When investors discuss performance, the conversation often turns to managers. Which managers were appointed, which outperformed, and which were replaced.

Manager selection is one part of the investment process, but the portfolio’s asset allocation is typically the primary driver of long-term outcomes.

The mix between equities, fixed interest, property, infrastructure, private markets and cash determines the return a portfolio can reasonably expect and the level of risk it is likely to experience along the way. More importantly, it determines how those exposures work together as a total portfolio to support long-term objectives.

Strategic before tactical

Strategic asset allocation is the long-term target mix of assets, established to support a client’s objectives, obligations and risk tolerance. It is reviewed deliberately and adjusted infrequently.

Developing a strategic asset allocation requires careful analysis of expected returns, diversification benefits and portfolio resilience across different market environments. Assumptions are tested, challenged and documented. The goal is to create a portfolio that can support long-term objectives across multiple market cycles rather than respond to a single set of conditions.

Because the strategic asset allocation has such a significant influence on outcomes, it receives considerable governance attention. This reflects a deliberate focus on the decisions that matter most over the long term.

Rebalancing is where discipline is tested

Market movements continuously shift portfolios away from their target allocations. A strong equity market can increase the weight of equities above target, while a market decline can reduce it.

Rebalancing brings the portfolio back towards its intended allocation. In practice, this may require selling assets that have performed well and adding to assets that have underperformed.

The rationale is straightforward. The discipline can be challenging because rebalancing often requires acting against prevailing market sentiment.

For this reason, rebalancing is embedded within governance processes rather than left to judgement in the moment. Allocation ranges are agreed in advance, triggers are established, and decision-making frameworks are defined before market conditions become difficult.

Where managers fit

Manager selection remains an important part of portfolio construction, but it sits within the asset allocation framework rather than replacing it.

The opportunity for managers to add value varies across asset classes and market environments. In some areas of the portfolio, broad market exposure may be appropriate. In others, specialist managers may be able to add value through their expertise, access or investment approach.

Funds SA appoints specialist investment managers across a range of asset classes. Our role is to determine the strategic asset allocation, select and oversee managers, and ensure the overall portfolio remains aligned with client objectives.

Diversification is the underlying mechanism

Asset allocation works because different asset classes respond differently to changing economic and market conditions.

Diversification is not simply about holding many investments. It is about combining assets that behave differently so that no single event determines the portfolio’s outcome.

This principle is straightforward in theory but demanding in practice. Relationships between asset classes can change over time, particularly during periods of market stress. Assets that have historically provided diversification benefits may move more closely together when uncertainty rises.

Understanding and testing how portfolios may behave under a range of conditions is therefore an ongoing part of portfolio management rather than an occasional exercise.

Looking at the whole portfolio

Asset allocation is one of the most important decisions in portfolio construction. It determines how risk is distributed across the portfolio and has a significant influence on long-term investment outcomes.

Manager selection, implementation and rebalancing all matter, but they operate within the framework established by the strategic asset allocation.

A whole-of-portfolio approach recognises that no investment should be considered in isolation. What matters most is how exposures work together to support client objectives, build portfolio resilience and deliver long-term outcomes.

Our focus is on building diversified portfolios that align with client objectives, remain resilient across market cycles, and support long-term investment outcomes.