Portfolio construction

Constructing an investment portfolio? Don’t overlook structure

September 09, 2025 - 3 min

For many multi-asset portfolio practitioners, asset allocation and manager selection are the primary focus when constructing an investment portfolio. After all, from an attribution perspective, these are the main drivers of return and risk. However, there is an often overlooked return and risk driver that can influence performance in unexpected ways. This overlooked lever is the intermediate step needed to translate an asset allocation into a final portfolio implemented with funds.

While there isn’t a uniform label for this step, it can be thought of as portfolio structure. In short, portfolio structure is the translation of the asset allocation into an implemented portfolio. Since asset allocation focuses on asset class building blocks, there are many ways to translate those building blocks into a final portfolio.

Getting started with multi-asset portfolio structure

The first structuring decision has to do with the age-old question: Use active managers, strictly passive, or a hybrid approach? Another obvious issue revolves around strategies that do not fit neatly into a specific asset class. Think allocation funds, global funds, or idiosyncratic strategies such as option overlay or real estate investment trusts (REITs).

Within each broad asset class are style decisions to consider: Keep manager selection broad or split it out by value and growth? Or is there room to incorporate factor-based strategies such as minimum volatility? All these decisions can move the portfolio incrementally away from the initial asset allocation, creating both intended and unintended consequences.

An immediate solution when faced with these questions is to incorporate more granularity into the asset allocation process (e.g., incorporating the REIT asset class or a growth/value split). But this runs the risk of overspecifying the asset allocation without adding more value. The optimal asset allocation is one that is granular enough to offer a diversified assortment of asset classes while providing the necessary latitude for selecting appropriate strategies to fit in each bucket (Figure 1).

Figure 1: Overspecified vs. ideal asset allocation universe

Table highlighting optimal asset allocation vs. overspecified for investment portfolios.

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

Choosing among active, passive or hybrid portfolio strategies

With an ideal asset allocation in mind, should the portfolio be structured using passive or active strategies? Passive is the most straightforward from a structuring perspective, given that passive funds are representative of pure asset class exposure. Passive portfolios provide both benefits and considerations for end investors. On the benefit side, passive is cheap, easy to implement and eliminates manager selection risk. A major consideration is giving up potential alpha generation and diversification that active managers can provide.

With passive, if there are any missteps on the asset allocation side, there will not be any manager-specific alpha to offset them. The proliferation of sector, thematic, and factor exchange-traded funds (ETFs) is also a gray area for portfolio structuring. Is using a factor ETF that places bets on specific risk premia truly a passive strategy or more active?

With these considerations in mind, a hybrid approach can provide the best of both worlds: cheap asset class exposure using passive with the potential for alpha using active managers. There is also potential for enhanced diversification as an active manager’s investment style comes in and out of favor throughout the market cycle. Additionally, there is the luxury of deciding the best ratio of active and passive in the portfolio, with the default a 50/50 split between the two.

Accounting for specialized strategies

In addition to active and passive usage, strategies that do not fit neatly into an asset class bucket can present challenges for investors. Ideally, each strategy fits cleanly into an asset class and performs its designated role. The underlying exposures are understood, and style drift is not a day-to-day concern.

Strategies such as REITs, global allocation funds, or hedged strategies can cause headaches when implementing them in an equity and fixed income asset allocation. One solution is to create a separate sleeve to hold these strategies, funding the sleeve from equity and fixed income so the beta profile of the incorporated strategy matches the beta profile of the equity/fixed funding source.

Navigating style selection in asset class

The final structuring decision takes place within each asset class and addresses style selection. The most elementary question being as follows: Split by growth and value or stay broad? This is where the gray area of active/passive also comes into effect: Is it better to use thematic and factor ETFs or stay true to each asset class? With the prevalence of choice, it is easy to fall down the rabbit hole of style selection and never escape. The simplest way to make a decision is to assess where the comfort zone lies. If conviction on growth vs. value is low, staying broad is the best bet. If timing sector or factor rotation isn’t a strength, then keeping a strategic allocation to certain factor exposures or avoiding them altogether is a good option.

Portfolio construction isn’t a straightforward exercise. It goes beyond merely generating an asset allocation and then implementing with strategies. The intermediate step of portfolio structuring is just as valuable and may offer an additional source of alpha potential. Not understanding the trade-offs for certain decisions can introduce uncompensated risks that manifest at inopportune times. A flood of new products and strategies can make the structuring decision overwhelming, and in those times, the adage “keep it simple” rings true.

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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