Liontrust Responsible Capitalism Report 2024 - Flipbook - Page 84
PORTFOLIO CONSTRUCTION
• The purpose of portfolio construction is to take a fairly abstract
concept in the form of a TAA and to express it in an investable
form for each strategy that the Multi-Asset team manages.
• Portfolio construction takes account of the output from the TAA as
well as the input from the manager selection process.
The portfolio construction consists of four steps:
STEP 1: FACTOR SELECTION
• Different equity factors such as value, growth, quality or size
have significantly different performance characteristics. The
team believes these factors have inherent tailwinds to longterm performance predominantly due to behavioural investment
shortcomings or due to other inefficiencies, such as shortcomings
inherent in market cap weighted market indices.
• These factors have demonstrated long-term outperformance when
compared to market cap weighted indices but the performance
of each factor when viewed in isolation can have significant
tracking errors and outperformance can be sporadic.
• Blending factors can overcome some of these shortcomings
and result in a performance profile more akin to the market cap
weighted reference while maintaining good prospects for longterm outperformance.
• Suitability is, therefore, the prime determinant of whether a
passive or active vehicle is chosen.
• Suitability can depend on a wide array of factors such as the
time horizon and the nature of the asset class, for example its
efficiency, liquidity and index composition.
• Within equity markets, active managers have historically found
more success in some regions than others.
• The Liontrust Multi-Asset team has developed a robust and
repeatable method through which to identify the appropriate
blend between active managers and passive vehicles in different
equity regions. The three key inputs are:
1. Cross-sectional volatility of a given index.
2. The percentage of stocks that have historically outperformed
the index.
3. The level of index concentration.
• Indices that demonstrate high cross-sectional volatility, a high
percentage of stocks out-performing, and a low level of index
concentration have tended to provide the greatest opportunities
for manager outperformance.
• The outputs from this step are target percentage allocations to
active managers or passive vehicles which are embedded in the
portfolio targets.
• The outputs from this process are reviewed annually but the MultiAsset team may undertake tactical deviations away from the long
term targets as part of the quarterly TAA process.
• The team believes it is essential to apply a rigorous research
process to the combination of different factor blends in each
region rather than rely on arbitrary weightings methodologies.
• The team tests the performance and interaction of factors versus
each other over the long term and it identifies a blend which it
believes will provide the most effective risk-adjusted exposure to
the equity region in question.
• This blend forms the target factor allocation which the team
implements through manager selection.
• The outputs from this process are reviewed annually but the MultiAsset team may undertake tactical deviations away from the
long-term targets as part of the quarterly TAA process.
STEP 3: TARGETS SET
• The combination of TAA aligned with factor selection and
decisions on active managers and passive vehicles create a
detailed set of parameters to inform portfolio construction.
• The output from these stages combined with the manager selection
are consistent target manager allocations for each region, asset
class or sub-asset class.
• Each asset class or sub-asset class is assigned a weight through
the TAA process and the combination of the target manager
allocations and the TAA weights provides a target holding size
for every manager in each of the Liontrust Multi-Asset funds and
portfolios.
STEP 2: ACTIVE AND PASSIVE
• The majority of the Liontrust Multi-Asset funds and portfolios make
use of active and passive vehicles.
• The decision of where to use passive vehicles depends on two
main considerations: availability and suitability.
STEP 4: RISK CHECKS
• Due to the significant growth in passive vehicles over the past
couple of decades, there is now a wide range available,
meaning that most asset classes or sub-asset classes can be
invested in passively.
• Liontrust’s Multi-Asset funds and portfolios are managed to
carefully considered mandates and risk parameters and, ahead of
implementation, the team tests the new portfolio targets to ensure
they comply will all appropriate portfolio rules and restrictions.
84 - Responsible Capitalism Report 2023