The importance of core funds in a diversified portfolio
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Key takeaways
- Building resilient portfolios starts with core funds.
- Strategic Asset Allocation is the blueprint of portfolio construction, and core funds are the essential tools that bring it to life
- ETFs offer efficient access to core funds.
In today’s fast-moving and often unpredictable markets, building a resilient investment portfolio requires more than simply chasing the latest opportunity1. The foundation of long-term success lies in how you structure your portfolio and, crucially, in the core funds that sit at its centre. These are the building blocks that allow investors to pursue growth while managing risk, ensuring portfolios are designed to weather market cycles and deliver on long-term objectives.
At the heart of this approach is Strategic Asset Allocation (SAA) - the process of determining how a portfolio is divided across the major asset classes such as equities, fixed income, and, where appropriate, alternatives. Decades of academic research and practitioner evidence demonstrate that SAA is the main driver of portfolio performance over time, often outweighing the impact of tactical decisions or individual security selection3.
But to bring an SAA to life, investors need the right tools - and this is where core funds play a vital role.
What are core funds?
Core funds are broadly diversified2 investments that provide exposure to major segments of the global market. They typically include equity exposures across developed and emerging markets - whether accessed through global strategies or regional allocations - and fixed income allocations such as high-quality government bonds, investment-grade corporate bonds, and Euro high yield bonds, which together provide balance and income potential.
These vehicles are not designed to chase niche opportunities or short-term trends. Instead, they aim to deliver reliable, long-term exposure to the building blocks of asset allocation.
Why do core funds matter?
In a diversified2 portfolio, core funds serve as the anchor. They provide consistency, helping to ensure that performance is not overly dependent on a single market, region, or theme. This is particularly important in an environment marked by macroeconomic uncertainty, shifting monetary policy, and ongoing geopolitical tensions.
By investing in broad-based exposures, investors can reduce the risk that concentrated bets derail long-term objectives. A global equity core fund can help avoid home bias and provide access to leading companies worldwide, though investors should be mindful of regional weightings. Likewise, a core bond fund can help smooth volatility and provide consistent income.
Crucially, core funds offer the potential to deliver performance across a variety of market environments. They may not always be the best-performing part of a portfolio in a given year, but over time they underpin the growth and resilience that investors rely on.
The role of Strategic Asset Allocation
Core funds are often most effective when used to implement a clear, well-defined SAA. The discipline of setting - and adhering to - an asset allocation aligned with an investor’s objectives and risk appetite helps ensure that short-term market moves do not dictate long-term strategy.
For example, an investor with a long investment horizon and moderate risk tolerance may choose an allocation of 60% equities and 40% fixed income. Within that framework, core equity and core bond funds would be used to express these allocations consistently and cost-effectively. Adjustments can then be made at the margins - for instance, adding thematic or satellite exposures - without compromising the integrity of the core.
In this sense, SAA is the blueprint, and core funds are the bricks and mortar. Without them, a portfolio lacks structure and resilience.
ETFs: Efficient access to the core
In recent years, Exchange-Traded Funds (ETFs) have come to be regarded as an efficient way to build and maintain core exposures.Their combination of diversification2, transparency, daily liquidity and low cost4 makes them particularly well-suited to implementing SAA in practice.
By providing precise access to global and regional equity indices and high-quality bond markets - including government, investment grade and high yield - ETFs allow investors to establish a solid foundation for their portfolio, which they can complement with tactical or satellite allocations.
Bringing it all together with ETFs
Core funds are not necessarily the most glamorous part of an investment portfolio - but they are the most essential. They form the engine of long-term portfolio growth, translating Strategic Asset Allocation into real-world exposures that are consistent, diversified,2 and cost-efficient.4
In an environment where investors face heightened uncertainty, from fluctuating interest rates to geopolitical shifts, the value of astrong core cannot be overstated. By anchoring portfolios in broad-based exposures, investors may be better placed to meet their long-term objectives, regardless of short-term market noise.
ETFs offer an efficient means of building and maintaining these core exposures, providing investors with a transparent, scalable, and practical solution to express their allocation. At Amundi, we have recently launched our own Core ETF range, designed to give investors cost-effective4 access to the must-have building blocks of a broad and flexible allocation.
1.Investment involves risks. For more information, please refer to the Risk section below.
2.Diversification does not guarantee a profit or protect against a loss.
3.Brinson, Hood & Beebower (1986), “Determinants of Portfolio Performance,” Financial Analysts Journal; Brinson, Singer & Beebower (1991), “Determinants of Portfolio Performance II: An Update.”
4. Management fees refer to the <management fees and other administrative or operating costs of the fund. For more information regarding all the costs supported by the fund, please refer to its Key Information Document (KID). Transaction cost and commissions may occur when trading ETF.
Capital at risk. Investing in funds entails risk, most notably the risk of capital loss. The value of an investment is subject to market fluctuation and may decrease or increase as a consequence. As a result, fund subscribers may lose part or all of their initial investment.
KNOWING YOUR RISK
It is important for potential investors to evaluate the risks described below and in the fund’s Key Investor Information Document (“KIID”) and prospectus available on our websites www.amundietf.com.
CAPITAL AT RISK - ETFs are tracking instruments. Their risk profile is similar to a direct investment in the underlying index. Investors’ capital is fully at risk and investors may not get back the amount originally invested.
UNDERLYING RISK - The underlying index of an ETF may be complex and volatile. For example, ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks.
REPLICATION RISK - The fund’s objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication.
COUNTERPARTY RISK - Investors are exposed to risks resulting from the use of an OTC swap (over-the-counter) or securities lending with the respective counterparty(-ies). Counterparty(-ies) are credit institution(s) whose name(s) can be found on the fund’s website amundietf.com. In line with the UCITS guidelines, the exposure to the counterparty cannot exceed 10% of the total assets of the fund.
CURRENCY RISK – An ETF may be exposed to currency risk if the ETF is denominated in a currency different to that of the underlying index securities it is tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns.
LIQUIDITY RISK – There is a risk associated with the markets to which the ETF is exposed. The price and the value of investments are linked to the liquidity risk of the underlying index components. Investments can go up or down. In addition, on the secondary market liquidity is provided by registered market makers on the respective stock exchange where the ETF is listed. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event.
VOLATILITY RISK – The ETF is exposed to changes in the volatility patterns of the underlying index relevant markets. The ETF value can change rapidly and unpredictably, and potentially move in a large magnitude, up or down.
CONCENTRATION RISK – Thematic ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive, it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark.
IMPORTANT INFORMATION
This material is solely for the attention of professional and eligible counterparties, as defined in Directive MIF 2014/65/UE of the European Parliament (where relevant, as implemented into UK law) acting solely and exclusively on their own account. It is not directed at retail clients. In Switzerland, it is solely for the attention of qualified investors within the meaning of Article 10 paragraph 3 a), b), c) and d) of the Federal Act on Collective Investment Scheme of June 23, 2006.
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