OPINION: From Benjamin Graham to the Yale model, portfolio construction is always evolving. Now that bonds pay income again, diversified portfolios are more robust.
After the sharpest central bank interest rate cycle in many decades and quantitative tightening to contain inflation, 2022 ended with sharemarket falls. Investors couldn’t rely on bonds to cushion the losses of their riskier assets, as they had in past crises.
Furthermore, on the unlisted asset side, private markets were expected to offer more alpha than public markets, simply by virtue of the number of opportunities in the unlisted universe. Valuations are infrequent and appear to smooth portfolio returns; an interesting piece by Cliff Asness called “Volatility Laundering” is definitely worth a read.
Closer to home, Australia’s own Future Fund and its approach to asset allocation has seen it transition to a cheaper, more passive approach in asset classes where manager skill is less evident, such as listed equities. The Future Fund, in its own words, is taking passive approaches that “systematically harvests equity risk premia through exposure to factors”. That is smart beta.
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