The Power of Blending: Optimising Investment Strategies for Balanced Growth

At QuantQual, we've been actively engaging with fund managers this quarter, introducing a range of strategies to enhance investment outcomes through our roadshows. We’re also preparing to release a series of short podcasts focusing on the use of alternatives in portfolio construction. This quarter's white paper explores a crucial topic: the power of blending.

The Rise of Index Funds and the Need for Ongoing Research

Index funds have experienced significant growth over the last 15 years, as highlighted by the Investment Company Institute’s 2024 Fact Book.

While the rise of index investing has led to increased popularity, there's a common misconception that less research is necessary. It’s essential to remember that while investments are a critical part of the financial planning process, index investing still requires due diligence and thoughtful research.

Chasing Performance: The Risks of Overweighting the US Market

In recent years, some investment strategies have exhibited a pronounced skew towards the US market, resulting in strong performance. However, there are no guarantees this will continue in the future, and such strategies may increase risk for clients. Our white paper presents a balanced approach, combining various investment strategies to mitigate volatility and maximise returns.

The Benefits of Blending Investment Strategies

In our white paper, we explored the concept of blending investment strategies—combining the Magnificent Seven (top US stocks), the Roaring Dragons (top UK stocks), and the Granolas (European defensive leaders). Over five years, this blend delivered a return of 21.71% compared to 39.88% p.a. with the Magnificent Seven, but with half the volatility.

By blending these strategies, investors can achieve a more balanced return while gaining exposure to cheaper segments of the market, which may outperform in different market conditions.

What Is Blending?

Blending involves combining different types of investments to create a diversified, robust portfolio. It's not about finding a group of funds that all deliver similar returns; instead, it’s about achieving optimal diversification across asset classes, geographies, and investment styles. Here are a few common blending strategies:

Passive vs Active Indexing: Traditional passive strategies track an index, whereas smart beta strategies adjust weightings based on factors such as value, momentum, or quality, potentially offering higher returns with lower risk.
Active-Passive Pairing: A well-constructed portfolio may pair a broad global index fund (with a heavy US weighting) with an actively managed global strategy that seeks opportunities in underrepresented regions or sectors.
Multi-Asset Investing: By incorporating fixed income, alternative investments, and factor-based equity strategies, investors can enhance resilience across various market conditions and smooth out portfolio performance.

Overcoming Behavioural Bias

Blending strategies also help mitigate the psychological traps investors often fall into. Behavioural bias can influence investment decisions, leading us to seek evidence that confirms our existing beliefs. For example, many voices on platforms like LinkedIn claim that active management is dead; however, blending strategies provide a way to separate from this noise and make more objective, data-driven decisions.

For more on this, listen to our podcast with Emma Mogford from Premier Miton, where we discuss behavioural bias and how to overcome it in investing.

Conclusion: The Future of Investing Lies in Blended Portfolios

In our white paper, we outline how blending can:

Enhance risk-adjusted returns
Mitigate downside risk
Diversify across asset classes, geographies, and investment styles
Leverage AI & quantitative research for smarter decision-making

In short, the future of investing is about intelligent portfolio blending—combining the best of multiple strategies to optimise long-term outcomes. Read our white paper for more detailed insights on how blending can improve your investment strategy.