The portfolio is constructed with appropriate efficiency and diversification.
Guideline code
INVEST_01900
Mechanism
Mechanism
- The management or investment committee should select and consistently apply a preferred framework or frameworks for assessing diversification in the portfolio.
- Scenario analysis using historic and forward-looking returns, volatilities, correlations and contributions to portfolio risk should complement the qualitative assessment of the management or investment committee regarding portfolio diversity and sensitivity to “extreme” risks.
- The management or investment committee should select investments which are the most efficient means to gain access to the required return and risk attributes.
- The management or investment committee should consider factors such as leverage and illiquidity of underlying assets and the impact on the risk profile of assets of these factors.
- The management or investment committee should provide to the board on a regular basis an overview of the diversification of the portfolio, and recommend improvements where appropriate.
- Where the board, management or investment committee lacks sufficient resource, expertise or governance budget for portfolio construction, the board, or the management or investment committee with board authorization, should seek expert advice or appoint external professionals to carry out these functions.
Parent
Structure
Structure
- The strategic asset allocation approved by the board should be used as the framework for portfolio construction.
- The board should clearly assign responsibility for portfolio construction to either the management or investment committee, or both jointly.
- The management or investment committee should construct the portfolio considering the investment mission, investment beliefs, governance budget, return target and corresponding risk budget, available investment choices and liquidity requirements. The management and/or investment committee should sufficiently diversify the portfolio using frameworks such as asset class, geographic region, risk premia and, possibly, thematic investments as methodologies to assess diversity.
- The portfolio should be constructed using the most efficient investment possibilities available to achieve the required return and risk objectives.
- The board should approve any use of derivatives or leverage in constructing the portfolio.
- The management or investment committee should seek to manage (or “hedge”) risks that are deemed to be “unrewarded”. Diversification during portfolio construction is one method to manage such risks. Liquidity considerations and the governance budget should play a part in determining whether the use of derivatives is an appropriate alternative to managing risk with diversification.
- The management or investment committee should consider the nature of risks, including “extreme” or “tail” risks, which the board identifies as relevant for portfolio construction.
- The board will be required to authorize, on the recommendation of the management or investment committee, the appropriate allocation ranges around a central weight for each asset class in the strategic asset allocation.
Title HTML
Guideline 16. Approaches to portfolio construction
Type
Guideline_1
Weight
23