Portfolio Construction

While portfolio construction and portfolio diversification are related, there are differences. Portfolio diversification determines which investment style categories will be used, and in what amount, while portfolio construction determines the best way to implement the allocation. Specifically, portfolio construction considers the following areas:

Use of Active vs. Passive Management

Depending on the investment category, the use of low-cost index funds may or may not be appropriate. In certain investment style categories, index funds have consistently outperformed active managers. Tax sensitive clients may also benefit from low turnover index funds.

Manager Allocation

In selecting a manger, Johnston Investment Counsel must determine the effect a new manager may have on the existing portfolio. Specifically, Johnston Investment Counsel determines whether the new manager will add diversification benefits or simply replicate existing managers. This analysis is completed by examining several different portfolio characteristics, portfolio holdings, as well as the candidate managers' historical return pattern.

Taxes and Multiple Accounts

Some clients will have multiple accounts with different tax situations (such as an IRA, Roth IRA, trust, and a taxable account). To minimize the potential impact of taxes, Johnston Investment Counsel will allocate portfolio assets in as tax efficient way as possible. Johnston Investment Counsel could allocate higher turnover strategies to a tax deferred account while lower turnover strategies are held in a taxable account.

 

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