Constructing an Australian equities portfolio is an exercise that investors are approaching with an increasing array of options at their disposal. As the range of products and strategies grows, the notion of sticking to an exclusively active or index approach is becoming less and less feasible, portfolio construction experts agree.

The complexity of blending the right strategies places a premium on the role of financial advisers in the ecosystem. Choice has become critical for advisers, according to BlackRock director and head of portfolio analysis and solutions, James Kingston.

“The repertoire of securities and investment vehicles available to advisers is quite broad,” he explains. “More choice means a better understanding of how to combine these strategies is needed.”

Kingston says his team works with financial adviser clients, to blend active and index strategies to obtain a cost/risk mix that meets investor objectives, while simultaneously pursuing higher returns.

Ultimately, Kingston says, a blended strategy is in the best interests of investors. “Active in X and index in Y is too simplistic,” he adds.

Clients are increasingly looking to their advisers for a measure of control, and for their ability to create order out of chaos, Kingston says. The challenge for advisers is to combine them to deliver income and withstand different market cycles that align with the client’s goals. With financial market uncertainty set to continue, risk management and the selection and blending of strategies is arguably more important than ever.

“You’ve got strategies like smart beta and megatrend investing whilst ESG considerations are also becoming more important to many investors… all this can be factored into the portfolio construction process,” Kingston says. “Then we’ve also got to be aware of the different objectives; depending on client preferences you’ll adjust risk/return, cost with overlays of ESG or different flavours of investing.”

Miriam Herold, who is head of research at Centrepoint Alliance, says her team also employs a blended strategy in their model portfolios, “particularly in sectors such as large cap Aussie equities, where a lot of providers haven’t demonstrated an ability to generate alpha.”

Understanding the market

To make sense of the choices available to investors, Kingston breaks down strategies by the three drivers of return: ‘index’, for traditional market capitalisation exposure such as the ASX200; ‘factor’, through smart beta ETFs that are weighted to take advantage of risk factors that outperform over time; and ‘alpha’ by way of actively managed funds.

Clearly, ETFs are an important and growing part of the investment landscape. Low cost and liquid, they offer an easy entry into the market and a level of surety highly valued after the Hayne royal commission.

As head of iShares Australia, Christian Obrist, notes: “Values like transparency, liquidity and the client’s best interests have all come to the forefront, and ETFs really fit the bill.”

While ETFs are commonly referred to as passive products, they can be used as part of an active strategy. Model portfolios, for example, are typically built with ETFs but form part of an active portfolio.

“You’re essentially still buying an active product, but the building blocks used are ETFs,” Obrist adds. Kingston agrees, adding that any decision made within a portfolio – even if it’s choosing an index fund – is an active decision.