Step four: Investment strategy & implementation – It’s similar to building a house
Investing is like building a house. To construct a new home, you first need to know your strengths—and areas where you need to rely on experts and specialists. For instance, you know what you want your home to look like: two floors, an open kitchen, north-facing windows, and an oversized deck. But you may not really know how to go about building it to make this desire a reality. Sure, it’s possible that you might be able to cobble together something liveable over many years and many attempts, but could you be sure the electricals won’t fry, and the roof won’t leak? All things considered, it most likely wouldn’t provide you with the outcome you have in mind—and so, it may be time to turn to the experts.
The same holds true when it comes to investing and step four of an investment program: populating your portfolio with a diversified mix of strategies across assets, styles, and managers.
In step three you would have determined the broad foundation of what you want your portfolio to look like: your investment philosophy and strategic asset allocation (SAA). But how can your portfolio be designed and built in a way that helps make these outcomes a reality? Just as you’d leave the construction of your home to the experts, the build of your portfolio, the investment strategy and implementation should likewise be managed by a team of specialists across asset class design, manager research, manager selection and implementation.
Asset class design
For each asset class specified in your SAA, there is a range of possible strategies and implementation choices.
It’s no easy task to strike the right balance between choices such as active, passive, and smart beta strategies or whether to choose public vs private assets. Particularly when managing to cost constraints and fee budgets. Even within asset classes, diversification is critical. No one factor or style always outperforms. No single manager is great at everything.
At Russell Investments, our expertise extends well beyond traditional assets, with extensive expertise in non-traditional asset classes including infrastructure and private equity. In fact, we select from over 170 categories of sub-assets, and more than 220 investment styles to build portfolios to the most exacting requirements.
Even a professional master builder relies on specialist trades. And even then, the overall construction can be let down by poor workmanship. It’s no different for a portfolio.
Manager research involves vetting each manager on a range of factors, with a particular focus manager skill and potential to outperform in future. Quality manager research looks beyond simply past performance, and scrutinises factors such as people, process and even operational due diligence on business operations as well. Face to face research meetings and first-hand inspection of managers business premises and operations can be essential to understanding which managers make the grade.
At Russell Investments, we take a global, "best-of-breed" approach to manager research, with specialist manager researchers strategically placed around the world, searching for future outperformers. We research more than 14,000 manager products across dozens of countries, so that our portfolio managers and clients can choose from only the very best.
Manager selection is equally important as manager research. Once quality managers have been identified, constructing a portfolio is not as simple as selecting a few of the best. Combining managers with complementary styles and processes is both a delicate art and exacting science — it helps ensure a portfolio is built to perform in all types of market scenarios.
It’s also crucial that the specialists hired, do strictly the work they’re brought in. Over time some managers can drift in strategy and style. Just as you wouldn’t want an electrician doing the plumbing, even if he/she insists they can, you wouldn’t want an Australian large-cap equity manager selecting fixed income securities.
Even the best-designed investment strategy can be derailed by poor execution. Put another way, it’s one thing to offer great investment advice—but it’s another thing to implement investments successfully. Just like having an award-winning house design, if built poorly then the design doesn’t matter.
Anyone who has ever built a house can attest, hidden costs and wastage can add up quickly. Many critical risk management and efficiency functions can be easy for investors to ignore. End-to-end implementation strategies such as overlays, hedging, transitions, enhanced portfolio implementation, cash management, etc can save vital basis points.
At Russell Investments, effective and efficient implementation is our focus, especially net of fee performance. If there is a way to access additional net returns consistently, we will pursue it. If there is a way to consistently reduce costs, with a net benefit, we will find it.
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