SCLE Content Domain 3: Portfolio Construction, Asset Allocation and Valuation
Domain 3 focuses on building portfolios from an investment policy statement and valuing the resulting positions correctly. The exam tests whether you can connect client objectives and constraints to asset allocation, diversification, liquidity, and NAV calculations.
Core rules
- Start with the investment policy statement: return objective, risk tolerance, time horizon, liquidity needs, legal and tax constraints, and any unique client requirements.
- Asset allocation should reflect correlation and diversification, not just expected return. A portfolio concentrated in one sector or one issuer carries concentration risk even if each holding looks sound.
- Valuation must be consistent. Equities are generally marked at market price; bonds use clean price plus accrued interest; fund NAV equals assets minus liabilities divided by units in issue.
- Fees reduce net returns. Compare performance after fees and against an appropriate benchmark and risk level.
Worked example
A client has RM1 million, a two-year horizon, needs 20% liquidity, and cannot tolerate a drawdown above 10%. A proposed allocation is 50% short-duration bonds with expected return 4%, 30% large-cap equities with expected return 8%, and 20% cash with expected return 3%. Expected return is (0.50 x 4%) + (0.30 x 8%) + (0.20 x 3%) = 5.0% before fees. If annual fees are 0.6%, net expected return is about 4.4%. If the client requires 5% net, the allocation must be reconsidered against the drawdown limit.
Traps
Do not select a model portfolio before documenting the client's constraints. Do not ignore liquidity or fees. Do not add accrued interest twice when valuing a bond. Do not compare a portfolio's raw return with a benchmark of different risk.