Portfolio Construction and Management Process
At Meyer Asset Management, our staff work closely together to assist our clients achieve their financial goals. In order to do so, it is very important for us to understand our clients’ needs, so that we are able to construct a portfolio that meets their financial goal and objectives. Our fundamental market research having long term perspective makes it possible to optimize the efficiency of a portfolio by reducing risk without sacrificing return. It is also important for our clients to have a defined financial plan so that we can create a tailor made portfolio.
Need for diversification
In the world of investments, “don’t put all your eggs in one basket” is very true. By diversifying into different asset classes and investments, you can “spread your eggs around” to protect against any losses.
Asset Diversification
It is possible to increase your portfolio's return by investing in equities however they can be highly volatile and risky. An investment should not simply be speculative, but rather it should be planned. It is possible to reduce the overall volatility or risk of your portfolio by investing in lowly correlated assets; such as equities (or mutual funds), bonds, commodities, hedge funds, Real Estate Investment Trust (REITs / land banking) .
Geographical Diversification
It is necessary to diversify within regions in which you invest in order to decrease or minimize the country risk. Geographical diversification is possible by investing in countries that have low correlation among them and by investing in different financial markets in the world. A fund company analyzes the current market trends, the global economy and forecasts the market before making an investment decision. Some fund companies monitor the markets around the world by using specialized computer software.
Traditional investments
Traditional investments include stocks, bonds, indexes, currencies, domestic mutual funds, offshore funds. Among those investments, they are diversified by global area and industrial sector.
Alternative investments
These investments include hedge funds, funds of funds, REITs, land banking and commodities, which have a low correlation to a traditional portfolio that consists of only stocks and bonds.
Asset allocation
Through the process of asset allocation, you must take into consideration macroeconomic conditions, analysis of capital markets, intelligence related to investment products such as an expected return, risks and correlation with other investment products. It is equally important that we fully understand the financial goals, investment terms, risk tolerance of our clients. For example, it is often mistakenly assumed that a portfolio comprised of 100% bonds is very conservative and has very little risk. However, if you limit yourself to low-risk securities, you'll be limiting yourself to investments that tend to have low rates of return. So what you really want to do is include some higher growth, higher risk securities in your portfolio, but combine them in an efficient way. The result should actually provide an investor with increased returns with only slightly more risk.
A traditional portfolio
A traditional portfolio is the one that invests in stocks and bonds where prices may go up and down in accordance with market trends.
- Total return：225.3%
- Annualized return：7.5%
- Annualized volatility：8.7%
- Worst draw down：-23.7%
- Sharp ratio: 0.36
An enhanced portfolio with alternative investments
Reducing risk without sacrificing return can be achieved by including alternative investments into one's portfolio due to their low correlation with traditional mutual funds and equity investments.
- Total return：253.9% > improved by 28.6%
- Annualized return：8.1% > improved by 0.6%
- Annualized volatility：7.5% > improved by 1.2%
- Worst draw down：-19.4% > improved by 4.3%
- Sharp ratio：0.47 > improved by 0.11%
An efficient portfolio
Efficiency means reducing risk
without sacrificing return. An efficient portfolio is a portfolio which
takes into consideration correlation between investments in order to maximize
returns while reducing risk.
The efficient frontier is the curve that runs along the top of the achievable
region. Portfolios on the efficient frontier are optimal in both the sense
that they offer maximum expected return for some given level of risk and
minimal risk for some given level of expected return. Any portfolio plotted
on the curve is an efficient portfolio. Any portfolios that fall below
the curve are not optimized portfolios because they have higher risks
and lower returns.
