In reality how a new fund allocate its assets?

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!

10% cash then mansion, yatchs, fancy cars, and trips to the Bahamas.

haha, thank you, that could be a good choice if it is my own fund. But if I work for a fund, how I should persuade other people how I choose this ratio but not that ratio? I really want to know how theory can be applied in real?^^

I don’t manage a fund but when I build a portfolio for my planning clients, I usually start with their goals for the money, I evaluate their investment profile and help build an investment policy statement. I imagine it’s the same for a fund manager. The IPS guides everything. All portfolios I recommend fall within that IPS. Go read some of the prospectuses for various mutual funds. They’re all IPS’s for those managers to follow.

I have a prospect who wants to focus on asset allocation instead of goals. I asked him what’s the point of the investment? Does he want to meet financial goals or have a pretty allocation Suze Orman told him about?

As a planner, I set a target return and try to manage the risk. Fund managers may (or may not) set the risk and try to manage the return.

^Fund management is a little different.

First you need a benchmark. If you want to make a balanced fund with a target of 60% equities and 40% bonds your bench is probably 60% S&P 500 and 40% Barclays Agg. Then the PM decides on the fund’s philosophy and process (sometimes one will drive the other or vice versa). On one hand, the PM could choose to build an enhanced index portfolio that has very low tracking error and active share. Basically taking small stock-specific bets but keeping close to the securities in the benchmark.

One the other, maybe they want to build a portfolio that has the same risk contours as a 60/40 portfolio but go way off the reservation and use securities that aren’t represented in their benchmark. This could take the shape of a concentrated portfolio or anything that has high tracking error and/or active share.

In the simplest terms, the first example would work well for a PM that believes they are good stock pickers. They have a basket of stocks (and bonds) to choose from and they add value by overweighting some and underweighting others. The second PM has more of a macro view and takes larger sector bets. Again, this is a very general example and there’s dozens of ways to run a fund that fall somewhere in between, but that’s the gist.

Wow. I figured the perspectives were totally different. So the prospectus is really just for me and my clients. So we can see if the PMs strategy fits with our goals. The PM is engineering a product they hope we will find useful in our pursuit. I haven’t even take lvl 1 yet. Hell if I know… lol

Sometimes but normally no, the PM doesn’t care about the advisors or clients. They start funds because they believe they’ve built a better mousetrap. Once a fund company reaches scale, then you have product managers that get involved in fund creation to fill asset class voids to drive inflows. But that’s more of a business decision. Most PMs don’t care about the business side of things in that regard (though most are paid based on the AUM of their fund(s) so they definitely do want people to buy them).

Ultimately that’s why my job exists. I take the strategies our PMs have come up with and build a story around them that appeals to professional buyers. Very rarely do I take what my clients are telling me and get a fund built as a result. It has happened, but very, very rarely.