“What is Vanguard’s best thinking regarding portfolio construction?”

I am often asked this question by investors trying to make sense of the myriad of choices before them. Who can blame them when one is faced with an ever-growing set of choices? Indeed, many investors whom I speak to want me to cut through the pages of analysis that our team of brilliant CFAs and PhDs have painstakingly prepared and tell them the bottom line. However, discovering the right answer is not that easy.

Instead of making a suggestion, I often ask: “What kind of car do you drive?”

After some head scratching and the quizzical looks from the audience I explain that it’s highly likely that the questioner and I drive different cars. This is not because one vehicle make or model is necessarily better than another car in any empirical way but, rather we drive different cars because our needs or specific circumstances dictate different solutions. A mother with five children might require a minivan, whereas a couple of empty nesters might be able to get around in a two-seater convertible.

The same is true for investments. There is no one right answer; it depends on an investor’s particular situation. More specifically, for institutions, the right answer often depends on two key criteria: objective and investment approach.

The intersection of objectives and investment approaches


Note: The allocations in each pie chart are for illustrative purposes only and are not intended as specific recommendations. Any actual recommendations would be determined using investor-specific criteria.

Source: Vanguard.

The chart above lays out the major choices for investors and outlines a framework to help find the solution that is best suited for them. The objectives for Institutional Investors are listed by column and the investment approaches to achieve these objectives are listed by row, creating a matrix of potential solutions.

The top left-hand corner is a valuable starting point. Indeed, if I don’t know anything about an investor, I typically suggest a market-cap-based balanced portfolio. However, if an investor seeks to add value to his or her portfolio via different investment approaches—or has an objective other than total return—the portfolio will inevitably pivot off of this index-based, market-cap approach.

When focusing on a total return objective, some investors may choose to maintain a long-term strategic tilt in their portfolio, for either outperformance or risk control purposes. For example, investors frequently implement static tilts when they exhibit a home country bias in their portfolio, or elect to favor a certain market segment.  Some investors may believe that additional alpha can be added to their portfolio through use of traditional active management.  Under the right conditions—talent, cost, and patience—active management can achieve outperformance, which over time should compound into a significant benefit. Alternative investments can also be a useful addition to an institutional portfolio, depending on the investor’s characteristics and the nature of the investment.

Because Vanguard is widely recognized as an indexing expert, the recommendation that active investing can be a good fit for some investors may be surprising. But, in reality, my reply to “What is Vanguard’s best thinking regarding portfolio construction” is nearly always “It depends.”  It depends on an investor’s objective and preferred investment approach.  For readers interested in delving deeper into the topic, Vanguard’s white paper, A framework for institutional portfolio construction, does just that.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.