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Multi-Asset Portfolio Management: Combining Prudent Investing With Timely Execution

Income Investing U.S. Equities
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Investors often rely on traditional balanced stock/bond portfolios to achieve long-term goals. Unfortunately, the improper measurement of risk and an inability to actively allocate risk has often yielded disappointing results. Fort Washington’s approach seeks to deal with these shortcomings while adding value through active management.

Shortcomings of Traditional Balanced Portfolios

The traditional 60/40 allocation has long been a staple of Balanced portfolios using Modern Portfolio Theory to develop well diversified strategic allocation targets. While this approach has certainly been popular, it often does not meet expectations when risk increases in periods of meaningful dislocation due to reduced benefits from diversification. This approach quantifies risk in terms of correlations and volatility and does not factor in valuation. For example, when the S&P 500 is at a peak, volatility is typically low. However, it’s at this time when prices are the highest that the risk is also the greatest, and balanced portfolios may fail to deliver. In such times of extreme market distress as we have recently experienced, correlations tend to break down and approach 1.0. In other words, multiple asset classes tend to lose value at the same time, and portfolio returns disappoint expectations.

An alternative approach rests on forward looking scenario analysis when setting tactical targets for balanced portfolios. We believe this to be the best approach as it depicts what to expect from a growth shock or recession. We prefer to characterize risk as the quantification of potential loss, not volatility. Knowing the implication on investment returns in a worst case scenario is important for investors to understand as it provides them with the knowledge of the amount of loss they may incur. This focus on loss avoidance guides the optimal allocation mix. We believe it is in an investor’s best interest to focus on cause and effect relationships when building diversified portfolios rather than depending on correlations that have typically proven to be unstable over time.

A Differentiated Approach

In managing balanced portfolios, Fort Washington employs two proprietary tools designed to overcome some of the shortcomings of typical balanced account mandates: Risk Budgeting and Forward Looking Scenario Based Analysis.

A Risk Budget is a tool that allows the portfolio management team to monitor the potential downside risk of a portfolio relative to a strategic benchmark through the use of a risk lens. This tool allows Fort Washington to not only efficiently allocate risk within our portfolios, but also use one common metric to track exposure across several asset classes with varying characteristics. If financial conditions are supportive, sentiment is positive, economic growth is improving, and asset class valuations are attractive, a higher degree of risk will typically be taken in the portfolio. Importantly, risk is focused on loss of principal, not volatility.

Fort Washington utilizes a proprietary asset allocation approach focused on Forward Looking Scenario Based Analysis that involves the following: 

  • Focuses on cause and effect rather than correlations
  • Allows for the application of a common downside risk measurement for all assets
  • Increases awareness that higher returns in stable markets might result in much lower returns in volatile markets
  • Drives the manager to find better asset combinations, increasing return per unit of risk

The combination of a Risk Budget and Forward Looking Scenario Based Analysis allows for the potential of optimally designed portfolios that seek to meet expectations in both good times and bad.

Active Management

Knowing when markets are going to bottom is a very difficult call to make. Emotion during times of stress exacerbates this difficulty. Using previously established scenarios provides a method for disciplined decision-making based on valuations, economic conditions, and market conditions. Given the right process behind efficient and consistent sector allocation decisions in a diversified portfolio, managers can not only weather the storm but may add additional value to their portfolio. This approach to active management, focusing on measurement not forecasting, is a key tenant of our philosophy.

In addition to active management with respect to these sector allocations, meaningful alpha can be generated by exploiting the more inefficient asset classes such as International Equities or certain sectors within Fixed Income such as Securitized Assets, Investment Grade Credit, and High Yield. Certain Fixed Income markets, for example, are less efficient and provide managers with a variety of opportunities to add alpha.1 The exploitation of these opportunities can be accomplished in a much tighter risk management construct when compared to Equities. If a Fixed Income allocation in a traditional 60/40 portfolio is able to provide additional alpha over the market, the end results could be significant, particularly on a risk adjusted basis.


Fort Washington combines over 30 years of institutional asset management expertise, a disciplined approach to sector-relative valuation, proprietary risk budgeting, and experienced security selection skills to optimize balanced portfolios.

Diversified portfolios have provided investors with attractive returns with manageable volatility over long- term investment horizons. Furthermore, actively managed balanced portfolios with a disciplined allocation philosophy based on risk budgeting and forward-looking scenario analysis can enable managers to act efficiently in volatile markets. This well-defined approach has the potential to generate alpha while ensuring that investment objectives are being fulfilled. It is the unencumbered approach to making these timely decisions that can make the diversified portfolio so appealing.

Alpha is the portion of a fund’s total return that is unique to that fund and is independent of movements in the benchmark.

The indexes mentioned are unmanaged statistical composites of stock market or bond market performance. Investing in an index is not possible. Unmanaged index returns do not reflect any fees, expenses or sales charges.

A Word About Risk
Fixed-income securities can lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities may be downgraded by a Nationally Recognized Statistical Rating Organization (NRSRO) to below investment grade status. Non-investment grade debt securities which are considered speculative with respect to the issuers’ ability to make timely payments of interest and principal, may lack liquidity and can have more frequent and larger price changes than other debt securities. Equities are subject to market volatility and loss. Preferred stocks are relegated below bonds for payment should the issuer be liquidated. The fixed dividend may be less attractive in a rising interest rate market. Convertible securities are subject to the risks of both debt securities and equity securities.

Performance data quoted represents past performance, which is no guarantee of future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than performance data given. For performance information current to the most recent month-end, visit TouchstoneInvestments.com/mutual-funds.

Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one here or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.

Touchstone Funds are distributed by Touchstone Securities, Inc.*
*A registered broker-dealer and member FINRA/SIPC.
Touchstone and Fort Washington Investment Advisors are members of Western & Southern Financial Group

Not FDIC Insured | No Bank Guarantee | May Lose Value

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