Rodrigo Gordillo: Why most advisors have portfolio construction backwards and how to fix it

August 14, 2018

2 minute read

Rodrigo Gordillo, Managing Partner and Portfolio Manager at Resolve Asset Management shines a light on one of the quintessential dilemmas of portfolio construction in the investment management business.

We spoke to Rodrigo Gordillo at the inaugural Inside ETFs Canada Conference in Montreal.

"When we see people [investment advisors and allocators] thinking about the alternative sleeve, [which] because of restrictions, ends up being 10% or 20% of a portfolio – and the rest is a traditional equity and bond portfolio – they're thinking about this [alternative] sleeve as "How can I put something in there that's going to be low risk, that is not going to lose my clients a lot of money," says Gordillo. "From a behavioural perspective it makes total sense. You're doing something that's different, you can't really explain it to your client, and the whole goal is "Look, it's low volatility, it's never gonna lose you money, we're just going to be slow and steady wins the race."

"We think they're thinking about the problem incorrectly," continues Gordillo. "If you have 20% of your portfolio that you can use to add diversification, you want to have as much volatility as you can get for those products. You actually should prefer higher risk."

"Let me give you a scenario – Market neutral strategies are very popular, and in 2008, if you can average it out, the market neutral space was up 3-5%. That's pretty good, you can sell it to a client, and say that's a good thing," says Gordillo. "But what did that actually do in order to protect the rest of your portfolio that was down 40-50%? Not much. You can point to a line item, but you can't point to the whole portfolio."

"What would be better is to to find alternative strategies that are orthogonal {def: statistically independent], that have different return streams, and that can offset [core portfolio] losses to a larger degree."

Listen in or watch for the rest of this enlightening and well-informed conversation.

Toronto-based Resolve Asset Management, one of the pre-eminent North American rules-based investing asset management firms, have invested themselves in a successful educative approach as an authority in Canada and the U.S., on building adaptive, diversified portfolios that emphasize strong, stable returns and real downside protection through all market environments.