Investments Unlocked ep2: Rethinking Portfolio Construction

Hi, everyone.

Welcome to our second episode of Investments Unlocked. Once again, I'm Chris Crea.

for Asia Pacific ex Japan. And today we're going to be talking about portfolio construction.

So we've got a couple of questions for you, Chris, something we discuss all the time, something that you do day in, day out.

So portfolio construction is obviously super important for all the investors across all segments, wealth, institutional to have robust investment processes.

Everyone's managing multi asset portfolios in some form or another. But basically our view is that there are ways of getting better at building portfolios and whether it's using different tools, different vehicles, a variety of investment strategies, it could be just passive, passive, active alternatives. Any decision is an active decision.

So what are you seeing today? How are you constructing your own portfolios?

First off, thank you for having me today. It's great to be here for episode #2 of the podcast.

Really excited to dive into some of these core topics around portfolio construction.

And I think what we're seeing now from investors both in the institutional and the wealth space is really, I think a further fine tuning and refinement of their underlying investment processes to really focus on the key component parts and underlying drivers of risk and return.

I think historically portfolio constructionist might have thought about building portfolios from a very kind of bottom up type approach is simply selecting effective or historically effective active managers, putting those portfolios together, not really taking a tremendous amount of inventory of what's there and maybe some of the unhidden risks.

I think what we're seeing now is a really sharp focus on both strategic and tactical asset allocation and then effective manager selection across both traditional passive building blocks, systematic building blocks and as well as core traditional active building blocks.

So thinking about all those key areas separately, but then rolling them up together to make sure the entire portfolio is effectuating core investment outcomes.

I think another big trend we see is really the institutionalization of the wealth channel.

We now see the wealth channel with, I think, roughly the same style of investing in the same types of blocks available to them that you see even with large institutions.

You've seen this trend unfolding now in the US for quite some time.

You're starting to see that unfold in Asia Pacific right now, where a lot of the same tools and techniques that institutions have used for a long time, you're seeing sophisticated wealth managers deploy those.

So those conversations we have now, I think almost move in tandem.

They almost move in lockstep.

So we're now having conversations about tracking error, about SAA (Strategic Asset Allocation)/TAA (Tactical Asset Allocation) decomposition, about manager attribution with family offices as well as sophisticated wealth intermediaries just like we would with sovereign asset owners.

So like just kind of a further refinement of the process and more focused on I'd say an analytics driven, quantitatively driven approach.

And I just giving investors more comfort around like what's there, what risks are in the portfolio and do the summation of those risks create a reward value proposition that's going to make the portfolio ultimately successful for our investors.

Yeah, fantastic.

And right.

So back in the old days and you would have seen this as well during your time in the US and a little bit potentially here in Asia.

We've been for a while similar.

I saw this back in Australia and a little bit in Asia as well.

You had the old process of let's buy a bunch of really attractive historically performing active managers blend 25 of these strategies into a portfolio for a client look at having an equity fixed income split.

And that's My Portfolio.

And as we know, that's not a super robust way of approaching portfolio construction nowadays.

To your point you have. Let's think about what our performance benchmark is going to be.

Let's think about what our strategic asset allocation should be potentially via some optimization process using analytical tools.

What's our implementation process going to be like?

What kind of structures or vehicles we want to use?

And of course, we're seeing a little bit more of what's my active risk budget, how much tracking or active risk am I willing to take around my strategic asset allocation and what kind of fees am I looking to spend as well?

And obviously fees is the question conversation point that I'm sure you're having all the time as well.

Absolutely, Yeah.

So I think from that, you know, perspective, I think you lay out the narrative, I think you lay out the case, you know, really, really well.

And by the way, we're firm believers in the value of active management.

We just believe in deploying it effectively and intelligently and using very much, I would say, risk aware approach to leveraging those strategies.

So we're going to take more of an inventory of what we think the market's going to look like going forward over maybe picking managers or picking strategies based on historical return.

So you obviously know we have a suite of long-term capital market assumptions as well as other strategic return drivers that help kind of set the stage for our portfolio construction process that we think is going to be the effective asset allocation schematic of the future.

And then from there, we can go in and appropriately populate that with active managers, with passive strategies, other ETF.

Do they really put together a compelling offering that essentially harnesses the power of our investment process with efficient levels of tracking here.

Totally said, harvest outperformance vis-à-vis benchmark because that's openly what our clients expect of us is to outperform the benchmark.

