Asset allocation versus security selection

Dear Reader and Fellow Investors,

For us, security selection is always important.

However, the importance of asset allocation varies over the economic, business and market cycle.

The factor that most effects the role of asset allocation for us is valuation.

When the market is trading at x 0.5 our estimate of fair value, we don´t care if the world is blowing up, we are increasing our equity position overall in the portfolio. The only variable that will matter to us in that moment will be the flow of increase into equities per unit of time.

Likewise, if the market is trading x 2 our estimate of fair value (as it did in the late 90s), we don´t care how many opportunities we are finding, we will be underweight equities. In our portfolios equities can take 20 - 75% of asset allocation.

As a note for our readers, the barrier where asset allocation starts to become more dominant in portfolio construction PURELY on a valuation basis can be seen on the below diagram. We use the S&P 500 as an example.





Yours sincerely,

Alessandro Sajwani