An Unmeasured Cost in Portfolio Analysis and Asset Allocation
Investors make portfolio reallocation decisions for a wide array of reasons. A plan sponsor may choose to implement a tactical tilt to its strategic asset allocation or a portfolio manager may seek to shorten portfolio duration in anticipation of an increase in interest rates.
No matter the reason, it is likely that significant analysis motivated the decision.
While portfolio analysis typically focuses on the return and risk of a new investment allocation, managers will also focus on implementation costs. If not carefully managed, these costs can erode or even eradicate the projected benefits of the target investment allocation. The consideration of implementation costs in investment decision-making is reasonably well documented. However, we find that the potential opportunity cost incurred between the point when the investment decision is made and the point when trading commences - a period that can easily span several months - is often overlooked.