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Dx3 Portfolio Construction Process

Dx3 is a risk-focused portfolio construction process designed by bringing together many threads of financial research and empirically proven asset management techniques in order to provide portfolio solutions that offer the best possible risk-adjusted returns for our clients.

Why the focus on risk?

  1. Risk is what can be controlled. Relative to returns, asset class risk is historically much more predictable, and can be reduced by both passive and active means.
  2. Risk reduction is what many investors are seeking. When market conditions are turbulent, the risk mitigation measures inherent in the Dx3 process help clients maintain a long-term perspective, comfortable in the knowledge that their portfolio is appropriately risk managed.
  3. Reducing risk helps investors reach their goals. Consider this question: if Portfolio A goes down 40% one year and then up 60% the next, how has that portfolio performed over the two year period? The surprising answer is that Portfolio A is down 4%! Now consider Portfolio B, a more closely risk managed portfolio that was down 10% the first year and then up 20% the next. The total performance over the two year period for Portfolio B is positive 8%. Portfolio A may have better average annual returns, but because of its higher volatility, it actually underperforms Portfolio B. It is for this reason that volatility and risk reduction can lead to better long-term returns for client portfolios.

What are the three levels of defense?

D1: The Dx3 process begins with traditional top-down asset allocation but goes further by empirically analyzing the correlations between asset classes, sub-asset classes, and individual investment holdings. Data analysis includes recent historic information, rolling statistics, and correlations under different market and economic regimes. Clients can see that their portfolios are truly diversified by observing the asset correlation matrix which is provided at every client review.

D2: A second level of defense comes from a granular examination of the risks of individual investment vehicles, evaluating not only volatility, but also drawdown history and “tail risk” metrics. This multi-faceted approach to risk analysis ensures that asset allocations appropriately reflect true risk. We help clients understand portfolio risk by utilizing a proprietary risk rating tool as well as an analysis of historic portfolio volatility – both of which are incorporated into the Dx3 process.

D3: The process also includes a systematic tactical equity allocation component that actively manages risk exposures. This model incorporates historically proven momentum, value, and macroeconomic measures to tilt equity allocations – reducing market risk when adverse conditions prevail and increasing market exposure when conditions are more favorable.