Portfolio Construction
Portfolio construction is the deliberate design of a portfolio’s exposures, position sizes, pacing, and diversification to meet return and risk objectives.
Allocator relevance: The allocator’s main lever—good manager selection can be undone by poor construction and pacing.
Expanded Definition
Portfolio construction combines strategy selection (what to own) with sizing and timing (how much, when). It includes asset allocation, vintage diversification, liquidity management, concentration limits, and alignment with risk budgets. In private markets, construction also includes commitment pacing, reserves planning, and managing the J-curve.
For allocator intelligence, portfolio construction context explains why certain mandates exist and how investment decisions are operationally constrained.
How It Works in Practice
Allocators define target exposures, then build a portfolio using managers, direct investments, co-investments, and liquid sleeves. They monitor drift and rebalance while managing cash flow obligations from capital calls and spending needs.
Decision Authority and Governance
Governance defines construction rules (limits, pacing models, rebalancing thresholds) and ensures decisions remain consistent through cycles rather than reactive.
Common Misconceptions
- Portfolio construction is just “diversification.”
- Construction is set once and doesn’t change.
- Construction can ignore liquidity terms.
Key Takeaways
- Construction is exposures + sizing + timing + liquidity reality.
- Pacing and limits protect the portfolio in stress.
- Governance makes construction repeatable.