Asset allocation is the process of developing a strategy to deliver a Client Investment Objective. The basis for the allocation strategy are expected returns, risk and correlation. Expected returns are unlikely to look exactly like past returns. So to devise an asset allocation strategy, expected future returns need to take account of current pricing and changes in the occupier market that may affect future growth. Lease terms may also have changed, such as the move to more flexible leasing, which may impact irrecoverable costs, vacancy and tenant default rates.

The input of the investment and management teams is crucial in picking up any market changes that will impact the returns positively or negatively moving forward and research should be focussed on quantifying the impact of any developments in the market on the key return drivers. By being transparent about the expectations in the asset allocation strategy, the investment team will be better able to deliver the required portfolio and so avoid the risk of ‘style drift’.

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