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CONTRIBUTORS

Gordon Nicholson, CFA, CAIA, ESQ.

Portfolio Manager
Franklin Templeton Investment Solutions

Logan Miller

Solutions Portfolio Manager
Franklin Templeton Investment Solutions

Key takeaways

  • Portable alpha provides a structural solution for institutions to put their capital to its highest and best use. The framework separates a portfolio’s market exposure (beta) from active return generation (alpha), allowing investors to maintain their desired benchmark exposure while layering on independent sources of return without altering the strategic asset allocation.
  • While each investor’s objectives are unique, portable alpha can be particularly effective at improving total portfolio-level diversification. For this objective, selecting the right alpha source is critical. An ideal alpha source should generate positive returns over a full market cycle, exhibit an alpha-driven return stream, demonstrate low sensitivity to market shocks, and adapt flexibly to different market risk regimes.
  • In this paper , we demonstrate how portable alpha, when implemented properly, enables portfolios to allocate capital more flexibly and efficiently, improving risk-adjusted returns across different market environments and ultimately creating a more resilient asset allocation structure.

Institutional portfolios face a structurally difficult investment environment marked by higher rates, greater macro dispersion and bouts of volatility. Traditional allocations built around large passive exposures and illiquid private assets are under increasing pressure, making capital efficiency, liquidity and differentiated return streams central to modern portfolio construction.

By separating beta exposure and alpha generation, portable alpha offers a structural solution to these challenges. When thoughtfully designed, it can help improve diversification, limit drawdowns and enhance alpha generation in ways that simple traditional asset mix reallocation cannot.

RISK CONSIDERATIONS

Investment in a fund of funds is a speculative investment, entails significant risk and should not be considered a complete investment program.  An investment in a fund of funds provides for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. There can be no assurance that the investment strategies employed by the Adviser or the managers of the investment entities in which the Funds invest will be successful.

The identification of attractive investment opportunities is difficult and involves a significant degree of uncertainty. Returns generated from the funds described in this report may not adequately compensate investors for the business and financial risks assumed. Investment in these types of funds is subject to those market risks common to entities investing in all types of securities, including market volatility. Also, certain trading techniques employed by the investment entities in which the funds described in this report invest, such as leverage and hedging, may increase the adverse impact to which the fund’s investment portfolio may be subject.

Many Alternative Investments are generally not required to provide investors with periodic pricing or valuation and there may be a lack of transparency as to the underlying assets. Investing in Alternative Investments may also involve tax consequences and a prospective investor should consult with a tax advisor before investing. Investors in Alternative Investments will incur direct asset-based fees and expenses and, for certain Alternative Investments such as funds of hedge funds, additional indirect fees, expenses and asset-based compensation payable to underlying managers or sub-advisors.

WF: 9179759

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

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