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        Model Portfolio Education

        What is Strategic Asset Allocation?

        It is recognised that asset allocation is a key driver of long term investment results, meaning it may be the most important decision an investor can make.

        2.5 min read

        Asset allocation is the process that determines the different asset class distribution within an investor’s portfolio. This process balances the risk and return across a combination of asset classes within a portfolio. Assets can be categorised as growth or defensive. Growth assets are investments that tends to carry high levels of risk, but also offer potential for higher returns over time. Whereas, defensive assets carry lower levels of risk, and typically lower returns. Equities are an example of a growth asset, whereas fixed income and cash are examples of defensive assets.

        Asset classes perform differently in different market cycles, therefore, investors are encouraged to employed a diversified approach in their asset allocation process. Combining asset classes where the performance is relatively uncorrelated, so that when one asset class underperforms, this is offset by the performance of another asset class.

        There are three common approaches to asset allocation:

        • Strategic asset allocation (SAA) is constructed on the basis of long term asset class forecasts with targets to maintain a set combination of asset classes.
        • Dynamic asset allocation (DAA) is an active strategy that adjusts the allocation of assets based on medium term views.
        • Tactical asset allocation (TAA) is also an active asset allocation strategy, whereby the allocation is adjusted to take advantage of short term market opportunities.

        Investors should be aware that the more active asset allocation strategies typically incur active fees or higher management costs.

        Given SAA is constructed on the basis of long term asset class forecasts, this approach is considered appropriate for investors that won’t require access to their portfolio for at least the next five years. The investors time horizon, risk tolerance and investment objective are taken into consideration when selecting the appropriate SAA strategy. From an industry perspective, SAA strategies are commonly labelled to reflect the investors risk tolerance. Labels include moderate, balanced and growth. Below are examples of Hypothetical Model Portfolio Allocations for the State Street ETF Model Portfolios

        What is Asset Allocation

        The forecasts driving a portfolios asset allocation will evolve over time to align with the fundamental, structural an d market changes. Therefore, it’s important to continually review and monitor asset allocation forecasts to ensure they align to the risk and return objectives of the SAA strategy. The State Street ETF Model Portfolios are founded on an SAA framework. The portfolios asset allocation is reviewed and updated annually and reflect our portfolio management team, the Investment Solution Group’s (ISG), long-term capital market assumptions and qualitative insights.

        Reflective of asset class forecasts, the portfolio's actual allocations will also fluctuate over time. All else being equal, assets that have performed well will consume a bigger share of that portfolio's value and assets that have done poorly will decrease from their initial asset allocation. ISG believes that strategic portfolios should be rebalanced to the annual reconstitution weights on a quarterly basis.

        SAA provides investors with a longer-term investment horizon, a disciplined and diversified asset allocation regime and is therefore utilised as an asset allocation strategy for the State Street ETF Model Portfolios. It is no surprise many investors have chosen to include these strategies as part of a core satellite approach.

        More on ETF Model Portfolios

        - For financial advisers / wholesale clients only – Not for distribution to retail clients -

        The recipient warrants by receipt of this material that they are a wholesale client, as defined under the Australian Corporations Act 2001 (Cth). State Street Global Advisors, Australia Limited (AFSL Number 238 276, ABN 42 003 914 225) (“SSGA, AL”) is the investment manager for the State Street ETF Model Portfolios and State Street Global Advisors, Australia Services Limited (AFSL number 274900 ABN 16 108 671 441) is the Responsible Entity and issuer of units in the State Street SPDR ETFs which are Australian registered managed investment schemes quoted on the AQUA market of the ASX or listed on the ASX. State Street ETF Model Portfolios may include State Street SPDR ETFs and other third party ETFs. This material is general information only and does not take into account your or your client’s individual objectives, financial situation or needs and you should consider whether it is appropriate for you or your client. You should ensure that your clients consider the product disclosure document of the underlying ETFs, available at www.ssga.com or the third party ETFs website, before deciding whether to acquire or continue to hold units in an ETF.

        General Risks ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. Asset Allocation is a method of diversification which positions assets among major investment categories. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. An investment in the model portfolio carries a number of standard investment risks; these risks are outlined in each Provider’s PDS which should be read in full and understood by the potential investors.

        Implementation Risk State Street does not manage the accounts of retail investors pursuant to the model portfolio strategies and the strategies are only available to retail investors through various Providers that offer account management and other services to retail investors. The actual results of accounts managed by a Provider that receives access to the strategies may differ substantially from the hypothetical results of the State Street ETF Model Portfolios for a variety of reasons, including but not limited to:

        i. the fees assessed by the Provider and other third parties;

        ii. the Provider’s decision to exercise its discretion to implement a given strategy in a way that differs from the information provided by State Street;

        iii. the timing of the Provider’s implementation of strategy updates; and

        iv. investor imposed investment restrictions; and the timing and nature of investor initiated cash flow activity in the account.

        “SPDR” is a trademark of Standard & Poor’s Financial Services LLC (“S&P”) and has been licensed for use by State Street Corporation. No financial product offered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P or its affiliates, and S&P and its affiliates make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in such products. The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA, AL’s express written consent.

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