus on several factors.

  • Risk Analysis is the start of the asset allocation process. Understanding when the market environment is rewarding or penalizing risk-taking helps to set the framework of the asset allocation to either a defensive or opportunistic tone.
  • Insight on current factors that are impacting the markets such as U.S. and global economic growth, corporate earnings trends, market sentiment, interest rates, monetary and fiscal policy, and geopolitical concerns.
  • Vital details on the ever changing fundamental and valuation inputs to the different sectors and asset classes. We believe that prices matter and spend time understanding which investment opportunities offer the best risk/reward tradeoff.
  • Consolidated views from the hundreds of portfolio managers we recommend and monitor. This valuable input provides an important complement to our ideas and investment process.
  • Data and analysis tools to help make solid tactical decisions. Quantitative analysts provide real time, technical overlay to our process on asset allocation, helping us to not only make the correct decision on which asset class to allocate to, but also providing us with the optimal time to make that decision.

Real Time Decision Making

Our investment decisions and model portfolios are monitored closely on a daily basis against their benchmarks, peers, and our own internal metrics. We review each model's risk and return characteristics daily and formally review them at bi-weekly meetings that cover: market capitalization, sector exposure, duration, credit quality, foreign exposure, equity style (growth versus value), and tracking error.

Additionally, we track daily, weekly, monthly, and quarterly performance reports on the investment vehicles within the models, as well as how the investment decisions have contributed to overall performance. Knowing how our tactical decisions have performed in the past, and more importantly, why they performed the way they did is a critical input to the decision making process.

Sell Discipline

Our sell discipline framework helps take much of the emotion out of the investing process and helps us monitor the risk/return characteristics of our trades on a real time basis. The sophisticated and in-depth sell discipline is an important part of our risk control and portfolio monitoring process. Our sell discipline enables us to determine:

How long we should wait until we sell an investment idea to avoid further losses?

How long do we stay with a successful investment idea without getting greedy?

The result is our team can focus on the continued validity of the investment thesis, or simply put, the basis for the trade determined at the outset of creating the model. We review such factors as macro variables, valuations, fundamentals, and technicals—to ensure whether or not the thesis is still valid.

Once a decision has been made, we track the risk and return expectations, and how the model is performing relative to its peer group.

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