An Inside View of BBH’s Asset Allocation Process: How We Create Value for Clients

October 23, 2023
Co-Chief Investment Officer Suzanne Brenner explores how the various aspects of our asset allocation, portfolio construction, risk management, and manager selection processes work together to create value for clients.

The Brown Brothers Harriman (BBH) Investment Research Group (IRG) has written at length about the many facets of our investment philosophy and process. With all that we have written, however, we believe it is beneficial to step back and illustrate how the various aspects of our asset allocation process work together to create value for clients.

“Asset allocation” has different meanings across the investment industry, but it most commonly refers to the setting of sub-asset class weights based on top-down macroeconomic and financial market variables utilizing techniques such as mean-variance optimization.

At BBH, we define asset allocation as the process of selecting a diversified portfolio that balances a client’s desire for return with his or her ability and willingness to accept risk. As seen in the nearby graph, IRG employs a three-step process for asset allocation that starts with setting broad equity and fixed income targets for our portfolios. With these targets as our guideposts, we then seek out the best managers to partner with for the long term, which results in preliminary manager and sub-asset class weights. We then employ a top-down risk overlay designed to avoid unintended risk exposures to specific asset classes and geographies.

To consider how the portfolio comes together as a whole, we marry these three processes:

  1. Establish the appropriate equity and fixed income levels
  2. Identify talented managers to determine our sub-asset class weights
  3. Employ a top-down risk overlay

We refer to this process as “portfolio construction.” What follows is an explanation of these three processes.

A flow chart showing how three processes – Asset Allocation (Equity vs. Fixed Income), Capital Allocation and Manager Selection (Sub-Asset Class Weights), and Risk Management (Resilience and Exposure) – form the IRG’s Portfolio Construction Process.

Portfolio Construction Process


Asset Allocation

The first step in the process is to select a portfolio that balances a client’s desire for return with his or her ability and willingness to accept risk. A client’s return objective is met with growth- or equity-oriented investments, while risk is largely controlled by investing in high-quality fixed income investments or cash. Equities also serve as an inflation hedge, which is important because even modest inflation can erode the purchasing power of a portfolio over time.

At its core, asset allocation is an exercise in balance sheet management. Individuals and families have assets and liabilities, just like companies. Family liabilities might include future tuition payments or the desire to retire at a certain age, engage in philanthropy, or leave wealth to future generations.

Setting the appropriate asset allocation is both an art and a science, and clients will naturally have diverse investment objectives, circumstances, and risk tolerances that require different portfolios of equities and fixed income.

For example, an investor with a limited time horizon and a short-term need for both income and liquidity may be appropriately invested in a portfolio comprising solely fixed income, whereas an all-equity portfolio may be optimal for a long-term-oriented client who is not sensitive to temporary portfolio drawdowns,1 has limited spending needs from his portfolio, and has a job that produces a dependable income stream.

Just as important is the client’s willingness to take on risk. In fact, two clients with similar assets and liabilities may choose different portfolios with different investment strategies simply due to differences in their attitudes toward risk.

To help inform this decision, IRG performs capital markets research to understand the risk-return trade-offs of various equity and fixed income combinations. Taking these factors into account, BBH offers a range of portfolios that are differentiated across the risk-return spectrum that can be used as a starting point in client asset allocation decisions.

Just as these portfolios may only be a starting point for discussions between relationship managers and clients in setting the appropriate asset allocation, they are also just the beginning for IRG in the creation of more granular policy portfolios, which include sub-asset class and manager-level allocations.

Capital Allocation/Manager Selection

Because BBH utilizes a fundamental, bottom-up investment approach, we do not set targets for sub-asset classes based on macroeconomic views and predictions about price movements and asset class correlations. Instead, we search for talented managers across asset classes (including equity, fixed income, and alternatives) to partner with for the long term. We refer to this process of selecting and sizing managers as “capital allocation,” which forms the foundation for our policy portfolios.

