Asset Class Taxonomy: A New Construct for Assessing Balance in Portfolios

16 Pages Posted: 1 Oct 2020

See all articles by Stefan Whitwell

Stefan Whitwell

National Wealth Partners, LLC

Thomas Villalta

AUSTIN | 180 ADVISORY GROUP LLC

Date Written: June 24, 2020

Abstract

Investment innovation and the proliferation of alternative investments have rendered the current asset class taxonomy ineffectual. Moreover, private equity and hedge funds muddle understandings of risk in portfolios. The starting place for assessing a useful taxonomy is determining what is most important to investors from a diversification perspective. We observe that investors are most concerned with extreme market environments where more classical constructs for asset taxonomy fall short. We suggest that a taxonomy that articulates the main “drivers” of significant downside returns would complement existing methods for assessing diversification and convey important information to stakeholders. We offer three broad groupings that we feel give a high-level assessment of balance. More importantly, we provide a pragmatic framework for determining which sub-asset grouping should fall into each broad grouping. In short, we live with a commonly used taxonomy that materially misrepresents the risks and degree of diversification in portfolios. It is time that we reflect on the taxonomy of asset classes given the impact it has on the management of large pools of capital.

Keywords: Asset Class, Portfolio Management, Alternative Investments

JEL Classification: G11

Suggested Citation

Whitwell, Stefan and Villalta, Thomas, Asset Class Taxonomy: A New Construct for Assessing Balance in Portfolios (June 24, 2020). Available at SSRN: https://ssrn.com/abstract=3696742 or http://dx.doi.org/10.2139/ssrn.3696742

Stefan Whitwell

National Wealth Partners, LLC ( email )

815-A Brazos St. Unit #526
Austin, TX 78701
United States

HOME PAGE: http://www.natwp.com

Thomas Villalta (Contact Author)

AUSTIN | 180 ADVISORY GROUP LLC ( email )

201 West 5th Street
11th Floor
Austin, TX 78701
United States
15127675812 (Phone)

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