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Many events have shaken the global financial markets since 2019, from the pandemic to the US-China trade war to the Ukraine- Russia war, to name a few. As a result, family offices and high net-worth individuals are changing their investment framework and portfolio-level strategies to create an all-weather portfolio. 

The objective of an all-weather portfolio is to navigate and withstand the vagaries of economic, business, and asset cycles. As a result, a single investment style and a ‘buy & hold’ framework is transitioning toward a multi-investment style and ‘core and satellite’ framework. In addition to the benefits of diversification across various investment styles, this helps to keep the portfolio risk and volatility within the targeted level while exploiting opportunities. The advantage is that it removes the classic source of performance leakage from an inadvertent single investment style and buy & hold approach. 

Investment style

An investment style often describes the overarching approach taken by the fund manager when assembling a portfolio of assets. It provides some insight into what risks and return investors are likely to be exposed to and what will be the likely drivers of this return. 

Investment strategies help investors choose where and how to invest as per their expected return, risk appetite, and time horizon. They are governed by a set of rules and procedures created to guide investors in designing their investment portfolios. Investors have transitioned to bucketing style strategies where investments are held in two or more investment styles that an investor understands and relates to. Many family offices and ultra HNIs have moved to the so-called core/satellite strategy where the core forms the bulk of the portfolio and satellite complements it, which is tactical allocation to explore opportunities to earn higher portfolio returns.

Multiple strategies 

There is no one-size-fits-all approach, and there are various blends of strategy and style that one can consider to construct an investment framework. For example, an equity investment framework built around market capitalization can have a 60:40 core and satellite allocation. The core can have Nifty/ Nifty Next 50 ETFs (40:20) for large-cap exposure. The satellite can have actively managed mid-cap and small-cap funds, (25:15), to ensure that one is well-diversified across market capitalizations. The core portion of the portfolio helps to minimize costs because passive investments (ETFs) are always less expensive than their active counterparts. The satellite portion is targeted toward generating excess returns over large caps. 

A debt investment framework built on duration can have a laddering maturities approach. This involves creating multiple maturity buckets for example, less than 1-year (B1), 1-2 year (B2), 2-3 year (B3), 3-5 years (B4), 5-7 year (B5), more than 7 years (B6) buckets and buying funds/bonds across these different maturity buckets. This not only attempts to mitigate interest rate risk and improve returns but also permits reinvestment flexibility, a predictable cash flow and a desired level of liquidity. Given today’s context, 50:30:10:10 laddering in B1:B2:B3:B4 can be considered. One can invest in liquids/ ultra-short-term funds to participate in B1; floating rate funds for B2, B3, and B4 buckets along with a few select hold-to-maturity individual instruments. Floating rate funds can navigate changing interest rate environments and offer investors a unique layer of diversification, especially in rising interest rate scenarios. 

The weights can be changed within each framework based on an investor’s risk-return requirement, and monitoring and rebalancing is imperative. However, a thorough understanding of the risk and reward of an investment framework is a must supported by back-testing, scenario analysis, and other empirical evidence. Gone are those days when investors-built portfolios on an ad-hoc basis without any real grasp of the investment framework. Instead, they have understood that having the right investment style and strategy blend significantly improves your chances of success and is needed for an all-weather portfolio.

Prashant Joshi is co- founder & partner, Fintrust Advisors

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