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Portfolio Construction
Portfolio construction can be compared to the engineering of a vehicle; there is a process in which an analysis of the usefulness of many component parts come together to create something that gets you to where you want to go.
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The portfolio construction and allocation process relies on combining both quantitative and qualitative input.
Our multi-step process is designed to determine the potential investment universe, calculate the price relationships of the investments, perform rigorous modeling, review the output of our modeling, determine an allocation, liaise with the trading desk, and finally to execute the trades necessary to complete the construct the portfolio.
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We hope you find the following educational and useful in your understanding of what we do.
The Investment Universe
1
Selecting the proper investments to compose the portfolio is a rigorous process.
Identify Instruments
Conduct an exhaustive and comprehensive review of all instruments for possible portfolio inclusion.
Determine Incremental Diversification
To increase diversification value, we rely on a variety of input factors.
Assess Tradability
An instrument's tradability will be dependent on a many factors including AUM (assets under management).
Investment Structures
The method of exposure to the instrument will affect the decision to use the instrument.
Calculate
Correlations
2
Determine the effect of each portfolio instrument on every other portfolio instrument.
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Error at this step is common. Among the many precautions we take to avoid error includes an increase in frequency of return measurements to reduce the impact of time-zones and bid/ask bounce, etc. (n.b., multiple starting days).
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Multi-year rolling windows for benchmarking generally offers quality trade-off between precision and flexibility.
Quantitative Modeling
3
The third step in our process is multi-staged with risk mitigation integral to its design.
Mathematics to Mitigate Risk
While not a novel approach (Markowitz pioneered modern portfolio theory in 1952), quantitative modeling is always evolving toward a better outcome.
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STAGE 1:
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The first stage involves a measured and equal approach to exposure across all instruments. This can also be thought of as taking the concept of risk-based diversification to its quantitative limit.
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STAGE 2:​
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The second stage is designed to ensure that over exposure (regulation of exposure) is avoided (accomplished) and that qualitative knowledge is incorporated.
The method for this is to examine and determine position limits, potential gross exposure limits, etc.
Qualitative Modeling
4
Refinement and fine tuning at the qualitative level.
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​A qualitative review of the quantitative output is required to further identify limitations of the quantitative analysis, analyze any error of estimated allocations, and relate changes in weights with shifts in underlying fundamentals.
Determine the Allocation
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Allocation and the path of implementation.
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Once the allocation amongst various instruments has been determined, market timing is avoided so as to avoid its risks. Additionally, and in relation, during a crisis moment there is no need to trim risk.
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Finally, with respect to rebalancing, cost and risk is minimized as much as possible.
Assemble the Portfolio
You can't create a portfolio without executing trades in the instruments you have selected for your portfolio. This is simple in concept but complex in execution.
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When making trades to construct or rebalance a portfolio the markets in which the instruments are traded are monitored for spreads, unusual volatility, market-moving news, etc. to ensure efficient execution.
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Further to ensure efficient execution, the optimal execution route additionally needs to be determined (e.g. OTC, NAV, on Exchange).
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Finally, when actually making the trades, this is accomplished by coordinating with the custodian (Vanguard), and in post-execution reconciling executed trades with the orders placed for those trades is done to confirm accuracy.
Portfolio Construction
Summary
The process by which we construct portfolios follows a step-basis so that every aspect of the portfolio’s construction is thoroughly analyzed and understood prior to taking any action.
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At every step, all conceivable forms of risk and cost are evaluated and minimized to the greatest degree reasonably possible.
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This is a highly scrutinizing and rigorous method for portfolio construction, and one that is more commonly found in the world of institutional finance, but one that is necessary to undertake for the outcome a portfolio that is well designed, executed and ultimately well constructed too.
Whenever you're ready, we are happy to meet or do a call to learn about you and how we can help with your goals.
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Please reach out or reserve your time on our calendar. We look forward to hearing from you.
Explore Our Strategy Benefits
Investors should conduct their own analysis prior to making any investment decisions. Diversification does not eliminate the risk of experiencing investment loss. Past performance is not a guarantee of future results. Investment process is subject to change.​ Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in a loss. ​​Investors should conduct their own analysis prior to making any investment decisions.