The bank's senior economist announces with great fanfare that recent economic developments in ASEAN are financially important. The investment committee has therefore increased the allocation to ASEAN equities by two per cent whilst maintaining a neutral position on emerging market bonds.
At first sight, this sounds reassuring. It suggests that the portfolio is continuously monitored and adjusted as circumstances change. Yet neither decision tells the client much. Why two per cent rather than five, and why should emerging market bonds remain neutral? Before either judgement has meaning, a more fundamental question must be answered: two per cent above what, and neutral relative to what?
Private banks frequently present changes from their strategic asset allocation as meaningful investment decisions. Yet the significance of any change depends entirely on the credibility of the starting point. If the original allocation was constructed years ago using outdated return and correlation assumptions, the adjustment may be less meaningful than it appears.
Many strategic allocations are legacy frameworks, built with analytical care but repeatedly adjusted without being fundamentally reconstructed. They are often influenced by peer-group considerations since no institution wants to move too far from the consensus.
Any serious client should ask several simple questions. How was the strategic allocation calculated and when was it last fully updated? What assumptions underpin returns, risks, correlations and liquidity? Is the latest change a genuine tactical view or simply a response to recent headlines?
If no one can explain when the allocation was last fully reviewed, what assumptions support it and why it remains appropriate today, every subsequent two per cent adjustment deserves considerable scepticism. It may simply represent portfolio drift with institutional branding.
