Portfolio Construction

Purpose

Portfolio construction is the discipline of deciding how individual exposures combine. A collection of individually reasonable positions can still form an incoherent portfolio. Construction addresses the relationships between holdings: how they behave together, where risk is concentrated, and how the portfolio behaves under stress.

Approach

1. 01

   Define the intended role of each allocation: growth, income, diversification, liquidity or capital preservation.

2. 02

   Examine concentration by issuer, sector, geography, factor and currency, not only by line item.

3. 03

   Model portfolio behaviour under a range of scenarios rather than a single expected path.

4. 04

   Set rebalancing tolerances in advance so that adjustment is systematic rather than reactive.

5. 05

   Account for implementation costs, taxes where relevant, and the practical liquidity of each holding.

Where it fits

The structural layer between asset allocation and individual security or fund selection.

• Portfolios that have accumulated holdings over time without a unifying framework.
• Investors combining public and private exposures with differing liquidity profiles.