FPC008 Investment Advice - Assessment Question

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Question 4 Tactical asset allocation (11 marks | Word limit: 600 words)

(a) (i) Tex’s current asset allocation approach is to rebalance his portfolio weightings to the ABC Super portfolio weightings on a six-monthly basis. Identify the key differences between this approach and a ‘buy and hold’ approach. (2 marks)

(ii) Looking at Tex’s portfolio, briefly discuss whether or not this strategy has worked. (2 marks)

(b) (i) As an adviser, you believe you can provide value to clients through an active asset allocation approach (tactical asset allocation (TAA)). Identify issues that you should consider when adopting the TAA approach, compared to strategic asset allocation (SAA), which rebalances to target allocations on a periodic (e.g. quarterly) basis. (2 marks)

(ii) How well does Tex’s current ABC Super portfolio meet the proposed agreed SAA? (1 mark)

(c) It has been reported that residential property prices have declined 10% over the past year and banks are restricting credit for housing loans.

Some economists are forecasting that the Reserve Bank of Australia will continue to reduce interest rates from the current record low level of 1.0 % due to the high levels of household debt and low wages growth. Against this backdrop, the US Federal Reserve is predicted to keep US interest rates steady, in the range of 2.25–2.5%.

Required:

Discuss some ways in which TAA might be used in this situation given these expectations.

Note to students: For this question, you are required to provide recommendations on how you would adjust the weightings for each asset class in the SAA provided in the case study. (4 marks)

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