A post to Exponent Philanthropy's blog

Spring Cleaning Your Investment Portfolio

Photo by Parth Shah on Unsplash

It’s that time of year again—the days are getting warmer, daffodils and tulips in bloom, and for many, a bit of spring cleaning. Now, have you considered the same for your investment portfolio?

This ten step checklist can help:

1. Has the organization’s risk tolerance changed?

Think about the time horizon of your organization, an important element of willingness and ability to bear risk, as well as other factors like changes to the spending policy in the coming years. If any big changes happened, the risk tolerance most likely changed.

2. Is the return objective still valid?

Maintenance of purchasing power; preservation of capital; and CPI plus 5% are normal return objective expressions. These wouldn’t ordinarily require a change. Regardless, you should deliberately consider your objective to see if it’s still correct.

3. Have there been any changes to the organization’s operational investment constraints?

Have the liquidity requirements of the organization changed (e.g. non-recurring or large outflows)? Are there any regulatory; legal or taxation issues; or special circumstances that may need to be factored into the investment program?

4. Is the strategic asset allocation still appropriate?

Studies have shown that asset allocation is the most important determinant of return. And given market expectations, are your selected asset classes, and their target allocations, likely to meet their long-term goals with an acceptable level of risk?

5. Does the actual asset allocation of each asset class fall within the target range?

The performances of asset classes and tactical allocation by an investment manager can move allocations away from the policy portfolio. Rebalancing is wise—if the investment policy considers rebalancing, allocations can be brought back in line with policy to move the portfolio back to the desired level of risk.

6. Is there enough diversification within each asset class?

Does the allocation achieve the desired level of exposure to large-cap, small cap, value and growth stocks?

It’s also important to ensure there are no unintended overlaps in risk with multiple managers working in the same space. And while diversification is important, having too many managers can add complexity, produce index-like returns, and be a burden to monitor.

7. Is the portfolio’s liquidity in line with expectations?

Likely not a problem for those invested in mutual funds and ETFs, but very relevant for those invested in hedge funds and private equity.

Your organization should be aware of lock-up periods, redemption dates, and notice and payout periods for hedge funds. And with private equity, the life of funds can be considerable with the investor having no control over the timing and amount of capital calls and distributions.

8. How has the portfolio performed in relation to its benchmark?

Given that the portfolio was chosen to achieve your investment goals, comparing your performance to the benchmark should be of interest. For example, tactical allocation (the process of investing away from the strategic allocation targets) can move you positively or negatively away from the benchmark, and it’s important to understand why.

9. How has each manager performed in relation to their benchmark?

Passively managed funds should regularly perform within a few basis points of their benchmark, while actively managed funds should be evaluated over three to five years. Again, it’s important to understand the reasons for over or underperformance. And the manager’s performance depends on their security selection and market timing skills, in addition to fees.

10. Is the portfolio of each manager consistent with their mandate?

From the start, it should be clear what financial exposure you expect your manager to deliver. Monitor them over time to ensure their investing stays in line with expectations. If there have been deviations (e.g. a large-cap manager investing in small caps or emerging markets) you may have unanticipated or duplicate risk in your portfolio.

This is not an exhaustive checklist, but it can help you make sure your investment program is on track and ready to meet your organization’s goals. Happy spring!


Brendan O’Connell, CFA is an investment consultant based in New York City. He was previously with The Atlantic Philanthropies for ten years.

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