Completion portfolio investments - A fad or something worth considering

A relatively new area of investment research focuses on portfolio completion. Given investors have a target or reference portfolio based on asset classes and style exposures, the completion strategy or manager will find gaps between the reference and actual portfolio that can be filled with asset or strategy mixes by a completion manager to close the gaps. If this is done as an overlay, the adjustments can be made without disturbing the existing portfolio mix. This will reduce transaction costs and manager adjustments. 

Recent interest in completion strategies has increased with the rise of factor strategy risk identification. In an older world that only focuses on asset classes the completion manager would only have to look at actual allocations against the target and then use futures or index products to close the gap. 

When investors focus on style risk, the completion problem becomes more difficult. First, there are more degrees of freedom or choices that must be managed. Second, the instruments that can be used to close gaps and complete the portfolio are more complex. Third, investors must think through the appropriate target levels for style risks and then determine whether any style gaps should be closed.

Is this a fad? I don't think so. 

1. Investor should have a target or reference portfolio. No surprise here.

2. The target should consider risk or factor exposures. Again, this should be done regardless of any completion strategy although style exposure analysis is not easy process to manage in practice. This becomes more difficult when the investor has a high exposure to alternative investments.

3. Measuring and determining the deviations from target is the core asset allocation job of the investor.

4. Using completion specialists to manage this process and providing guidelines for how this job should be done is where there is room for discussion.

There is commonality between the overlay and completion manager. Both exist to cut specific risk exposures. Perhaps the fad is in the naming convention between overlay and completion. There is a place for the completion manager to get the actual portfolio back to target quickly and efficiently at low cost. The value for completion increases when there is a higher exposure to illiquid private and alternative investments.