Practical Applications of Model Portfolios

Practical Applications Summary

In Model Portfolios, which appeared in the Spring 2019 issue of The Journal of Wealth Management, Debarshi Basu of BlackRock, Michael Gates of BlackRock, Vishal Karir of iHuddl, and Andrew Ang of BlackRock present a three-step framework for developing model portfolios: 1) create a performance benchmark that reflects an investor’s risk tolerance, 2) construct a strategic model portfolio that reflects long-term capital market expectations based on that benchmark, and 3) construct a final tactical model portfolio that rotates the holdings around the strategic model portfolio. The authors suggest that investors use this framework as a repeatable and verifiable process for model portfolio construction. To demonstrate the framework’s usefulness, the authors apply it to two examples: building a strategic model portfolio for multi-asset investing, and building a tactical factor timing portfolio.

TOPICS: Portfolio construction, risk management, analysis of individual factors/risk premia, performance measurement