How would an active fund manager seek to avoid underperforming their peer group when deciding on asset allocation?

How would an active fund manager seek to avoid underperforming their peer group when deciding on asset allocation?

A. Through the use of asset allocation by consensus

B. By assessing the prospects for each main asset class

C. By hedging currency and market risk

D. Through the use of quantitative models

View Answer

Answer: A

Explanation:

Active Fund Management

Active fund managers aim to outperform or avoid underperforming their peers by dynamically managing asset allocation.

Asset allocation by consensus ensures alignment with the strategies and expectations of the broader investment community, minimizing the risk of significant divergence from the peer group.

Why the Answer is A

Using consensus-driven allocation avoids extreme deviations in performance relative to peers, which is key for managers seeking to maintain competitive performance.

Why Other Options are Incorrect

B. Assessing prospects: This involves market analysis but does not specifically address peer performance.

C. Hedging risks: Focuses on risk management, not peer alignment.

D. Quantitative models: Useful for analysis but not tailored to peer group considerations.

ICWIM Study Guide, Chapter on Portfolio Management: Discusses consensus-driven asset allocation.

Active Fund Management Literature: Highlights peer-relative performance strategies.

Reference: Thus, the correct answer is A. Through the use of asset allocation by consensus.