In a rapidly evolving investment landscape, where traditional stock and bond strategies often falter under the weight of volatility and correlation, Picton Mahoney Asset Management’s BARBELL framework provides a pragmatic and innovative roadmap for portfolio construction. Here’s a rundown of their seven actionable strategies, designed to empower advisors and strengthen portfolios against today’s complex financial environment.
1. (B)readth, Not Depth
Traditional diversification focuses heavily on depth—geographical, sectoral, and stylistic variations within stocks and bonds. Yet, as Picton Mahoney notes, this approach often amplifies risk rather than mitigates it.
Instead, they advocate for broader diversification by incorporating alternative assets and strategies. These additions, particularly those less sensitive to interest rate and equity risk, can counterbalance volatility and reduce the tandem movement of traditional assets. “Simply adding more of the same can inadvertently amplify portfolio risk,” the report warns, emphasizing the need to extend beyond conventional boundaries.
2. (A)llocate Risk, Not Dollars
Asset allocation by market value often masks true risk exposure. Picton Mahoney urges advisors to adopt a risk-based allocation framework, assessing how each holding contributes to overall portfolio risk. This approach ensures that risks are intentional and appropriately scaled.
“An asset’s market value weighting does not indicate how much risk that asset is contributing to a portfolio,” the framework explains, advocating the use of risk factor models to pinpoint and manage hidden vulnerabilities.
3. (R)ent Beta
Static allocations may struggle in today’s environment of shorter, sharper economic cycles. By adopting a dynamic approach, investors can “rent” beta—rotating allocations to asset classes that align with current market conditions.
Picton Mahoney likens this strategy to choosing a ski destination based on optimal conditions rather than being tied to a fixed location: “Investors can take advantage of the opportunities created by shorter, sharper market cycles,” a far cry from the stagnation of static allocations.
4. (B)uy Alpha
With diminishing returns from stocks and bonds and reduced diversification benefits, alpha-driven strategies become paramount. These strategies, guided by portfolio manager skill rather than market movements, offer the potential to outperform cash while mitigating risk.
Picton Mahoney calls them “cash beater” strategies, deserving of dedicated strategic allocation in any resilient portfolio.
5. Evaluate (E)fficiency
Efficient portfolio construction requires modern tools to assess the cost and value of each asset. Picton Mahoney recommends leveraging tools like their Portfolio Analyzer to optimize portfolios by minimizing drag and wastage.
“Spending a portfolio’s risk, alpha, tax, and fee budget thoughtfully can lead to streamlined portfolios capable of achieving goals more efficiently,” they emphasize, urging regular reviews of portfolio efficiency.
6. (L)ower Taxes
Increased interest rates have elevated the impact of tax drag on returns, now often exceeding management fees. Advisors must integrate tax-efficient strategies, such as asset location and alternative investments, into portfolio design.
Picton Mahoney underscores that understanding and addressing the tax implications of portfolio decisions is no longer optional but essential: “For many investors, taxes may have surpassed management fees as the largest cost drag on their portfolio”.
7. (L)imit Losses
Protecting portfolios from downside risks is crucial for long-term wealth accumulation. Defensively constructed portfolios can outperform by “making more by losing less.”
For example, from January 2000 to September 2023, a portfolio capturing 70% of the upside and 50% of the downside of the S&P/TSX Composite Total Return Index’s monthly returns accumulated 40% more wealth while experiencing significantly less volatility. “Minimizing downside risks takes on added significance in challenging markets,” Picton Mahoney asserts.
The Case for BARBELL
The BARBELL framework offers a robust response to the challenges of a volatile and interconnected financial landscape. Its seven strategies are not merely theoretical but actionable, providing advisors with tools to build resilient portfolios capable of thriving across diverse economic scenarios.
“Inaction may be tantamount to making an active decision to increase portfolio risk,” Picton Mahoney warns. By embracing the BARBELL approach, advisors can help clients achieve their goals more consistently and reliably, reinforcing the resilience of portfolios in an ever-changing world.
7 tips advisors can use to strengthen investor portfolios (11:54)
In this brief educational primer, Robert Wilson, Picton Mahoney's Head of Portfolio Construction Consultation Service, walks through each of the 7 pragmatic elements of Picton Mahoney's BARBELL approach.
Copyright © AdvisorAnalyst, Picton Mahoney Asset Management
