The dual portfolio framework

May 24, 2019

One of the most important decisions facing investors is how best to balance their risk and return objectives. Stated another way, investors must find the optimal trade-off between the goal of maximizing their long-term returns while addressing concerns such as spending, liquidity, or solvency requirements. One approach to meeting this balance is by using a dual portfolio framework.

A dual portfolio framework recasts the investment portfolio into two broad categories, risk-mitigating and return-seeking, to allow us to separately identify key risks at the total Plan level. This approach is especially useful within an asset-liability framework. First, it allows an investor to customize a portfolio based on their unique plan profile. Second, specific fixed income securities and strategies can be avoided to better meet investor needs. Finally, the amount of credit risk in both equities and bonds is more transparent such that investors are less prone to taking on an undesired amount of credit risk.