Multi-asset class portfolios continue to reap benefits from diversification; however, looking through asset classes to “risk betas" is critical to ensuring true diversification.
Formulating an appropriate risk budget based on expected return targets and sticking to it (i.e., no market timing) will deliver the best investment results over the long-term.
Extreme market environments occasionally provide tactical asset allocation opportunities that can enhance investment returns.
The vast majority of active asset managers do not justify their fees as their returns can be replicated with low cost passive instruments (e.g., ETFs).
Picking active managers that can outperform in the future requires deep research conducted by a highly specialized team. It requires rigorous quantitative analysis to understand if the returns are from manager skill or just market exposure, and judgment on whether this skill is sustainable.
A portfolio constructed with a small set of exceptional managers for “alpha" and passive low cost instruments for market exposure or “beta" is the most efficient use of the fee budget. In our opinion, properly constructed, such a portfolio can deliver 2-3% of outperformance per annum over the market.