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12 insights behind the Russell Model Portfolio
1. The Russell Model Portfolio takes a moderate to high level of risk in pursuit of a total portfolio return
The Russell Model Portfolio takes a moderate to high level of risk in pursuit of a total portfolio return
2. Traditional strategies alone do not offer enough fuel for success against most investors' targets . . .
Unlike, for example, the leading endowments, many pension plans have not fully embraced alternative investments, even though they've been available for many years. The alternatives category can include real estate, private equity, commodities and other asset classes that lie outside the traditional exchange-traded assets.
3. . . . but you do need to be selective.
New strategies merit consideration, but not every new strategy merits adoption. It is important to keep the total portfolio view in mind.
4. Opportunity doesn't knock for long.
To get the most from fresh opportunities, you need to be a relatively early adopter. Return-seeking investors need a structure that will enable, not resist, quick adoption of opportunistic strategies in their portfolios.
5. It's the total portfolio that counts, not the parts.
Risks should be balanced, so that no one source of risk is allowed to dominate the total portfolio. Reporting, likewise, should be focused on the total portfolio; it should not overemphasize the parts or adopt too short a time horizon.
6. Portable alpha allows (within limits) separation of the alpha and beta portfolios.
Portable alpha removes a constraint on active management and greatly frees up portfolio construction. If a particular field of active management is deemed attractive, it can be incorporated into the model portfolio, even if the asset class on which it is based is only a small part of the market allocation or is not present at all.
7. Today's return is more dependent on active management than yesterday's was.
For many reasons, investors have reevaluated the balance between market exposure (beta) and active management (alpha) and are looking to active management to carry more of the burden of return seeking than they did in the past.
8. If you find a source of (positive) alpha, take it.
For all practical purposes, the right amount of alpha to target is, currently, as much as you can find that you have confidence in. Of course, this depends on the ability to find alpha. The challenge of finding good sources of alpha remains the most important constraint on active management.
9. The equity risk premium is not dead.
Traditional asset classes—equities and fixed income—have not been abandoned. The model portfolio diversifies away from equity risk but does not abandon it.
10. Bonds can be beautiful.
Bonds have a place in a return-seeking portfolio. They provide a valuable source of diversification and an acknowledgment that over $20 trillion in capital markets should not be overlooked. The allocation to fixed income is one of the areas that will change as different investors assess their own situations and risk appetites.
11. To stay fresh, stay flexible.
Details of the division of the broad investment areas into subcategories should depend on practical considerations, such as the availability of suitable investment products and the state of the market at any point in time.
12. It is time to reconsider portfolio constraints.
Many plans have investment policies that are more restrictive than is desirable. Some, for example, still place a blanket restriction on derivative instruments. Other restrictions plans are reassessing include constraints on short selling or on many types of leverage, and the narrowness of their active management assignments.
Please contact Bill or Gerry if you have any questions about these 12 insights or the Russell Model Portfolio.
Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.
Stock/Equity investors should carefully consider risks such as market risk when investing. There are no guarantees when it comes to individual stocks. Any stock may go bankrupt, in which case your investment may be worth nothing.
Bond investors should carefully consider risks such as interest rate risk, credit risk, securities lending, repurchase and reverse repurchase transaction risk. Greater risk is inherent in portfolios that invest primarily in high yield bonds. They are subject to additional risks, such as limited liquidity and increased volatility.
In general, alternative investments involve a high degree of risk, including potential loss of principal; can be highly illiquid and can charge higher fees than other investments. Hedge strategies and private equity investments are not subject to the same regulatory requirements as registered investment products. Hedge strategies often engage in leveraging and other speculative investment practices that may increase the risk of investment loss.
Specific sector investing such as real estate can be subject to different and greater risks than
more diversified investments. Declines in the value of real estate, economic conditions, property
taxes and tax laws and interest rates all present potential risks to real estate investments.
The strategies listed above represent general investment options and are not meant to represent any actual investment.
USIRC2869
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