The challenge

How can I most efficiently reduce the costs in my portfolio to deliver stronger outcomes?

In an environment of regulatory change and continuing low-yields, wealth managers are increasingly re-thinking their product choices to maximise the efficiency of their fee budget allocation.

The action

In order to assess value-for-money within the portfolio, BlackRock analysed the portfolio to determine the main drivers of risk and return.

We found that a large portion of portfolio risk was driven by broad market exposures, and therefore potentially replicable with a low-cost index solution.

Looking deeper into the analysis, on an individual fund basis, alpha opportunities existed but when combined their active bets had negated each other. This resulted in a portfolio which looked much more similar to an index.

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

Since the return was largely driven by broad market exposures, the client opted to implement their strategic asset allocation through index strategies.

An indexed core of the portfolio, complemented by a select group of high octane alpha-seeking managers helped increase net return and reduce portfolio costs.

Why indexing?

Indexing is an efficient tool for expressing broad market views.

Due to the more selective investment approach, more time could be dedicated to research per manager leading to increased quality of alpha-seeking managers.

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.

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.


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