So we want to make sure the sum of all the individual components is actually greater than their individual parts, right?

And of course, we have a lot of active ETFs as well these days utilizing our really strong investment capabilities globally at Invesco, bringing some of those appropriate into the ETF format as well.

And like you said, ETFs have a place into portfolios, active strategies have a place in portfolios as well.

How are you seeing the allocation across ETF building blocks, active strategies and alternatives relative to what we used to see in the old days, how people being a little bit more selective with where and how they implement particular asset classes and strategies?

Sure.

And I'll kick off with ETFs.

And I would argue that ETFs are not only the vehicle of the future, they're the vehicle of the present.

And what you see now is ETF wrappers which give you exposure not just to traditional passive strategies than cap weighted indices or even smart beta strategies, but also active strategies.

And you see you know kind of you are from helping to kind of you know kind of lead the way in the proliferation of those types of investment vehicles.

So now as really portfolio constructionist, we can put together investment solutions that have exposure to kind of active, systematic and passive using a fully ETF driven line up.

I think another huge observation we see him back to that observation I shared earlier about wealth Vs institutional.

Is that the institutionalization of wealth?

Like I talked about a couple of questions ago, what you see now is institutions adopting ETF.

Historically we've thought about ETF as a vehicle for wealth and for retail.

Now we're seeing big institutional asset owners heavily engaged in ETF because they see the efficiency, they see the ability to get exposure, they see the cost effectiveness and then they're able to essentially get their underlying desired exposure through the ETF vehicle and not through other more costly cumbersome vehicles or, or approaches.

I think the private side is also interesting.

You know, as, as well as you know, when we think about investing in asset classes like private credit, we're looking at broadly syndicated loans, we're looking at asset classes like CLOs (Collateralized Loan Obligations).

Those are huge building blocks for us and the ability to leverage those in an ETF wrapper is huge because it gives us a lot of optionality within clients.
It gives clients a very flexible way for them to essentially intake our IP (Intellectual Property) and embed in their portfolios and hopefully leverage it to generate alpha.

So that's really how we're thinking about ETF as a vehicle.

It's evolved quite a bit over my last 10 years on the team.

It seems like every year we're using ETFs more and more in terms of our portfolios and these kind of ETF driven solutions or ETF driven model portfolios are not just kind of a huge staple of our day-to-day conversation with clients.

Yeah, you raise a great point as well around incorporating more and more ETFs into portfolios, not necessarily because people don't like active strategies because you can get so much granularity in the ETF space.

If your investment processes look at broad beta exposures, style factor exposures, single style factor, systematic active multi factor or not fundamental active, right, you can do a lot of that through ETF, right?

Doesn't necessarily mean that you're a passive investor.

You're making a lot of really active decisions and that's a big educational journey.

We're taking clients along right now is there are still some clients who I think are anchored to that historical mindset of, well, ETF equals passive.

And it doesn't a lot of cases, but it doesn't in every case.

And it's really getting clients to kind of expand their minds and expand their horizons and kind of understand what's available to them.

And I think once those unknown become known, I think they're able to kind of, I think fully appreciate our investment process we bring to the table and ultimately able to put together portfolios that they are much more well equipped for the next market cycle.

What's really exciting is some of the access ETFs are delivering to sophisticated investors who don't necessarily have the resources that large institutional investors might have.

So for instance, senior bank loans, collateralized loan obligations, accessing semi private, the ETF structure is fantastic, right?

Absolutely.

And it just kind of goes back to that whole confluence of wealth and institutional, like the ETF vehicle is really driving most of that.

It's like we're all using the same kind of underlying investment universe now for utilizing the same vehicles.

There really isn't that much of a difference between what you're saying with an institutional asset owner and what you're seeing with a family office or a wealth manager.

It's, it's really, truly kind of democratizing the investment universe.

That's really exciting.

We're seeing some fantastic portfolios from wealth clients as well where they're doing some really interesting things.

So you kind of touched on this topic a little bit, you know, investors potentially getting anchored to historical returns that active managers might be delivering and looking at those versus like a broad market index or some of the traps that you see investors falling into today.

And what would some of your, what would you suggest they look at to try and rectify some of those traps?

It's a great question.

Is it kind of a big part of our business within solutions?

We actually analyze different investor portfolios using our analytics platform called Invesco Vision, as you know.

So we look at thousands of portfolios a year.

So we have a pretty kind of, you know, robust inventory of like what we think like underlying investors are doing in terms of in terms of building portfolios.

