Asset Allocation and Portfolio Construction Considerations: July 2021

Updated Thinking in Asset Allocation and Portfolio Construction

Asset allocation and portfolio construction considerations remain integral to the investment process. and are strongly influenced by the prevailing investment scenarios. The persistence of a low yield, low return environment has forced many investors to consider alternatives to help meet return expectations, while the rise to the mainstream of interest in ESG and particularly climate change investing is forcing asset owners and investing institutions to refocus investing strategies and their implementation.

This collection of papers explores the latest in thinking about the topic, with a paper from Nuveen describing how a different approach to traditional asset allocation, particularly for those funds using alternatives, can highlight portfolio risk exposures. Other papers explore how changing the asset mix of portfolios impacts risk-adjusted returns, but the key takeaway is that a requirement to be flexible and adaptable to changing circumstances is a pre-requisite for investment management today.

   

  

Portfolio Construction: A factors-first approach to alternatives (Nuveen, 2021)

In this paper, Nuveen highlights how a factors-first approach highlights portfolio risk exposures often masked by traditional asset allocation. The paper examines how risk-factor exposures and the income-generating characteristics of alternatives evolved through the pandemic and the subsequent recovery.

A Framework for Currency Hedging Decisions (Dimensional Fund Advisors, 2020)

Dimensional Fund Advisors proposes a framework to evaluate the impact of currency hedging on anticipated returns and volatility for global equity and fixed income portfolios.

Constructing ESG Portfolios With Non-ESG Data (Intech, 2021)

For compliance reasons, this paper is only accessible in certain geographies

Intech’s paper highlights that targeting portfolio-level ESG outcomes may not require the extensive research that has become standard for many ESG investors. They Illustrate using statistical analysis of ESG ratings to identify persistent and dominant systematic factors, a reliable, repeatable process which can be applied to a portfolio in non-ESG terms.

Combining Equity and Fixed Income Listed Infrastructure (FTSE Russell, 2021)

This FTSE Russell paper suggests that a multi-asset approach combining listed infrastructure equities and listed infrastructure debt offers investors better risk-adjusted returns and portfolio diversification benefits than focusing solely on each individual asset class.

Thematic Universe: Harnessing megatrends in portfolios (WisdomTree, 2021)

For compliance reasons, this paper is only accessible in the UK & Europe

WisdomTree Investments illustrates how combining several megatrend ideas and other recognisable factors (e.g. momentum) may give investors a greater potential portfolio return.

Portfolio Strategies for the post-pandemic Period (World Gold Council, 2021)

For compliance reasons, this paper is only accessible in certain geographies

With investors facing new challenges in the post-Covid period, World Gold Council’s institutional investor survey highlights changing attitudes towards the risk of inflation, and the tools investors are considering to mitigate its effects.

Scenario Planning Helps Emphasize All-Weather Outcomes (QMA, Jun 2021)

QMA’s CEO Andre Dyson highlights the value in building scenario analysis and planning as an integral part of any effective investment strategy.

Climate Resilience Within a Strategic Framework (Wellington Management, 2021)

Wellington Management’s paper argues that asset allocators need to factor in climate change and climate risk into their structural planning – and offer a framework to assist.

Portfolio Constraints with Performance Attribution (Texas Tech University, 2021)

In this paper, the authors investigate performance attribution measures as a basis for constraining portfolio optimisation. Their results suggest that constraints placed on both asset allocation and selection weights can enhance performance.

Webinar: Incorporating liquidity considerations in asset allocation (CAIA, 2021)

This webinar highlights how illiquid assets might be incorporated into asset allocation and portfolio construction processes.

Webinar: Future of portfolio construction, if not 60/40, then what? (CAIA, 2021)

This webinar explores the future of the 60/40 portfolio in an era when perhaps its value is on the wane. Certainly, greater allocations to alternative assets and strategies as approaches of seeking returns need to be factored in. But what is the optimal portfolio for today’s lower long-term return environment?

What About Beta? Investment Objectives Via Allocation (AllAboutAlpha blog, 2021)

AllAboutAlpha’s piece highlights the considerations that need to go into investment objectives and how these impact upon asset allocation.