Stock picking or asset allocation? Investment press and marketing may have you believe that stock picking is what investing is all about. 

    However, evidence shows that investment results depend mostly on the assets you choose, with academic studies suggesting around 90% of a portfolio’s return variability can be a result of the choice of Strategic Asset Allocation (SAA)1. Given this, we believe investors’ emphasis should be on having a SAA that is aligned to their objectives and built from a robust, repeatable investment process.

    In this article we discuss strategy in more detail, focusing on the following:

    • Setting investment strategy
    • The approach IMX is taking to achieve success

    Setting strategic asset allocation

    SAA is defined as the strategic split between different types of assets. At its highest level, it’s the central allocation to equities, property and bonds, but there are additional levels e.g. regional split of equities, split between bonds etc. The SAA is the key determinant of a portfolio’s expected level of future return and the level of risk being taken.

    Three key inputs to setting an SAA include:


    In other words, what are you trying to achieve and by when? Knowing this gives a sense of the level of return required by the portfolio and what level of exposure is required to assets that have higher expected returns, albeit with greater risk e.g. equities. 

    Alignment to objectives

    In IMX portfolios a “goals based” approach was adopted in setting the SAAs i.e. the starting point was consideration of the goals that underlying investors will be trying to achieve. This starting point is a key differentiator compared to other model portfolios which typically start from risk buckets. This alignment of SAA to goals is the reason why there are two sets of portfolios; ‘grow’, aimed at investors in the accumulation stage of investment, and ‘spend’, aimed at investors who are looking at the decumulation stage and to take regular withdrawals from their portfolios.

    Opportunity set

    There is a broad range of asset classes available for investment. Consideration must be given to their appropriateness and the role they may play in the SAA. Factors to assess include the evidence of the future sources of return and the asset class’s liquidity - is it aligned to investors’ needs? The SAA construction phase (outlined below) should only include assets that pass this assessment.

    Derived from broad, but considered, opportunity set

    Asset classes must pass several tests before they are considered as potential candidates for IMX SAAs. These tests include having a broad enough range of assets to meet a wide range of goals; simplicity being preferred over complexity; and risk and return drivers being backed by empirical evidence and economic rationale. These tests result in a current opportunity set of 12 asset classes, this opportunity set is assessed on a regular basis and may change in the future.

    SAA construction

    The next stage is combining the asset classes in the opportunity set to design an SAA that is aligned to the objectives, but also spreads the risk i.e. to make sure investors do not have “all their eggs in one basket”. Data analysis, combined with a qualitative overview, supports this process by projecting how different SAAs may perform in different economic scenarios. Consideration must be given to ensure SAAs sit relative to, and are aligned with, the investment policies and beliefs.

    IMX construction alignment to policy and beliefs

    The IMX portfolios have been designed in-line with these key principles. Throughout the whole SAA setting process, consideration is given to IMX’s investment policies and beliefs.

    IMX investment beliefs

    Client goals

    All of our investment decisions should be made with the aim of helping you achieve your clients' investment goals.

    Asset allocation

    Investment outcomes will be primarily determined by asset allocation which should be made appropriate for the term of the investment.

    Risk management

    Underlying risk exposures of an asset allocation should be understood and appropriately managed.


    Costs and charges impact client outcomes and need to be effectively managed.


    Investment decisions should be evidence based and supported by robust economic rationale.


    Investment solutions should be as simple as possible but as complex as necessary to drive the right client outcome.

    Responsible investing

    We believe that environmental, social and governance (ESG) factors should be considered in manager selection and will adapt our approach and strategy as responsible investing continues to evolve.

    Governance and transparency

    Good governance adds value and we'll be transparent and accountable in all our actions and communications.

    Using the agreed opportunity set, detailed economic modelling and a subjective overlay, we assess the relative merits of potential SAAs in achieving the required objectives. These relative assessments are based on a range of IMX specific metrics, with different metrics applied to spend and grow portfolios. Spend metrics focus more on short-term risk measures to reduce the impact of 'sequencing risk' whereas grow portfolios focus more on longer term risk measures (reflecting the typical longer-term investment horizon of grow portfolio investors).

    SAAs should be set with a time horizon that is aligned to investors’ objectives. This means they are not expected to change dramatically on an ongoing basis. Nevertheless, it is important to review a SAA’s appropriateness on a regular basis and what potential changes could be made to ensure alignment.

    Review and reflect

    IMX review the appropriateness of their SAAs on an ongoing basis, at least quarterly. To avoid portfolios’ actual allocations deviating considerably from their SAA, rebalancing takes place on a quarterly basis.

    Having the appropriate SAA is likely to be the key driver of an investor’s ability to achieve their objectives. IMX has developed a process, along with supporting technology, that helps investors determine the SAA most aligned to their individual investment goals.

    William Marshall

    Partner, Hymans Robertson

    [ 1 ] Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, 1986, “Determinants of Portfolio Performance,” Financial Analysts Journal vol. 42 (4), July/August, pages 39–44 (reprint, 1995, Financial Analysts Journal 51 (1), pages 133–138, 50th Anniversary Issue). Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, 1991, “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal 47 (3), pages 40–48. Roger G.  Ibbotson and Paul D. Kaplan, 2000, “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?”, Financial Analysts Journal 56 (1), pages 26–33.

    Risk warning: This communication has been approved and issued by Hymans Robertson LLP (HR) on behalf of Hymans Robertson Investment Services LLP (HRIS) and is based upon their understanding of events as at date of publication. It is designed to be a general summary of topical investments issues, it does not constitute investment advice and is not specific to the circumstances of any particular financial advisory firm. Please note where reference is made to legal matters, HRIS is not qualified to provide legal opinions and you may wish to seek independent legal advice. HRIS accepts no liability for errors or omissions.

    Please note the value of investments, and income from them, may fall as well as rise. This includes equities, government or corporate bonds, and property, whether held directly or in a pooled or collective investment vehicle. Further, investments in developing or emerging markets may be more volatile or less marketable than in mature markets. Exchange rates may also affect the value of an overseas investment. As a result, an investor may not get back the amount originally invested. Past performance is not necessarily a guide to future performance.