Designing a Multi-Manager Equity Portfolio

Pension Plan, Canada | 2022

Engagement at a glance

Client Country/Type: Pension plan, Canada
Year: 2022
Asset Class, Geography: Public global equity (ACWI)
Portfolio Size: Multi-billion
Service Provided: Strategic Portfolio Design
Objectives: Refine a multi-manager global equity portfolio


Client-specific concerns

A Canadian pension plan was seeking to refine its approach to investing in global equities. After initial review (with bfinance) revealed both known and unknown biases, priorities included: the regional segmentation of the portfolio, the proportion of passive exposure, the choice of active management styles and the appropriate excess return target. In addition, the investor was also keen to focus on the incorporation of ESG factors, including considering the potential feasibility of a dedicated ‘impact’ allocation. As well as designing an appropriate multi-manager portfolio, bfinance was also expected to provide a workable implementation plan to transition from the current setup to the new model.


  • Developing and quantifying objectives: The first phase of the engagement considered the structure of suitable (risk and return) objectives, how they could be quantified, how they might be achieved via relevant building blocks and whether they were realistic. In effect, this process took the form of developing a hypothetical investment policy statement.

  • Understanding tracking error: With a substantial allocation to enhanced passive equities, it would only be possible to achieve meaningful relative returns (e.g. 1-2%) if the sub-portfolio of active managers provided significant tracking error. While many managers individually achieve an Information Ratio above 0.5, it can be quite challenging to maintain tracking error levels in a multi-manager portfolio: once combined, their overall performance tends to converge to the benchmark. Analysis demonstrated that tracking error in the range of 3% per annum should be achievable, depending on how many managers are used.

  • Combining complementary equity styles: Researchers proposed a set of style ‘building blocks’ that are complementary to each other (i.e. with negative excess return correlations between styles). Analysis showed that this greatly increased chances for robust long-term relative outperformance.

  • Global core, regional/sector satellites: Beyond a core portfolio of global equity managers, other buildings blocks were considered for suitability. These included domestic Canadian equities, emerging market equities, China, small caps and impact funds.

  • Providing detailed quantitative modelling, in-depth analysis gave confidence that the resulting strategic portfolio was well aligned with the client’s investment objectives.


Tracking error erosion in multi-manager equity portfolios

Tracking error erosion in multi-manager equity portfolios

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