13th November 2026
Last week we wrote about how we select active funds based on what they contribute to our funds’ portfolios. They need to increase diversification while improving the chances the fund will meet the client outcome and fund objective. We likened our process to that deployed by institutions that are said to use the “Total Portfolio Approach” (TPA). This week we develop these points.
When we invest in a fund, we are not necessarily thinking along the lines of a traditional asset allocator. A typical approach by others might be along the lines of: “I have an analytical process that leads me to allocate to various asset classes and here is what I want to allocate to Asia Ex-Japan equities”. Then the allocator might decide whether to select an active or a passive fund to fill that asset allocation.
If the decision whether and how much to allocate to a particular regional equity market is based on the historic performance of an index, or even the valuation of an index, or some other index-based analysis, then picking an active fund which acts and looks nothing like that index might not make sense.
A good example is CIM Dividend Income – a fund investing in Asian equities that we use across our mandates. It isn’t constrained by a benchmark and has a performance comparator of MSCI AC Asia Pacific Ex Japan. Over 3 years, its correlation with the index is just 0.53. In fact that index is more correlated with the Nasdaq 100 (0.68) or S&P 500 (0.62)! The fund’s own correlations with US equities are lower: just 0.36 with S&P 500 and 0.21 with Nasdaq 100. This isn’t surprising given its portfolio looks nothing like the highly concentrated market-cap weighted MSCI AC Asia Pacific Ex Japan index.
We also don’t think in terms of having pre-determined target weights to certain regions or asset classes. Rather than beginning with how much we should be overweight or underweight a particular market, we ask why we want to own it at all. On the other hand, we might also find an active fund that happens to have the characteristics we want – despite the overall market in which it invests being grossly over-valued.
We judge each fund on its merits (regardless of where it is invested) and look at what characteristics it brings to the portfolio. The only thing we demand of the fund is that we can describe it as being attractively valued and has what we believe to be a skilled and culturally aligned manager at the helm. We analyse our own funds’ portfolios for how they’re exposed to different kinds of risks and whether a new holding improves the prospects for our funds (or if it’s doubling up on risks we’re already exposed to even if it optically looks different to anything else we own). In theory, you could have a portfolio that looks very diversified by its asset class labels, but in practice is anything but. The reverse is also true.
For us, asset allocation and fund selection cannot sensibly be separated. Industry convention dictates that we should display certain asset allocation breakdowns on our factsheets. While this does help show how diversified we are, it doesn’t really do justice to our process. As discussed in our previous article, a specialist insurance fund is not simply another piece of global equity exposure. Its role depends on the particular opportunity and risk-return characteristics we identify. The same principle applies across the portfolio: the label tells us where an investment sits, but not necessarily what it does.
All that being said, benchmark independence for our own funds does not mean an absence of constraints. Our funds’ objectives, risk considerations (and investor time horizons) and relevant IA sector guidelines remain central. What it gives us is the freedom to decide which opportunities deserve capital within those boundaries, rather than allowing an arbitrary index to make that decision for us.
Our process will be successful if we can continue to identify cheap funds / groups of assets that perform differently to each other. The first part is about continuous and rigorous research and always being curious. The second part is a qualitative judgement using quantitative analysis. We don’t know for certain that one fund will be uncorrelated to any other. The past is often no guide to the future for either correlation or performance. Instead, we must interrogate the characteristics of a fund’s portfolio and the investment process and ultimately make a judgement call.
We think this is a variant of the Total Portfolio Approach an increasing number of institutions are adopting; but to us TPA is a fancy way of labelling what we think of as “common sense”. (It is also another TLA (three letter acronym) you could probably do without!) We must also stress that we don’t think of our process as being superior to any other process: most processes can produce good results if practiced with rigour, discipline and care. But we hope this has shown you how we construct portfolios and why our funds might look so different to our peers. It is also why we blend so well with multi-asset funds that do take a more benchmark-aware approach or who might use SAA / TAA frameworks (Strategic / Tactical asset allocation).
Ben Conway – Head of Fund Management
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For professional advisers only. This article is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is Sterling Court, 17 Dix’s Field, Exeter, Devon EX1 1QA. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC26800.
