Don't Overlook Asset Allocation

By Sirt, Ronald A. | Independent Banker, November 2007 | Go to article overview

Don't Overlook Asset Allocation


Sirt, Ronald A., Independent Banker


One interesting theme I discovered in my recent dealings with bank owners and senior executives is what I call the barbell approach to investing. Most clients invest the bulk of their assets in their own bank stock and round out their portfolio with investments in other banks. In addition, these clients tend to own a fair amount of real estate. Without exploring the actual financial planning process, I would like to focus on asset allocation within the equity component of the portfolio.

Equities are broadly categorized in two ways: market capitalization and investment style.

In reviewing portfolios, most bank owners and senior executives invest a large portion of their portfolio in their own bank's stock. These clients instinctively complement those holdings with large cap equity money managers or large cap equities.

According to Ibbotson Associates, 92 percent of a portfolio's investment return is determined by the strategic allocation. As a result, spend a fair amount of time concentrating on this area when reviewing and constructing portfolios.

Different sectors and investment categories respond to economic and market changes in various ways. For example, the market was extremely volatile during the past quarter ending Sept. 30th, which resulted in the following returns for the following sectors: according to the Oct. 1 edition of The Wall Street Journal: non-ferrous metals (19.9 percent) consumer electronics (18.7 percent) heavy construction (18.6 percent) and gambling (16.2 percent). These sectors continued to outperform the more defensive sectors such as durable household products (-9.8 percent) and mortgage finance (-16.4 percent). Collectively, growth sectors outperformed value sectors regardless of capitalization with Mid Cap Growth leading the way at 14.6 percent year-to-date.

At any time different sectors and asset classes will outperform or under perform various benchmarks. See the periodical table (page 100). Large cap growth stocks may outperform emerging markets depending on the current market environment, and vice versa. Regardless, sophisticated planning requires a focus on asset allocation with tactical sector shifts and regular rebalancing.

Having a concentration of securities in two or three asset classes exposes a portfolio to what many people consider an unacceptable amount of volatility. Volatility is the rate at which the price of a security changes over a certain time horizon, and is typically measured by standard deviation. …

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