Durable Portfolio Construction®: Harnessing the True Potential of Asset Allocation

Increasingly complex global markets create challenges for investors and meeting those challenges calls for a new approach to building portfolios. We call this Durable Portfolio Construction®.

The approach integrates a variety of asset classes and strategies with a goal of creating a diversified portfolio focused on risk management – one with the potential to stand up to short-term market gyrations, so investors can focus on long-term goals.

Durable Portfolio Construction® is built on a foundation of five basic principles that result in a consistent portfolio construction process – perhaps the single most important strategy for optimizing long-term results:

The Basic Principles

img

Put Risk First

Use risk parameters as the main input for asset allocation to manage volatility. For the last decade, the risk profiles of some indexes have been relatively stable – while their returns varied dramatically. Durable Portfolio Construction®, therefore, targets a consistent range of risk rather than a potential range of returns. The result is added predictability and, ultimately, durability in the portfolio.

img

Maximize Diversification

Consider the broadest possible range of asset classes and investment strategies – long and short1 exposures to global equities, global fixed-income and real estate. The goal is to manage volatility in the overall portfolio, and, in many cases, assets held together have lower volatility than they do as stand-alone investments.

img

Use Alternatives

Alternatives may be an effective means of diversification. They also may lower correlations,2 temper volatility and offer new sources of return. For example, alternative strategies that may be well-suited to a durable portfolio include shorting – for the potential of non-correlated returns; real estate for new sources of return; and hedging to help reduce risk.

img

Make Smarter Use of Traditional Asset Classes

Seek new, efficient ways to capitalize on the long-term potential of stocks and bonds. Smarter use of equities includes techniques and strategies that have the potential to enhance long-term returns or reduce short-term risk – for example, high-conviction equities and absolute return strategies. Smarter use of fixed-income may include inflation-aware bond strategies and multisector bond funds.

img

Be Consistent

Maintain a consistent portfolio construction process to focus on the big picture and withstand short-term market changes. Choosing and using a rational, repeatable construction process is the hallmark of a durable portfolio – and perhaps the most important principle of Durable Portfolio Construction®.