More with Core: portfolios for an uncertain world

Geopolitical tensions, changing interest rate expectations, market concentration and the rapid development of artificial intelligence are creating a more complex investment environment.

For UK financial advisers, the challenge is not simply deciding what markets might do next. It is selecting portfolios that remain aligned with clients’ objectives, time horizons and attitude to risk across a range of possible outcomes.
 

Risk-targeted multi-asset portfolios provide a practical framework for doing this. Built around a defined level of risk, with strategic asset allocation, diversification, governance and rebalancing helping to keep portfolios aligned over time.

Within MyFolio Core, this framework is implemented through a blend of active funds, passive exposures, third-party managers and Aberdeen’s Enhanced Index strategies. Tactical asset allocation provides an additional layer of flexibility when opportunities emerge.

The aim is not to predict every market move. It is to avoid becoming overly reliant on any single source of return.

Moving beyond active versus passive

The active versus passive debate is familiar territory for advisers. Passive investing aims to track a benchmark efficiently, offering relatively low costs, broad diversification and consistency. Active management seeks to outperform through research, judgement and stock selection, but usually brings higher fees, greater manager-specific risk and less predictable outcomes. Enhanced Index is an active systematic strategy that sits between the two.

It combines some of the efficiency and discipline associated with passive investing with a systematic process designed to generate incremental outperformance. Rather than relying on a small number of high-conviction positions, it makes modest adjustments relative to the benchmark while carefully controlling risk.

For advisers, this creates a third option: an approach that seeks to improve on benchmark returns without taking the degree of active risk typically associated with traditional stock-picking strategies.

A systematic source of potential returns

Aberdeen’s Enhanced Index approach evaluates companies using three established investment factors: value, quality and momentum.

Value identifies companies that appear attractively priced relative to their fundamentals. Quality focuses on businesses with strong balance sheets, robust earnings and sustainable business models. Momentum looks for companies where positive trends in share prices, fundamentals or market sentiment are emerging.  

None of these factors works all the time. An apparently cheap company may be cheap for good reason. A quality business can go unrewarded for an extended period, while momentum can reverse when market leadership changes.

That is why the factors are combined rather than used in isolation. Their weaker periods do not necessarily coincide, potentially creating a more balanced exposure to different return drivers across different market environments. In this sense, Enhanced Index introduces another form of diversification: not only by company, sector or geography, but also by the underlying drivers of return.

Modest tilts, not dramatic bets

The process begins by assessing companies within an index against value, quality and momentum characteristics.

Those with stronger characteristics receive slightly larger portfolio weights, while those with weaker characteristics receive slightly lower weights. These are measured tilts rather than significant departures from the benchmark.

Risk management remains central. The intention is that returns come from deliberate exposure to the three factors, rather than unintended positions in individual companies, sectors or countries. Portfolios are therefore designed to remain diversified, liquid and broadly similar to their benchmarks, with tracking error carefully controlled.

The objective is straightforward: to seek incremental outperformance without introducing the level of risk that can accompany more concentrated active strategies.

Making the investment budget work harder

Not all markets offer the same opportunities for active management. Some are highly efficient, making consistent outperformance difficult. Others may provide greater scope for skilled managers to add value.

Recognising these differences helps determine where active funds should be used, where passive exposure may be sufficient and where Enhanced Index can offer an effective middle ground.

Within MyFolio Core, Enhanced Index is therefore not a wholesale replacement for active or passive investing. It sits alongside both, with the approach varying across markets.

This allows the portfolio managers to consider the potential for added value alongside the cost and risk required to achieve it. Put simply, it is about allocating the investment budget across approaches based on opportunities of improving client outcomes.

Preparing rather than predicting

A dynamic forward-looking strategic asset allocation process remains the foundation of the MyFolio range of funds. Portfolios are diversified across asset classes, regions, managers and investment styles, with ongoing oversight intended to keep them within clearly defined risk parameters.

MyFolio Core adds further flexibility through its blended implementation. Active management can be used where the team believes manager skill has a stronger opportunity to add value. Passive strategies provide efficient market exposure, while Enhanced Index seeks incremental outperformance with controlled cost and risk.

No investment approach can eliminate uncertainty, and a consistent process cannot guarantee a consistent outcome. The value of a risk-targeted multi-asset approach lies instead in reducing dependence on any single forecast, theme or investment style.

Ultimately, successful portfolio construction is not about being certain what happens next. It is about building sufficient breadth, discipline and flexibility into portfolios so that clients are better prepared for a range of outcomes.

In a more uncertain world, that distinction, and diversification matters.

This article was originally published in Investment Week.