In my previous three articles in this series, I have outlined the pros and cons of passive, active and smart beta investment strategies. Dynasty believes that an optimal approach to managing portfolios is to blend all three strategies in a manner that optimises returns in the longer term while mitigating the risks of following just one strategy.
We have followed this approach for several years in our local portfolios, with great success, and will adopt it as we launch our new offshore funds in the months to come. Our strategy essentially places passive and smart beta funds and products in the core of the portfolio, and surrounds them with top, actively managed funds as satellites.
The passive and smart beta core allows us to reduce fund management costs and mitigate the risk of a portfolio underperforming the market or benchmarks at any point in time. Then, by handpicking some of the best active funds through the research process of our Investment Committee, we help clients reap returns that outperform the benchmark or the market over the long-term. This approach delivers lower management fees and minimises tracking error, which enhances clients’ returns.
When we select the active satellites, we look for those that are aligned to our philosophy of quality. We choose our active fund managers based on criteria such as their resources and capabilities, as well as their performance track record. We don’t manage an active fund of our own. We leave the individual stock selection decisions to the underlying managers – and we seek out managers who have a proven stock picking ability and defendable performance pattern.
The goal of our blended portfolios is to ensure that each component complements the other, rather than duplicating the same role. As such, our active funds should not simply track the makeup of their benchmark indices, but must have the mandated flexibility to take sensible action in terms of stock picking and asset allocation during times of market turmoil. They must also have a track record of outperforming smart-beta strategies of a similar style to theirs.
This approach is flexible enough to cater for the differing requirements of clients in terms of investment horizons, appetites for above-benchmark returns, and tolerance for risk. Our structure allows us to make changes to our managers and their allocations without triggering capital gains for clients, thus ensuring the portfolios always reflect our house-view.
Although the investment world is often characterised by random events and unpredictability, we believe that a well-constructed portfolio can manage risk and reap long-term portfolio performance. This philosophy has proven to be prudent and effective during periods of market turmoil as well as in the phases when markets have enjoyed a bull run.
By Ryan Page, Director at Dynasty Private Wealth and Asset Management