Book Review: Understanding Asset Allocation

Asset allocation was one of two investing topics which I had resolved to learn more about some time ago. I picked Victor Canto's "Understanding Asset Allocation" from several books on the subject at my local books store not only because it came with solid recommendations (and not just by those whose reviews were printed on the dust jacket) but also because it was the shortest of the choices available. I was hoping for a relatively light easy-to-read introduction to the subject.

While I did find Canto's take on the subject interesting, it was heavier going that I had hoped for. I put this down to an expectation issue on my part rather than a criticism of the book.

On the whole I did get a good introduction to an important subject. Canto explains different asset allocation models (strategic asset allocation and cyclical asset allocation) clearly and supports them with historic case studies showing how the different models worked in different market conditions. The major take away I took from this book was the importance of anticipating and participating in asset cycles. Of course, this requires an ability to successfully cycle into the asset classes which will outperform during the following period of time (usually measured in years) and to avoid the asset classes which are likely to underperform.

One of the more interesting points raised is Canto's view on the debate between active and passive fund management. In Canto's view active management tends to (or perhaps has a better chance of outperforming) during small cap cycles while passive managment is the better option during large cap cycles. I wasn't wholly convinced as too much seems to depend on your choice of active fund manager, but in spite of my reservation, Canto presents a reasonable amount of data to support his views.

While the explanation of asset cycles was useful and something to consider in my investment decision making going forward, two issues remain.

The first issue is a practical one. Outside the United States, the ability to invest in low cost funds which track the relevant indexes is quite limited. Certainly, there is nothing available in Hong Kong that would enable the type of diversification and asset allocation that Canto describes to be implemented.

The second issue is a conceptual one. If asset allocation is a methodology that in effect attempts to generate above market returns, by definition it is impossible for every investor to successfully implement. This does not mean that the attempt should not be made, but the bottom line is that for every investor who beats the market by cycling out of asset classes that will underperform and into those which will outperform, almost by definition there must be someone who, consciously or not, is doing the reverse.

On the whole a useful book that introduced my to another way of looking at asset selection.