BLACKROCK INVESTMENT INSTITUTE

Portfolio construction

Bringing our framework to life

The current market environment is a challenging one –with low expected returns and high uncertainty. The standard industry disclaimer of “past performance is not a reliable indicator of current or future results” has never been more pertinent. How can investors navigate this maze? Our answer is to build portfolios employing an investment process grounded in the latest research and applicable across many different types of investment problems. A set of practical principles condenses our framework into a guide for investors.

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Building blocks
BlackRock's portfolio construction toolkit showing one consistent process with investor oversight at each stage

Building blocks

This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise - or even estimate - of future performance.
Sources: BlackRock Investment Institute, September 2019. This schematic is for illustrative purposes only and subject to change without notice..

We launch four, investor-specific SAAs that take into account our lower expected returns across asset classes, and each investor type’s typical objectives and constraints. These hypothetical SAAs are intended to show how our portfolio construction process applies to individual risk budgets, goals and limitations. Our resulting SAAs differ materially from one another, yet underpinning them is a consistent, scalable process, shown in the schematic above, that limits the need for subjective fixes.

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Multiple return pathways
Our CMAs give a view of returns over an entire horizon – a term structure. Our use of uncertainty creates a range of potential return pathways – from five years out to the long term. Such a granular view of returns over time allows investors to think about the future in a more realistic way.
Multiple return pathways
Understanding uncertainty
Building resilient, investor-specific portfolios requires a shift away from point estimates for returns. That is why we explicitly include uncertainty into our return projections and can create optimal portfolios by considering multiple return pathways.
Understanding uncertainty
Blending alpha and factor returns
Blending alpha-seeking and index products has become more challenging as the number of indices has increased and factor strategies have emerged to replicate what was previously alpha. Our framework helps determine a better blend of return sources to meet their individual needs.
Blending alpha and factor returns
The core role of private markets
Private markets also play a core role in modern portfolios. We show how many institutional investors have room for relatively large allocations to private markets depending on risk tolerance and their specific objectives, and outline our new method of estimating private equity returns.
The core role of private markets
Capital market assumptions
Our capital market assumptions show our return expectations across asset classes.
Capital market assumptions