While an account's precise asset allocation will always vary based upon prevailing market conditions, the account's strategic asset allocation will still be the largest single factor that impacts investment performance. Although clients always hope that the selection of particular money managers can "add value," this value is normally added at the margin. It is in the selection of asset classes (i.e., equity, fixed income and cash) and investment styles (e.g., large cap stocks and small cap stocks), and in the allocation of the fund among these asset classes and investment styles, where the largest components of investment performance can be found.

In addition to being the dominant factor impacting an account's performance, establishing a strategic asset allocation is also the most important part of the investment process that is normally under the client's direct control. While managers usually have complete discretion in selecting individual securities, it is the client that selects the asset classes, investment styles and asset allocation, and then selects specific managers that reflect these decisions, as part of establishing the investment policy. 

An Asset Allocation Analysis ("AAA") provides a basis for these decisions. An AAA can be viewed as the first step toward taking an account's investment objectives, and translating them into an investment game plan. Investment objectives define a client's goals, an AAA indicates how the client can position their portfolio to reach those goals.

The analysis itself is designed to produce an appropriate mix of asset classes and investment styles in a manner that will meet each client's objectives. The analysis can focus on either the return objectives or the risk objectives, i.e., what type of risk is the account likely to encounter if it is to achieve a given return, or if the client does not want to accept more than a given level of risk, what type of return can be expected. For each of these issues, the analysis will present a range of asset allocation options.

Like most forms of investment analysis, the results of an AAA are dependent upon the criteria and assumptions that are employed. These criteria are both objective and subjective, and can vary substantially from client to client. They relate to two distinct categories: the client's investment program and the market environment. As investment consultants, IPEX takes an active role in addressing both sets of issues.