Hello everyone. I have a question which I really want to get to know. Could anyone tell me: In reality how a new fund choose how to allocate its asset? How much in cash, how much in stock, and bond? For each class of asset, how to allocate how many % to invest in each field? Actually I learned about SML, CAL, efficient frontier, CML… but somehow I feel so difficult to connect them all together, from the begin to the end. What I read from the advertisement of fund is that they create different types of fund: like 40 bond/60 stock or 30 bond/70 stock, something just like from the experiences? Could anyone tell me, what steps do these funds do in reality to reach a specific number for each class of assets and each field of economy? Thank you very much!
A firm decides that they have largecap value, growth and blend funds… Yet they only have a small cap blend and mid cap blend funds… So based on market demand they feel the midgap value and midcap growth funds will sell well… So they decide on those two styles…
Then they hire some portfolio managers that has experience running mid-cap growth and midcap values at other firms… Maybe these guys are #2 in line at those firms… Since the firm advertises active management, they want these guys to utilize fundamental analysis and use discretion, and create concentrated portfolios … They decide that the benchmark should be XYZ, etc…
They also feel that they’re missing a good growth and income fund which they think will work very well for the pre-retired markets… Based on their market research, they think the 60/40 blended portfolio (stocks/bonds) will sell well… They choose the morningstar moderatel allocation as their benchmark.
Dude its all in the reading… i just made all that up… you can do the same.
My firm used to only have small-cap blend fund, but now they just opened up a small-cap growth becaues of demand. They also used to have international developed and international emerging markets funds, but lack of demand they combined thoes two into the same fund.
Also you’re referring to asset allocation funds. Moderate funds are usually 50-65% stocks and the rest bonds. Moderately aggressive is 70-85% stocks and rest bonds. This is predefined by the allocation bands. Theyll have 5 allocation funds for all investors to choose from conservative to aggressive.
the investment committee and/or PM determines the allocations. The PM does the heavy lifting.
Thank you a lot for your answer. You are right, I read from book that they use different funds like: 40-60, 45-55, 50-50, 30-70 for all investors to choose. But what if I only have one fund, then how I should choose a specific number, such as 40-60 but not 30-70? I want to ask for a theory base for that choice, not only from the experience?
Theres no theory. You set up the fund based on demand or need, and then set up the mandates.
if the mandate is moderately conservative, you cant make it 60-40. If you can only have one allocation fund, you would set the one you think would get the most volume.
you could be more lax and setup a “growth and income” and put a loose mandate 30 to 80% equity, likewise there are active all cap funds that can go any capitalization.
Its true that I should set up the fund based on demand - and then set up the mandate, if I were in the position to choose 
.
However, my job is to build a kind of strategy for a government’s fund. So I must try to find something like theory first, then based on that theory, come up with the reason why I choose 30-70 or 40-60. It’s quite ridiculous, right? But if I start from some kind of theory then it’s easier for me to persuade the committee to agree with the choice^^
If you are setting up a fund for something or someone, you set it based on thier risk tolerance and/or capital market expectations. You would be 30/70 during a downturn and 70/30 on a bull run.