Sunday, April 3, 2016

Natixis Durable Portfolio Construction - a good foundational philosophy

Many money managers want to make the investment process complex as if complexity will have investors think there they should pay a premium for the services of the manager. In reality, simplicity is extremely valuable for any process faced with high uncertainty.  Simplicity starts with a philosophy that drives the discussion and decision-making. The Natixis Durable Portfolio Construction approach does a nice job of providing that good investment foundation. Of course, execution is the ultimate driver, but we think there is something to learn from the five tenents of their durable portfolio construction philosophy.No one will argue with their five tenets; nevertheless, explicitly stating them forces decisions to pass through their filter.

First, put risk ahead of other considerations. Ultimately, money management is about principle protection because the cost of coming out of any drawdown is high. Putting risk first does not mean that returns should be scarified. Rather, the focus should be on controlling risk so it is bounded and understood.

Second, maximize diversification through investing in all asset classes. Every portfolio should have a global focus. There is no such thing as a local portfolio or one that is not connected to all asset classes.

Third, employ alternative investments. The use of alternatives just further provides diversification beyond asset class and toward strategy differences.

Fourth, while smarter use of traditional asset classes is harder to describe, it focuses on the idea that a simple market-weighted approach to asset classes is limiting. Factors drive asset classes, so focus on the factors that will drive asset classes.

Finally, a durable approach should be consistent. Consistency does not lock-in behavior but provides a way to look at diverse bets across different asset class using a single language.

The description I have provided may not match the Natixis approach but it does employ the key tenants which can be used by all money managers. A money management philosophy does not have to match Natixis but having one will add precision to decision-making.

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