How Do Billion-Dollar Funds Manage Their Money: Part 1 Asset Allocation

โดย Tanapoom Damraks | Jul 21, 2017 | view 4,312

We might wonder how wealthy individuals manage their money to maintain their wealth over the long term. In this article, we will take a closer look at the money management strategies of funds that handle the finances of this group. Generally, managing large funds involves a process known as Asset Allocation, which we will explore in this article.

What is Asset Allocation?

It refers to the systematic division of investment proportions among various asset types to achieve a balance between returns and risks. This allocation must consider the investment goals, acceptable risk levels, and the investment duration of each investor.

What types of assets are included in Asset Allocation?

Primary assets are typically categorized into four types: stocks, bonds, cash, and alternative assets.

Stocks (Equity) refer to common shares traded on major stock exchanges both in Thailand and abroad (excluding shares in private companies not traded on the stock exchange). They can also be categorized by region, such as Thai stocks, Asian stocks, American stocks, and European stocks, or by investment strategy, such as value stocks or growth stocks. Advantages of stocks: They tend to provide higher long-term returns compared to other asset types, but the downside is that they are much more volatile.

Bonds (Fixed Income) refer to debt securities issued by private companies or governments to borrow money from the public, offering periodic interest payments (called coupons) and returning the principal at the end of the contract. Advantages of bonds: Investors receive regular interest payments, but there is a risk of default by the borrower.

Cash and Equivalents refer to cash, bank deposits, or short-term securities that can be quickly converted into cash. Advantages of cash: It has high liquidity and can be quickly converted into other asset types, but the downside is that it offers low returns.

Alternative Assets refer to other assets outside the primary categories mentioned above, such as real estate or gold.

Once we categorize assets into different types, we need to have a process for allocating investment weights to each asset type, considering the following points:

Investment Goals - Each investor has different goals. Some may want their portfolio to grow quickly, while others may just want a steady income from interest. These factors must be considered in the investment planning process.
Risk Tolerance - Expecting high returns from investments always comes with increased risk. Investors must assess their acceptable risk levels, which depend on their individual circumstances. For example, a working-age investor can take on more risk due to future income potential, while a retiree may have a lower risk tolerance due to a lack of future income sources.
Time Horizon - Investors with a long investment horizon, such as those just starting their careers and not planning to use investment income soon, differ from those nearing retirement or planning to spend their investment funds soon, resulting in a shorter investment horizon.
Investment Constraints - Each individual may have specific needs that limit their investment options, such as needing to withdraw funds for a child's education abroad. These factors must also be considered in the investment planning process.

In upcoming articles, we will delve into the details of how to perform Asset Allocation.