Recently David Neal, chief investment officer of the Australian Government Future Fund, reportedly said: “The Future Fund operates as a single portfolio… rather than breaking allocation into various sectors as is traditionally done. …Every idea should instead be evaluated against every other idea with strategies directly compared to assess the marginal benefit of where each dollar goes.”

He has thrown down an interesting challenge. However, I believe that this is a red herring and that we could do much better.


Deductive reasoning The deductive process starts with all parties agreeing to a set of axioms. The dialogue then progresses on a step-by-step basis, with each party agreeing to the logic that leads from axioms and previously agreed statements to points of agreement.

I thought that this approach might be useful in thinking about asset allocation as much of the debate on this issue does not build from agreed axioms, and worse, is often heavily influenced by vested interests, often without the awareness of the conflicted party.


Axioms and conjectures I start with two axioms and work through seven conjectures.

Axiom 1: There is a huge number of ultimate investors. Axiom 2: There is a large number of investment opportunities.

Conjecture 1: Intermediaries are needed to match owners of capital to users of capital.

Conjecture 2: No one intermediary can offer a complete service.

If individual investors could get a comprehensive solution to their investment needs from one integrated provider then asset allocation may not be necessary. However, this is impossible as the task is simply too massive. Even if an organisation attempted to do it all, it could not do so in an integrated way: the different functions would operate as a set of internal intermediaries operating as independent silos.

Conjecture 3: Intermediaries need to focus on either individual investors, individual investments or packaging investment products.

Conjecture 4: Aggregation is needed to create complete portfolios. The different and focused roles of various intermediaries in a chain require asset allocation.

At this point it is worth reflecting on Neal’s remarks. He implies that investors should simply select portfolios of direct investment opportunities that, when assessed from the bottom up, result in a portfolio that suits the investor’s needs. This is an alluring proposition, but I believe it is a red herring for much of the investment industry and its clients: some sort of aggregation is required at some point.

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