Portfolio construction

Building a strong portfolio foundation with asset allocation

August 27, 2025 - 3 min

When it comes to portfolio construction, you need to get the big decisions right, and there is no bigger decision than asset allocation. Asset allocation acts as a portfolio’s foundation, and without a sound foundation, the entire structure collapses. So where to begin when constructing an asset allocation? And if the foundation is already built, how can you determine whether it is sound?

Getting started with asset allocation

The most intuitive place to start is with the desired risk profile. This is determined by risk tolerance and time horizon. Based on the selected risk profile, an investor or advisor can select the appropriate benchmark. A common benchmark for a moderate risk tolerance, US-based investor is a global 60% MSCI All Country World Index/40% Barclays Aggregate Bond Index. While an argument can be made that this benchmark is outdated given subdued outlooks for equity and fixed income, the global 60/40 has stood the test of time and is universally accepted.

For a benchmark-relative strategy, there are two investment objectives providing tension in the asset allocation process: outperforming the benchmark and keeping tracking error within an acceptable range. While a higher tracking error can raise the odds of outperformance, it also raises the odds of diverging significantly from the benchmark.

There are two distinct levers driving excess return and tracking error in an asset allocation: relative asset class weights and out-of-benchmark asset class bets. To operate the two levers effectively, the benchmark must be broken out into asset class components with appropriate weights. Figure 1 shows the current asset class breakout for our global 60/40 benchmark.

Figure 1: Global 60/40 portfolio benchmark weights

Asset class breakout pie graph for global 60/40 benchmark

Source: Natixis Investment Managers Solutions. For illustrative purposes only.

Defining asset classes and benchmarks

Investors must decide on not only on relative weights but also whether to include any asset classes not represented in the benchmark. Here it helps to define the asset class investment universe. What may be a viable and investible asset class for some may be too esoteric or risky for others. Figure 2 lines up the benchmark asset classes and weights with a hypothetical asset class universe. Note the out-of-benchmark bets, especially in fixed income. Here the investor should have good reason to include each asset class in the investible universe, including differentiation from existing asset classes in terms of risk drivers and return expectations.

Figure 2: Asset class universe comparison

Table of benchmark asset classes and weights with a hypothetical asset class universe

Source: Natixis Investment Managers Solutions. For illustrative purposes.

Once the benchmark and investible universe are defined, the hard decisions begin. Namely, what asset classes to overweight, underweight or remain neutral? What out-of-benchmark asset classes should be funded and how large a position? While there are many variables that go into this decision, the two most important are the investment selection framework and time horizon. Institutions typically use forward-looking capital market assumptions that project over a full market cycle of around seven to ten years.

For individual investors with shorter time frames, the investment outlook could be three to five years while blending forward assumptions with asset class fundamentals, such as valuations and current yields. A tactical component could also be employed to capitalize on short-term dislocations. Figure 3 shows a strategic allocation for an individual investor with a three-to-five-year investment outlook.

Figure 3: Strategic allocation vs. benchmark

Table showing strategic allocation for an individual investor with a three-to-five-year investment outlook

Source: Natixis Investment Managers Solutions. For illustrative purposes.

Once the allocation is determined, the next step in the portfolio construction process is implementation, which can add additional tracking error but is also a source of potential excess return. The challenge is how to structure the portfolio with strategies that reflect the spirit of the asset allocation but also offer the latitude to add value – another balancing act.

This content is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author only and do not necessarily reflect the views of Natixis Investment Managers or any of its affiliates. There can be no assurance that developments will transpire as forecasted and actual results will be different. Data and analysis do not represent the actual or expected future performance of any investment product. We believe the information, including that obtained from outside resources, to be correct, but we cannot guarantee its accuracy. The information is subject to change at any time without notice.

The data contained herein is the result of analysis conducted by Natixis Investment Managers Solutions’ consulting team on model portfolios submitted by Investment Professionals.

Natixis Investment Managers Solutions collects portfolio data and aggregates that data in accordance with the peer group portfolio category that is assigned to an individual portfolio by the Investment Professionals. At such time that a Professional requests a report, the Professional will categorize the portfolios as a portfolio belonging to one of the following categories: Aggressive, Moderately Aggressive, Moderate, Moderately Conservative, or Conservative.

The categorization of individual portfolios is not determined by Natixis Investment Managers Solutions, as its role is solely as an aggregator of the pre-risk attributes of the Moderate Peer Group and will change over time due to movements in the capital markets.

Portfolio allocations provided to Natixis Investment Managers Solutions are static in nature and subsequent changes in a Professional’s portfolio allocations may not be reflected in the current Moderate Peer Group data. Investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, international and emerging markets. Additionally, alternative investments, including managed futures, can involve a higher degree of risk and may not be suitable for all investors. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

Natixis Advisors, LLC provides advisory services through its division Natixis Investment Managers Solutions. Advisory services are generally provided with the assistance of model portfolio providers, some of which are affiliates of Natixis Investment Managers, LLC. Natixis Advisors, LLC does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decision.

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