And I think kind of the big take away I have is investors not really fully knowing what they own and taking like a very kind of deep X-ray in terms of understanding what holdings they have, how those holdings interact together.

Do those underlying holdings drive a risk profile that's going to create an economic benefit to your portfolio over a long term?

It's going to suit your goals.

And really I think knowing what's there in the underlying and how those decisions interact together, how do your different managers work together?

Are they, do they have something like you know, negative excess return correlation or do they have positive excess return correlation?

Are they making the same alphabets?

Things like that.

I'd say more on the systematic side.

How are you defining your underlying factor exposure?

What factors are you targeting?

Are you using a strategic approach?

You're using more of a dynamic approach on the passive side.

I think a lot of times people aren't even necessarily thinking about which indices they're replicating and is that index really going to give them the best underlying exposure to effectuate their asset allocation view.

So it gets really diving deep kind of going, you know, a couple of miles below the surface level, kind of getting past the tip of the iceberg and really having some of those deep conversations.

I think you see a lot of concentration in portfolios in certain areas since we work a lot with financial advisors or wealth advisors.

Not surprisingly, we see concentrated portfolios given the run up in US tech stocks.

We saw an abatement in that right around the time we shot our first podcast the markets kind of since you know reconcentrated in the NASDAQ 100's done really, really well.

So we'll see concentrated equity portfolios.

We'll see kind of a lack of global diversification which exposes portfolios to some risks as we've seen unfold in 2025 with everything we've seen with kind of a trade in geopolitical issues.

And then on the fixed income side, you know, often times we see either an over concentration of interest rate centric bets or credit centric bets.

So we'll see investors either underweighting or overweighting their duration without being like really conscious of it, focusing very much on like credit heavy portfolios and not understanding what some of those different levers can do for you from a diversification perspective like duration can.

So it's like another area to where investors also have things struggle with putting fixed income building blocks together and not really thinking about fixed income is kind of like a series of asset allocation decisions and split between let's say investment grade and some investment grade.

In private, they're kind of just picking really good managers, which kind of work individually.

But when you roll them up, oftentimes we're making a lot of the same macro bets.

So really like unpacking, I think all that getting really granular and kind of understanding what each an individual risk looks at and kind of almost reconstructing it from the beginning.

They're like, well, OK, what does the end result look like now?

Does this actually create a risk profile that's attractive to me?

Does this align with my long-term return expectations?

Is this align with my tactical views?

And then kind of thinking about it more of an iterative process versus like more like backward looking like we see in a lot of portfolios we look at, right.

You raised some really common traps that I see a lot of investors fall into, which is allocating to a lot of active managers, not necessarily fully having a view of what they're doing under the hood.

One manager might be taking a value tilt, another might be taking a growth tilt.

And if you're not balancing these allocations, you get a really expensive, inefficient broad beta exposure.

I think there are a significant amount of fixed income building blocks out there investors have at their fingertips, which gives you a lot of levers to pull to solve for a variety of outcomes, risk, return outcomes.

We see the same thing, a tendency to allocate to a handful of active managers, not necessarily seeing what they're doing under the hood and potentially being able to construct something a little bit more bespoke for your own clients.

Utilizing things like ETFs as well or incorporating ETFs into that existing process.

For instance, looking at different credit quality exposures, different duration exposures and diversifying across the capital stack, for example.

Exactly what are you guys doing in in that space right now, just out of curiosity?

Yeah.

I mean, I would say something I would implore investors to think about more and more is looking at ETF's with respect to implementing their fixed income views.

Because we talked about at the beginning of the conversation, because ETF's give you a very targeted specific universe by which to invest, you can become very granular in terms of how you pick certain types of asset classes, credit types, vehicle types, structures.

Truly I think construct A uniquely alpha generative portfolio coming from your fixed income assets.

I mean, as you know, I think the ability to make decisions across the strategic and tactical spectrum using ETF's on the fixed income side is very, very important to us.

Whether we're looking at core investment grade exposure, whether we're looking at something like high grade CLOs, whether we're going kind of in the sub investment grade space and looking at very unique asset classes, we find very value additive like something like high yield fallen angels.

And those are very specific alpha levers to our investment processes, you know, and we're able to essentially replicate them exactly with ETF's.

So and that's really where we've taken a lot of kind of research effort over the last couple of years and kind of thinking about, OK, what are good strategic return drivers in our fixed income portfolio and essentially mapping those over to available ETF so we can actually effectuate those views in a live format.

