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The Investment Universe
FULL EXAMINATION
Conduct an exhaustive and comprehensive review of all instruments for possible portfolio inclusion.
Identify all instruments
Without a complete examination and identification, there will inevitably be blind spots in any analysis and whatever subsequent action is taken based on that analysis.
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Therefore, we conduct a comprehensive review of all possible instruments.
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The intent when reviewing the investment universe is to maximize coverage of the returns space for the purpose of maximal diversification. This is accomplished by including as many asset classes as possible, some of which are listed here (please forgive us for not listing the entire universe).
domestic equities
Domestic equities are stocks that are issued by companies domiciled in the United States of America (US). This assets class is extensive and includes within it many sub-asset classes that are characterized by their representation of and exposure to certain portions of the US economy. There are many, many options for portfolio construction consideration in this asset class.
Foreign equities
Foreign equities are much like domestic equities but they are issued by companies that are not domiciled in the US. This difference is not just geographic. In fact, there are many differences between foreign and domestic equities to consider during the identification and construction process.
bonds
Bonds are long-term debt issued by the US government. Generally speaking, there are many other types of bonds as well that vary in their term (how long the bond lasts for), their issuer (some are issued by government agencies rather than the Treasury, while others can be issued by state governments or corporations, etc.), and many other charateristics.
interest rates
Interest rates are simply the interest that any instrument delivers. These instruments can be bonds or anything else that pays a rate of return, which can be variable or fixed.
Real Estate
Real estate as an asset class includes your home(s), a company's property, shares of ownership in any instrument that itself holds or has exposure to real estate.
Commodities
Commodities are base inputs that go into many products and affect services as well. The most well known and widely traded commodity is oil, which is an energy commodity. Other energy commodities include coal, natural gas, uranium and plutonium, lithium, etc.
Precious metals
The best known precious metals are platinum, gold and silver, but the asset class includes other as well like palladium, ruthenium, and many others.
money market
The money market as an asset class is the most short-term portion of the bond asset class. It includes on-the-run and off-the-run short-term treasuries with terms that are 52 weeks and under.
forex (Fx)
Forex (foreign exchange) referes to foreign currencies as an asset class and the trading of those currencies.
derivatives
Derivatives, also know as futures and options, are instruments that are built on top of other asset classes, or have an underlying assets class. For example, a buy option (also known as a call option) on an equity is the right but not the obligation to purchase the underlying instrument at an agreed upon price called the strike price.
Determine Incremental Diversification
INCREASE BENEFIT
To increase diversification value, we rely on a variety of input factors.
Determining incremental diversification is in part achieved by examining independent and dependent price behavior across multiple historical time periods and windows, as well as by identifying associated economic risk premia.
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> Risk premia are excess return values that are demanded/required for taking additional risk.
The portfolio construction and allocation process relies on combining both quantitative and qualitative input.
Measure Cost
REDUCTIONS TO RETURN
Assess direct and indirect costs.
​> Direct costs include, but are not limited to, the fees of instruments, bid/ask spreads, commissions
> Indirect costs include, but are not limited to, roll yields, swap costs, rebalancing within the instrument
Assess Tradability
EASE OF TRANSACTION
An instrument's tradability will be dependent on its current, past and predicted future AUM.
The typical liquidity of the instrument will also play a role in its tradability.
​Additionally, how the instrument trades must be taken into consideration as well (e.g. NAV and/or at close)
Evaluate Instrument Structures
INSTRUMENT INTEGRITY
The method of exposure to the instrument will effect the decision to use the instrument. If exposure is direct or achieved through an indirect method such as a swap, both must be considered.
The credit risk of the instrument is crucial as well. This risk will always play a large role in the instrument's viability for portfolio inclusion.
A review of the underlying documents, including the prospectus and associated contracts, is also done to understand the structure.
