Equity strategy selection for institutional investors is an important process that can be time-consuming, both from an implementation and an on-going management perspective. A significant challenge that arises from this process is that it can cause investors to focus on each equity mandate in isolation when assessing its strengths.

As an asset allocator, it is critical to recognize that all equity strategies have style biases and to ensure that the overall portfolio structure has the right set of style ingredients to weather any market environment. This gestalt approach recognizes that the whole is greater than the sum of its parts, provided those parts fit together. Finding and maintaining an optimal mix of styles within and across asset classes can be complex, but investors could potentially reap the benefits in reduced volatility and improved risk-adjusted returns.

Every asset class has style biases, but the diversity and liquidity of the equity market mean that equities offer a particularly powerful set of tools for shifting a portfolio's underlying factor exposures.

A newly published in-depth paper by TD Asset Management Inc. called An Asset Allocator's Guide to Multi-Strategy Equity Portfolios explores the merits of equity style diversification. It also lays out a helpful four-step framework for implementing it on a strategic and tactical basis.

The first step in the equity style diversification framework is strategic design: establishing a portfolio's overall asset mix and the benchmark weights for each component asset class or equity style.

The second step involves achieving the right mix of styles or factors in a portfolio, based on the multiple objectives that each investor has.

The third step is tactical management of equity styles: dynamically adjusting exposures to better position a portfolio as market conditions change and to potentially realize more value-add.

The final step is active and thoughtful rebalancing across equity styles in order to manage drift and add value.

For more detail, read the full article.