And you can do that because of the transparency of the ETFs, right?

It's something that some of our investors really like is that you look at the ETF, you see all of the fixed income characteristics on that ETF.

You can see the yield to maturity, all the yield to worst.

And then you can also look at the weighted average market price of the underlying bonds.

You can look at the weighted average coupon.

So you get a really good feel for what's driving the yield in this particular portfolio, right.

Is it, is it deep discounts to par?

Is it really high coupons, right, from different credit qualities?

And that's something that you can't always get from some opaque active managers, right?

Correct.

Yeah.

I mean, ETFs give you the feel of owning individual securities.

Yeah.

So it feels like we own a portfolio of individual securities with the level of I think specificity and granularity we can get around portfolio characteristics and analytics and ETFs are able to provide that to us.

And instead of owning you know 650 different individual bonds, we might own six or seven ETFs.

We have a completely diversified end to end global fixed income portfolio across investment grade and sub investment grade, right.

I, think the instances where investors don't want to be at the whim of an index methodology and potentially have the PM (Portfolio Manager) sell down bonds at a price they're not necessarily keen to sell down those bonds at.

You can then look at our bullet shares range, which is, you know, term maturity type ETFs that's there's a fantastic for us that liability matching portfolios as well, right?

Absolutely.

I mean, I think you break them.

Another interesting point is even now for let's say liability sensitive investors, traditionally we've thought about very complement, very complicated LDI (Liability-Driven Investment) type structures to match those liabilities.

Now with the advent and creation of ETF's, you're actually able to use ETF type vehicles.

You're giving an example of the bullet shares for liability sensitive investors who have a particular liability that's due at a certain date or a cash flow that they have to match at a certain date.

And I'm being able to use ETF's to do that, not having to buy 750 individual bonds.

I think it's ease of access, it's diversification.

There's a liquidity component and there's just a simplicity component that I think helps people sleep at night, right.

And I just heard that our AUM is now over 2 trillion globally in U.S. (Source: Invesco, as of 30 June 2025) dollars.

A third of that is fixed income.

We have a lot of scale that we can deliver through those ETFs as well directly to investors.

So there's a lot investors need to consider when constructing portfolios.

We've spoken a little bit about some of the approaches investors can take, some of the traps they might fall into to what are some of the benefits of investors coming to a large institution like Invesco to engage with Invesco and yourself on an advisory basis? What are some of the benefits they can gain from that?

It's a great question.

And I think you investors, I think you tap our expertise.

I mean they're trying to leverage what we can do come through a variety of dimensions, right?

Some investors kind of tap us and they just want to seek, I think kind of broad-based portfolio advice.

Maybe they'll have us analyze one of their portfolios and you provide some areas of expertise so we can maybe provide value on the margins.

Some investors come to us and actually want us to build individual end to end solutions for them, leveraging the full suite of our asset allocation views that I've talked about throughout the course of this conversation.

I think when investors tap us, I think the value they receive is, I think it's really threefold.

I think 1, the breadth of capabilities.

I mean, you talked about our firm just hitting 2 trillion in AUM (Source: Invesco, as of 30 June, 2025), which I think is a pretty big deal.

There aren't a lot of firms in the industry that have that level of scale.

But I think two additional things we bring to the table are transparency.

I think if you think about our team, as you know, because our investment process is systematic in nature, it's highly transparent.

So we're able to share a lot of information with our clients, not just in terms of the what in terms of our investment process, but the how and the why.

So I think investors walk away with a really good concrete feeling of what our investment process is, how it works and how it ultimately adapts to changing market conditions.

And I think the third piece would be flexibility.

As you know, the heart of any solutions team is always going to be built around the concept of customization.

So we're usually very keen and acceptable of customizing on behalf of our clients because we are systematic in nature.

It makes customization actually a fairly straightforward and scalable process.

So I think it's really those, those three things.

It's that breadth of capabilities, transparency and flexibility.

And I think that's kind of wrapped around, but I think it's a very solid communication ecosystem.

I think something we strive for on our team is if you ask me the question in Asia, you get the same answer in Asia as you do in North America, as you do in Europe.

We all try to communicate with each other, speak with each other, share a common research platform and set of ideas.

So you're getting really, I'd say, a common best practices type approach, whether you engage us in the US or you engage us in Hong Kong.

Fantastic.

Thank you very much, Chris.

Well, thank you very much for joining us on our second episode of Investments Unlocked.

Thanks, Chris.