Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

The challenge

How can I decide which investment tools to use to implement my market views?

Portfolio managers are increasingly realising that ‘active in x, passive in y’ is too simplistic, while recognising the benefits of blending across investment tools to achieve stronger portfolio outcomes.

This means investors are re-thinking product choices to maximise the efficiency of their risk and fee budget allocation.

The action

Investors need to know what they are buying and how to identify the main drivers behind their portfolio risks and returns.

In this instance, while each of the below alpha-seeking managers had generated alpha, when combined their active bets had negated each other.

The portfolio was overdiversified, resulting in a large portion of risk being driven by broad market exposures, and therefore potentially replicable with an index solution.

Active Risk vs Benchmark

Source: BlackRock, as at May 2020.
For illustrative purpose only. Chart assesses ex-ante active risk of three active mutual funds with the same benchmark. Combined exposure (ABC) is an equal weighted combination of the three funds.

The outcome

Consolidation of the number of managers used to express the market view helped drive improved efficiencies.

By recognising different drivers of returns, the required benchmark expected return can be generated through low-cost indexing, with the remainder of the fee and risk budget allocated to selective alpha-seeking strategies that demonstrate ‘true alpha’.

Why indexing?

Moving beyond an asset class siloed approach between ‘active vs passive’, and instead determining the optimal index and alpha split at a portfolio level, resulted in a greater allocation to indexing across exposures.

Taking a blended approach, while using indexing as an efficient way to express broad market views can enable clients to maximise the efficiency of risk and fee budget allocations.

Risk: There can be no guarantee that the investment strategy can be successful and the value of investments may go down as well as up.

Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.


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