Portfolio Construction

Definition

Portfolio construction is the disciplined process of building a portfolio by selecting exposures, sizing positions, managing correlations, and balancing risk factors. It translates strategic asset allocation into practical decisions about manager selection, position sizing, diversification, and liquidity planning. Allocator Context Institutional allocators typically operate with defined sleeves and constraints (e.g., PE buyout, private credit, venture). Construction emphasizes diversification by strategy, manager, vintage, geography, and risk factor. Family offices may concentrate more intentionally, but still must manage liquidity, taxes, and downside risk. Decision Authority Portfolio construction parameters are often defined by IPS/mandate and overseen by investment committees. CIO teams may execute within these rules. Large changes to sleeve sizing, concentration, or liquidity posture typically require escalation. Why It Matters for Fundraising Managers are evaluated based on where they fit in portfolio construction. Allocators need to know: are you a diversifier, a core return driver, an income sleeve, or a tactical allocation? A manager who frames the strategy in portfolio construction terms is easier to approve. Key Takeaways Converts allocation policy into real exposures Sizing and correlation matter as much as returns Constraints shape feasibility and speed Clear portfolio role positioning increases conversion