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Asset Allocation and Portfolio Construction: Latest thoughts – May 2021

New Thinking in Portfolio Construction and Asset Allocation

Portfolio construction and asset allocation remain the key building blocks in the investment process, so keeping abreast of the latest thinking and research will give members insights they can harness to enable better outcomes for investor portfolios.

In this selection of papers, State Street offers new insight into portfolio construction methodology which combines both long- and short-term returns into a mixed frequency sample, BlackRock builds climate change risk into their capital market assumptions (CMAs), whilst a couple of commentators investigate the traditional 60/40 model in a low yield, low return environment, and offer views on how to potentially enhance the model.

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History, Shocks and Drifts: Impacts on portfolio formation (State Street, 2021)

This paper by State Street shares new insights into portfolio construction, making allowances for the complexities that investors may face, while also allowing for scrutiny of performance over multiple frequencies.

Video: Turning risk in climate investment into opportunity (BlackRock, 2021)

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

Climate change is real and cannot be ignored by investors. Climate risk is investment risk, and BlackRock sees it as a historic investment opportunity. Their capital market assumptions (CMAs) – a core input to building portfolios – for the first time explicitly reflect the impact of climate change on the investment landscape.

Enhancing Beta Returns via Disintermediation Alphas (Janus Henderson, 2021)

Janus Henderson’s paper examines the demise of enhanced index strategies. The authors suggest a new approach that combines passive investing strategies with alpha, obtained by disintermediating some of the services typically provided by investment banks.

The Cross-Section of Corporate Bond Returns (Dimensional Fund Advisors, 2021)

Analysis by Dimensional Fund Advisors suggests certain variables may provide additional insight into expected bond returns, over and above those provided by forward rate curves.

Diversification in Credit Using Multi-Factor Strategies (BNP Paribas AM, 2021)

BNP Paribas Asset Management’s study looks at the potential diversification benefits of using a multi-factor approach to corporate credit investing.

60/40 Balanced Funds and Asset Mix: Past, present and future (RBC GAM, 2021)

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

This discussion piece from RBC Global Asset Management focuses on whether the 60/40 portfolio can still meet the needs of investors in a low interest rate, low expected return environment.

A Minimum Variance Framework in Risk Control 2 (S&P Dow Jones Indices, Apr 2021)

S&P Dow Jones Indices introduces a new index, the S&P 500 Futures Daily Risk Control 5% Index (RC 2 Minimum Variance), which differs in approach and methodology from their existing Risk Control indices. The difference is largely in the treatment of cash as market volatility increases.

Risk, Reward, and Asset Allocation of Nonprofit Endowment Funds (2021)

In this paper, the authors examine the asset allocation and performance of U.S. endowment funds from 2009 to 2017. They find that larger funds tend to outperform smaller ones. Endowments focusing on sectors, including the environment and public and societal benefit, are among the better performers.

How Portfolio Construction Impacts Reliable Outcomes (Alpha Architect, 2021)

Alpha Architect’s paper investigates the relationship between the number of stocks in a factor portfolio and the probability of beating the market over the longer term. Concentrated momentum and value portfolios tend to outperform more diversified portfolios focusing on the same factors.

Market Scenarios and Risks (Amundi, Apr 2021)

For compliance reasons, this paper is NOT accessible in the United States

In this paper, Amundi revisits several assumptions made in their economic outcome scenarios based on recent, more positive economic data. This, in turn, has implications for their asset composition models and market risk assessment.

Private Equity in a 60/40 Portfolio (Investments & Wealth Institute, 2021)

This study examines the value of adding a private equity element to the traditional 60/40 portfolio.

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