Effective View Formation and Smart Optimisation: A Better Way to Invest Over Time

Effective View Formation and Smart Optimisation A Better Way to Invest Over Time.pdf

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In today’s fast-moving financial world, investors are constantly looking for smarter ways to grow their money. One powerful approach combines creative idea generation, advanced optimisation models like Black-Litterman, and strong risk management. Together, these tools can help deliver better investment returns over the medium term.

Let’s break down how this works.

View Formation: The Power of Creative Ideas in View Formation

Great investment strategies often start with fresh thinking. Instead of relying only on past data or market trends, creative view formation encourages investors to look at the bigger picture—macroeconomic signals, technical indicators, and even geopolitical events. At Alpha Beta Partners, for example, we use a scorecard approach that identifies and blends multiple types of critical data to crystallise well-informed views on different asset classes.

This structured approach to investment view formation helps us spot opportunities others might miss. It also allows us to build forward-looking portfolios that can adapt to changing market conditions, rather than relying on past trends and performance.

Smarter Optimisation: The Black-Litterman Model

Traditional portfolio models, like Mean-Variance Optimisation (MVO), aim to balance risk and return, but they often rely too heavily on historical data and assume markets behave in predictable ways. Markets can be volatile and unpredictable—especially during stress periods like financial crises or geopolitical events.

This is where the Black-Litterman Model comes in. Developed by Fischer Black and Robert Litterman in the 1990s, this model improves on MVO by allowing managers to blend their own views with market data and consensus forecasts. It uses a Bayesian approach, meaning it starts with a “neutral” market portfolio and adjusts it based on the investor’s expectations and confidence levels.

This flexibility makes Black-Litterman more realistic and less sensitive to small changes in input data. It also helps avoid extreme or overly concentrated portfolios, which are common problems with older models that typically use historic data for future portfolio construction.

Portfolio Construction: Active, Passive or Blended

As a manufacturer, Alpha Beta Partners caters for client philosophies and portfolio construction preferences. We manufacture a range of different portfolios comprising active managers, passive managers and with or without ESG-related considerations.

Active manager selection across the full range of disciplines is a particular skillset and one we believe is best delivered by focused and independent specialists who are not swayed by corporate pressure. We are joint owners in the Fund Research Centre who offer a dedicated and independently-minded approach to manager and fund research and selection.

Managing Risk: The Key to Long-Term Success

Even the best ideas and models won’t work without solid risk management. Markets don’t always behave as expected—especially during high volatility “fat-tail” events like the 2008 Financial Crisis or the COVID-19 pandemic. During these times, assets that usually move independently can suddenly become highly correlated, increasing overall portfolio risk.

At Alpha Beta Partners we highlight the importance of understanding how different asset classes behave under various economic regimes. For example, we break down vgovernment debt into three categories instead of treating the debt as one uniform group. This level of detail helps build more resilient portfolios. Portfolios are constructed from the beginning with our 'Risk-First' framework in mind. Each portfolio is created as a standalone entity – not a series of modular building blocks. As such each portfolio delivers a prescribed level of risk. This risk can be monitored. We monitor each portfolio’s risk daily using sophisticated systems. If risk levels rise close to their prescribed limit, we can take action to bring down the risk to acceptable levels.

Alpha Beta Partners use dynamic asset allocation, which means adjusting the portfolio as market conditions and views change. This approach is supported by proprietary tools and techniques. Since launch, in January 2018, Alpha Beta Partners portfolios have never breached their stipulated risk corridors – despite some trying markets and a global pandemic bringing periods of hyper volatility. This fact is testament to a robust and proprietary 'Risk-First' approach.

Source: Morningstar, Investment Growth: Time period: Last Year End (01/01/2025) to Last Week End (11/10/2025), accessed 15 October 2025.

Putting It All Together: Performance with Control

When creative investment view formation, smart optimisation, and effective risk management are combined, investors can build portfolios that are not only well-diversified and future-facing but also responsive to change when it comes. Over the medium term, this can lead to superior investment returns compared to traditional methods.

The key is to treat investment management as a dynamic process—not a one-time or infrequent asset allocation decision based on yesterday’s asset class interactions. By continuously refining views, updating models, and managing risks, investors can stay ahead of the curve and know their hard-earned savings are positioned to benefit from future market developments.

In summary, the future of investing lies in blending human insight with advanced tools. Creative investment idea generation fuels innovation. The Black-Litterman model brings flexibility and realism. Portfolio construction can cater for specific philosophies and preferences. Strong risk management ensures stability. Together, they form a powerful strategy for navigating today’s complex financial landscape.

Authored by Andrew Thompson.

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