BlackRock Portfolio Analysis and Solutions (BPAS)1 have helped over 600 European institutions2 in assessing and repositioning existing portfolios, and in building new propositions. Regulatory catalysts and the desire to stay competitive is driving discretionary managers, heads of advisory propositions, unit-linked and fund-of-fund managers alike to ask:
How do I adapt my processes to address the fact that my end investors want more for their money, amid greater scrutiny on the suitability of investments and on cost transparency?
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.
Download: The 3 habits of highly effective 'active' investors
We believe a complex and rapidly changing world demands a new approach to portfolio construction. We reflect on three habits that are shared by some of our most effective 'active' investors.
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They actively understand
their portfolioInvestors are increasingly shifting their processes from fund selection to holistic portfolio construction, with a strong emphasis on technology to inspect portfolio alignment with desired outcomes.
Do you have a holistic multi-asset view of your portfolio? -
They actively identify and combine sources of return
Investors are beginning to move past the out-dated dichotomy between ‘active or passive’. They understand the importance of differentiating sources of returns within their portfolios – blending index, factor and alpha-seeking strategies.
Do you know the true drivers of returns in your portfolio? -
They actively use the
whole investment toolboxWith the expanding investment universe at their disposal, investors are shifting more attention towards greater indexing and a search for true alpha and alternatives.
When was the last time you reviewed the products you use?
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1Actively understand their portfolio
Know what you hold
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.
The best funds don’t always make the best portfolios
When discretionary managers build their solutions, an emphasis is often placed on shortlisting the best alpha-seeking managers which are believed can outperform the benchmark. However, the value generated by single funds can be easily destroyed if these are poorly combined within a portfolio and do not work cohesively toward the investment goal.
Drivers of these results are cancellation (or, at the opposite end, compounding) of active bets among managers. If a portfolio combines managers expressing opposite views, their respective expertise could end up being eroded. The resulting exposure could potentially be very close to that of a broad market index – but at the price of an active investment.
Successful investors are those whose choices of managers are always assessed not just as standalone decisions, but in the context of the overall portfolio.
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2Actively identify and
combine sources of return
Select returns deliberately
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.
It is widely accepted that there are four drivers of portfolio risk and return.
These are:
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Broad market exposure
An investor's strategic asset allocation view on broad market exposures that they wish to maintain for the long term -
Strategic factor tilts
Macro and style factor tilts that are believed to be rewarded drivers of return. -
Dynamic asset and factor choices
Choices aimed at capturing shorter term opportunities through over- and under-weights of asset classes, countries, industries or factors. -
Security selection
Expression of granular views on single stocks or bonds.
Knowing that the bulk of portfolio outcomes is largely determined by the first two drivers, successful investors have recognised the value of using index vehicles to express their long-term market and factor choices and deploying excess fee budget to acquire alpha excellence from managers skilled in timing exposures and factors, and in selecting securities.
The role of manager selectors is progressively refocusing on identifying the sources of return that they want to capture and how these can be efficiently accessed through blending of alpha seeking, factor and index strategies.
1 Source: Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower [1995]. Determinant of Portfolio Performance.
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3Actively use the whole
investment toolbox
Use more tools
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.
The investment toolbox available to investors has expanded enormously in recent decades and continues to do so. The growth in index instruments, as well as an increasing growth in alternatives are two of the standout trends.
As availability of data and technology evolve, systematic returns can increasingly be accessed in cost-efficient manners through indexing. Meanwhile, alpha capabilities are prioritising delivering idiosyncratic returns which cannot be replicated other than through manager skill – such as market and factor timing choices, or security selection.
Strike a balance
Alpha management remains important but finding the right balance is too.
We believe that consciously and effectively combining different vehicles has profound effects on the portfolio built and the outcomes that are delivered. We believe that this could represent a bigger component of distributors’ success in the years to come.
Why index more?
Regulatory changes and the desire to stay competitive are driving distributors to search for more cost-efficient wrappers. Meanwhile, the ETF market in Europe has come of age and is maturing fast.
We explore how indexing is disrupting portfolio construction and helping investors become much more efficient.
Risk: While the investment approach described herein seeks to control risk, risk cannot be eliminated.
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How can we help you?
BlackRock Portfolio Analysis and Solutions (BPAS) are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Please note you will only be contacted subject to meeting certain BPAS criteria.
1BPAS (BlackRock Portfolio Analysis and Solutions) is a team of portfolio consultants which seeks to provide industry leading tools, analysis and insights for our clients. Through customised, outcome-orientated client engagements around portfolio construction and risk management, the team can assist clients with asset allocation, portfolio restructuring and implementation decisions.
2BlackRock Portfolio Analysis and Solutions, from January 2017 – December 2018.
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