Determinants of Return

Diversification is not a new idea but how you choose to diversify your assets among the various asset classes (and the determination of the appropriate weighting) is one of the most important investment decisions you can make when constructing a portfolio. The construction of an “efficient” asset mix entails maximizing the return on a client’s portfolio within a comfortable level of risk. This result is achieved through our unique optimization model. Emphasis is placed on identifying the client’s need for liquidity, income, safety, term and growth requirements, as these parameters will contribute to the overall investment policy.

Asset allocation is the major determinant of portfolio performance.  A landmark study comparing a large number of different portfolios illustrated that the difference in returns was mainly explained by asset allocation. The research revealed that 91.5% of the variability in portfolio return was determined by asset allocation alone. Since asset allocation is the critical investment decision, CAPITAL G has applied investment science to ensure our client's portfolios are effectively diversified

Determinants of Portfolio Return

Source: “Determinants of Portfolio Performance II”, Brinson, Beebower & Singer, Financial Analysts Journal, May 1991

Downside Risk

Traditionally, investment practitioners have measured risk by examining volatility (i.e. both upside and downside) of a portfolio. CAPITAL G's approach is different.  We look at risk as the possibility of a bad outcome, as most clients do not complain if a portfolio has returns that exceed their expectations.  In other words, we focus on the downside risk when we structure a portfolio. Although the statistics are complex, the underlying concept is simple.  Most clients have a minimal level of acceptable returns that must be attained in order to satisfy long-term investment goals.  Returns above a minimum target return (i.e. the Treasury bill return) do not represent risk; returns below the minimum do represent risk.  In your personalized Investment Policy Statement, we will define for you the probability of not achieving your long-term goals.

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