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Enhancing Outcomes from Optimal Portfolio Construction

Portfolio Construction and Optimization

What constitutes an optimal portfolio? Different investment philosophies and doctrines play a part, as do the biases held by a portfolio manager and the parameters they are operating within. Together, these forces (and others) guide investment decision-makers towards a particular set of choices (and outcomes).

Some of these choices may stem from an analysis of historical correlations or particularly pervasive long-term trends.  Others may be rooted in guidelines for strategic asset allocation, beliefs about factors and factor combinations, or methods for managing/mitigating equity market volatility. Optimality itself is relative, unless the relevant parameters are well-defined. 

portfolio construction alpha

The state of global investing (MSCI blog, Nov 2019)

Analyzing and framing historical relationships in the appropriate context may prove critical for global investors. This brief post from MSCI touches upon several of these relationships.

The 21st Century Portfolio*: Investing for the grandchildren (Invesco, 2019)

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

Invesco's most recent whitepaper identifies four forces that could affect investment returns throughout the remainder of the 21st century. The paper also suggests methods of accounting for and accommodating these themes within a long-term asset allocation model.

Using NDX Option Strategies to Improve Risk-Adjusted Returns (Nasdaq, 2019)

Passive investors in index ETFs and index-mimicking portfolios sometimes use options overlays to boost returns. This study shows that options overlay strategies could be even more effective when using NDX options overlays on Nasdaq portfolios than SPX options on S&P 500 portfolios.

Lengthening the Investment Time Horizon (MFS, 2019)

Investors who are mindful and disciplined in their approach may be able to capture alpha by lengthening their time horizon and filtering out some of the short-term noise within the capital markets.

A Case for Growth Stocks (Baillie Gifford, 2019)

Many investors appear convinced that the contrary is true (and value is due for a comeback), which makes Ballie Gifford's paper putting forward their argument in favour of growth stocks an interesting take on the issue of value vs growth.

What explains the poor performance of factor strategies over the last 3 years? (Scientific Beta, 2019)

The implementation considerations of a particular strategy should not be overlooked. In this paper, Scientific Beta shows that recent poor factor performance may be more due to implementation choices than the underlying factors.

Combine factors the right way (AGF, 2019)

For compliance reasons, this paper is only accessible in the United States and Canada

How should multi-factor portfolios be constructed? AGF recommends starting at the individual stock level to precisely target the desired factor exposures.

Are Your Asset Allocation Models Exposed Right Now? (Intech, 2019)

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

Equity allocations are risky, but to what extent should this risk be diversified away? Intech suggests an innovative approach, illustrated using a glide-path model.

Remastering Volatility: Reducing Noise in Equity Allocations (AB, 2019)

For compliance reasons, this paper is only accessible in North America and South America

What are the root causes of equity market volatility? This paper distinguishes between stock-specific risks, factor risk, and market risk, equipping investors with the appropriate weaponry to combat volatility within their portfolios.

The Investment Golden Rule for Strategic Asset Allocation (Verus Investments, 2019)

Verus Investments presents a capital allocation process for asset owners, simplistically reduced to a combination of strategic asset allocation, manager selection, and ongoing portfolio management.

A practical guide to robust portfolio optimization (BNP Paribas AM, 2019)

This quantitative paper provides a) guidance for using a robust optimization process in portfolio construction and b) shows how robust optimization addresses some of the faults inherent within a mean-variance optimization process.

Appraising home bias exposure (FTSE Russell, 2019)

How has a home bias (the tendency of global investors to more heavily weight equity portfolios to local markets) affected portfolio returns? FTSE Russell looks at five large pension funds for answers.

The Impact of Crowding in Alternative Risk Premia Investing (Financial Analysts Journal, 2019)

Alternative risk premia investors worried about crowding within the industry should understand the differences between convergence and divergence premia. Returns to convergence premia are positively correlated with periods of crowding, while divergence premia are likely to underperform in these time periods.

The Future of the Securities Lending Market (ISLA/Linklaters, 2019)

Understanding the regulatory issues underpinning the securities lending market will be critical for investment managers that undertake this process to boost portfolio returns.

Chasing Your Own Tail (Risk), Revisited (AQR Capital Management, 2019)

AQR revisits its recommendation against deploying a simple put option strategy to guard against equity drawdown risk, explaining why other methods may lead to higher risk-adjusted returns.