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Emphasizes attributes such as risk-return, income, liquidity, and duration, plus regular scenario analysis to support predictable funding outcomes.",{"@graph":14,"@context":72},[15,34,55],{"@type":16,"itemListElement":17},"BreadcrumbList",[18,23,27,31],{"item":19,"name":20,"@type":21,"position":22},"https://docshare.wps.com","Home","ListItem",1,{"item":24,"name":25,"@type":21,"position":26},"https://docshare.wps.com/document/","Document",2,{"item":28,"name":29,"@type":21,"position":30},"https://docshare.wps.com/document/research-report/","Research & 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was your age” is a familiar phrase most children hear regularly.  \nI recently caught myself saying this whilst bemoaning how Lego has evolved from my childhood.“Back in my day”, at least in my memory, we only had a handful of different Lego building blocks and no instruction book.  \nDouglas Clark  \nHead of Research & Solutions  \nChildren were left to their creative imaginations, albeit constrained by the limited number of pieces. Today ’s Lego has a seemingly infinite number of building blocks alongside instruction books requiring an engineering PhD!  \nPortfolio construction today shares similarities with the evolution in Lego’s building blocks. Just as Formula One Lego didn’t exist in the 1980s, super-core infrastructure and senior direct lending were not part of the institutional investors toolkit. And whilst today ’s allocators have an abundance of different building blocks, their instruction manuals haven’t kept pace.  \nBack to the days of my Lego youth, modern portfolio theory made perfect sense and life was simple. We had equities for growth, bonds for income and 60/40 did the trick.  \nToday we still have equities: but is that US, Europe, Emerging Markets, large, small, tech or a factor strategy? And which flavour of equity: public, private, semi-liquid? And where does infrastructure sit? Or real estate? And for those, do you want core, value-add, or opportunistic?  \nA h, I hear you say, but bonds are boring and the easy bit but, no. Is that government or corporate, high grade or junk, corporate or securitised, public or private, CLO or MBS!  \nYou (sort of) know where you are with equities and bonds. What about ILS, SRT ’s, NAV loans, secondaries…. even engineering PhDs are now worried.  \nSo how can investors today adapt to having a much wider toolkit but a dated and largely tattered instruction manual with pages missing. The Total Portfolio Approach (TPA) that is now widely adopted by many of the largest global investors provides one such solution.  \nAt Brightwell, our One Portfolio Approach is an evolution of the TPA tailored for the needs of decumulating defined benefit ( DB) pension schemes. There are 3 key elements our approach:  \n1. Function, not form. In the old days the function and form of assets was largely synonymous. Equities for growth, bonds for income. That is not the case with the range of potential assets today. For example, core infrastructure and core real estate have more in common with bonds, whereas their opportunistic equivalents are very much equity-like.  \nOur approach considers the functional role an asset performs in a portfolio over its asset class form. We consider assets or strategies across 4 core attributes – risk-return, income, liquidity and duration. And build portfolios based on functional allocations, not asset allocations.  \nFor example, our cash-flow or income allocations comprise all assets with contractual income and limited terminal value risk –clearly this includes bonds but also assets like core, non-GDP sensitive infrastructure.  \n2. Outcomes, not optimisation. The mean-variance optimisation of a small number of ( mostly public) asset classes formed the basic instruction manual for portfolio construction. Whilst there have always been certain limitations of this approach it can work relatively well with a small number of inputs which are relatively diversified and differentiated in their risk-return characteristics.  \nOptimisation problems are exacerbated when the number of inputs increase as public and private assets are combined, which presents challenges from a modelling perspective. The growth in private markets allocations within investors’ portfolios compounds those issues by making a portfolio rebalancing more difficult, as we have seen in the recent years since interest rates began to normalise. Our approach is to build portfolios that look to deliver outcomes in a range of scenarios that align with our cl","cbCaivyaRSytPBDA","https://ap.wps.com/l/cbCaivyaRSytPBDA","pdf",1885288,"English","# Introduction\n## The Lego analogy for portfolio evolution\n# One Portfolio Approach for DB decumulation\n## Function, not form\n## Outcomes, not optimisation\n## Cashflows, not co-variance","[{\"question\":\"Why does the document compare Lego evolution with portfolio construction?\",\"answer\":\"It argues that investors now have a much wider range of potential assets, but the “instruction manual” used for portfolio building has not kept pace, similar to how Lego changed from simple sets to complex systems with technical instructions.\"},{\"question\":\"What is meant by “Function, not form” in the proposed approach?\",\"answer\":\"The approach allocates based on the functional role an asset plays in the portfolio (e.g., risk-return, income, liquidity, duration), rather than relying only on traditional asset labels like equities for growth and bonds for income.\"},{\"question\":\"How does the approach differ from mean-variance optimisation?\",\"answer\":\"It shifts from optimisation to delivering outcomes across multiple scenarios that match clients’ expectations and tolerances, supported by regular scenario analysis and reporting.\"}]","Learning from Lego - how we build client portfolios | PDF"]