Asset Allocation Based Investment Strategy to Improve Profitability and Sustainability of the SMEs

Abstract

SMEs usually have a volatile revenue and income stream. In order to reduce the operational risk, SMEs allocates high cash position as a buffer during difficult situation. This paper aims to increase earning from this cash position through asset allocation strategy. Asset Allocation Investment Strategy is a strategy that allocates investment among several different investment classes in certain proportions and rebalanced periodically. By keeping the same proportion in these different investment class, SMEs are forced to apply the simplified investment principle which is many time difficult to apply in reality because of market sentiment.The author forms three portfolios consisting of stock mutual fund, bond mutual fund and money market in certain proportion into conservative, moderate and aggressive portfolio. The proportions are kept in balance through rebalancing process. Three rebalancing process are applied, which is quarterly, semi-annually, and annually. The return performance of all portfolios combined with these three rebalancing processes then will be compared each other and against the IHSG (Indonesian Stock Market Index) performance.The research result shows that Asset Allocation Strategy with Periodically Rebalancing gives better return compared to IHSG index performance. Aggressive Portfolio with quarterly rebalancing gives superior result compared to all other portfolios. When SMEs use this strategy for profit generated from their business, SMEs can improve their profit and sustainability significantly.