Build a Better Return Path

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  • 02 mins 09 secs
What drives investment success? In our view, it’s not how much return you get but how effective your return path is. Our market strategist presents portfolio-building pillars that may lead to a better up/down capture ratio—a powerful barometer of success.

Targeting Better Portfolio Up/Down Capture


Build A Better Return Path
Erin Bigley-Senior Portfolio Manager

Build a Better Path is based on the notion that over the coming years we need to focus more on the sequence of levels than the level of returns. The best way to capture that? Try to get more of the market upside than its downside, or great up/down capture ratios. However, there’s a really important behavioral element – we have to determine whether a client is more of an up-participator and really needs to keep up with up-markets or a principal-protector.

Take a look at two ratios which, over time, have demonstrably outperformed the S&P with lower volatility. But if we zoom in on a strong market run, it’s pretty clear to see where the 20/50 portfolio will be challenged in retaining investors. So clearly, understanding investors’ stick-to-it-iveness is important to having success with this approach.

There are three elements to focus on: Better Beta, Efficient Structure and Targeted Alpha.

There are risks in the world that naturally carry better up/down capture ratios than others. Like global currency hedged bonds vs. domestic.

Efficient structure is combining those types of risks to get a great up/down capture experience. For example, a credit barbell – treasuries and high yield generates better up/down capture than treasuries or high yield or comparably rated corporate bonds.

Pick your spots and find areas of the world where there’s a greater opportunity to outperform. Structural alpha, places where indices may be inefficient and there’s a demonstrated informational advantage are key examples of that.

And finally as we go forward, we’re going to be sharing seven key investment themes that can help enhance the up/down capture experience that has been created or magnified by the financial crisis. We’ll have more to share on that in the future, but for now we thank you for joining us and wish you the best up/down capture experience.

• Stay Away from Problem Children
• Avoid the Crowds
• Master Liquidity
• Be the Last Active Manager Standing
• Relook at Re-Emerging Markets
• Embrace Alts 2.0
• Capitalize on Trends Around the World

An investor cannot invest directly in an index. Chart source: Standard & Poor’s (S&P) and AB

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