Building Your Portfolio

Our Baseline Asset Allocation

We first create a diversified, balanced Baseline portfolio that looks beyond the market cap weights of the widely used MSCI and FTSE indexes. We construct a portfolio that is more representative of economic fundamentals and includes other liquid risk premia in addition to equity market Beta. This helps us mitigate the issues caused by booms and busts, such as when Japanese equities represented 50% of global equity market capitalization. We choose asset class buckets that can be matched with low cost, well-constructed index fund and ETF building blocks.

Dynamically Adjusted


Sometimes markets offer more attractive long-term expected returns than at other times. Through the use of simple valuation metrics such as the cyclically adjusted earnings yield (CAPE) for equities, or the real yield or credit spreads for fixed income assets, we vary our desired exposure to each asset bucket in proportion to how far its valuation metric is from what we consider fair value, but never by more than 2/3rds of the Baseline weight.


While fundamental value drives an asset’s long-term return, in the shorter term we believe that asset prices have a propensity to trend. This may be caused by investors’ tendency to chase returns, increasing their exposure to assets that have performed well recently, and vice versa. We measure momentum for each asset bucket by comparing today’s index value to its one year moving average. We increase the Baseline weight of a bucket with positive momentum by 1/3rd and reduce it by 1/3rd when momentum is negative.

Historical Asset Allocation

We combine the value and momentum signals described above when we rebalance your portfolio, which we do on a 40 day cycle. Because value and momentum tend to be negatively correlated with each other, the combination of the two produces better results than either on its own. Each bucket can vary from its Baseline weight by up to 2/3rds due to value and 1/3rd due to momentum, and so the combination of value and momentum can lead us to desire anywhere from 0 to twice a bucket’s Baseline weight. In creating the portfolio, we add up the desired weights of all the buckets.
If the sum is less than 100%, then the remainder is allocated to short-term fixed income. If greater than 100%, we scale down each bucket’s desired exposure by the sum of the weights to get a 100% allocation, with no leverage. You can get an idea for just how dynamic our asset allocation has been historically from the chart. We revisit our framework and parameters continually, striving for improvement, while also being mindful to resist the temptation to change the framework in a way that allows subjective market views to enter the process.

The asset allocation chart above represents a portfolio for a US-taxable investor invested through our SMAs at Fidelity. You can find more detailed information on our asset allocation mechanics here.

Your Managed Account at Fidelity

Your portfolio is held in your own Separately Managed Account at Fidelity*, managed by us.

You can start or end your participation on any day you choose. We select the most appropriate ETFs and index funds to express the asset allocation described above, taking into account fund expenses, trading costs, liquidity and the construction of the underlying index. We manage your portfolio in a tax aware manner, weighing the tax consequences of each trade we consider for your account.
Accounts are available as individual accounts, joint accounts, or IRAs. We accept clients with a minimum $300k investment, and charge a straightforward 0.12% per annum management fee.
Sign up for an account, or transfer your existing Fidelity account here.

*SIPC protected. Fidelity customer accounts: $5 trillion.

Past returns and historically simulated returns are not indicative of future returns. The above methodology example is for a taxable Separately Managed Account. We also manage a Delaware fund and a Cayman fund for Qualified Purchasers, as well as SMAs for US citizens long term resident in the UK.


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