Optimality Is in the Eye of the Beholder: The Science and Art of Equity Portfolio Construction
Having the right ingredients for equity investing is mission-critical for superannuation funds. Much research exists on the ingredients funds can use to construct a physical equity portfolio—matters like the attractiveness of investing onshore or offshore (in developed versus emerging markets), whether to adopt an active or passive management philosophy, the exploitation of factor risks, different weighting strategies, how to define risk and manage risk budgets, measuring trading costs and the impact of tax on equity investing. Far less research exists on how to combine these singularly important ingredients into the right mix from a taxable superannuation fund investor’s perspective.
In this paper, researched jointly with the Australian Catholic Superannuation and Retirement Fund, we argue that how these ingredients are combined matters—and demonstrate why portfolio construction is as much art as it is science.