In seeking talented managers, we look across sub-asset classes:

  • In equities, we look for managers that invest in U.S., internationally developed, and emerging markets equities across the capitalization spectrum.
  • In fixed income, we invest across a range of securities, including Treasuries, corporates, and asset-backed and other structured products, as well as loans to private companies (direct lending).

We also search for managers that invest in privately owned and distressed companies as well as real estate.

What differentiates our approach from many other wealth managers is that we determine sub-asset class weights largely based on our ability to identify talented managers to partner with that seek to generate attractive long-term returns. Importantly, we would rather forgo investing in a specific sub-asset class than invest with a manager who does not meet our standards.

Perhaps the most differentiated part of BBH’s process is the strict investment criteria with which we evaluate and underwrite new managers for client portfolios. Once a manager is approved, the position sizing is determined based on the following criteria:

  • Expected risks, return expectations, and diversification benefits: To gain a good understanding of these factors, we look at a manager’s specific opportunity set and conduct deep due diligence to understand its strategy on a granular level. This deep research allows us to ascertain how a manager’s investment strategy will affect the risk and return of client portfolios.

    As an example, IRG’s decision a few years ago to allocate capital to a manager that originates loans to lower middle-market companies was based on the quality of the manager, its experience investing in private debt, and its ability to provide attractive expected returns with the potential to outperform in down markets. While IRG considered general characteristics of the sub-asset class (direct lending), these favorable characteristics of the manager drove the capital allocation decision.

  • Concentration of holdings: Before assigning a portfolio weight to a manager, we consider what that weight implies for the position sizes of individual equity holdings in the portfolio on a look-through basis.

    For example, a manager with an 8% weight and an average position size of 10% and a manager with a 5% weight and an average position size of 15% would both have positions that are roughly 0.80% on a look-through basis.

Along with the consideration of other factors, including the manager’s capacity, liquidity profile of the underlying investments, level of transparency into the manager’s holdings and fees, and fund structure, IRG will establish weights to the various managers, which then roll up to sub-asset classes and, ultimately, to equity and fixed income targets.

A flowchart showing BBH’s capital allocation process. First, the manager is approved. Then, position sizing is determined based on the following criteria: the expected risks, returns, and diversification benefits; the concentration of holdings; the manager’s capacity; the liquidity profile of underlying investments; the level of transparency; and the fund structure. Then, IRG establishes weights for the managers, which roll up into sub-asset classes and then to equity and fixed income targets.

Risk Management

After marrying both the bottom-up and top-down elements of our asset allocation and capital allocation processes, we employ a top-down risk overlay designed to avoid unintended risk exposures by analyzing a range of different qualitative and quantitative criteria.

In our risk management step, we utilize top-down risk management tools to determine whether our bottom-up decision-making process has resulted in unintended concentrations in key risk exposures. Accordingly, any key risks identified in the risk management process may prompt us to reconsider our initial manager/sub-asset class weights. In describing BBH’s asset allocation process, we say, “We invest bottom-up and worry top-down.” Our risk management tools include the following.

Portfolio Guardrails

We perform several analyses in the risk management process, but arguably the most important is what we refer to as portfolio “guardrails.” With guardrails, we regularly monitor key portfolio exposures at the underlying security levelon factors such as:

  • Individual holding concentration
  • Manager concentrations
  • Liquidity
  • Leverage
  • Currency
  • Geography
  • Credit sensitivity or commodity risk (more nuanced exposures)

Because we put so much emphasis on individual managers, this process is a key risk control that allows IRG to measure portfolio-level risk exposures.

Geographic concentration, for example, is a risk that we measure by looking at the country of domicile for each security in each manager’s portfolio. By looking at the security level as opposed to the asset class level, we can gain a more nuanced picture of our exposures, since not all managers invest 100% of their assets in their “assigned” asset class.

We classify BBH U.S. Large Cap, for example, as U.S. large-cap equity, but the strategy holds American depositary receipts (ADRs) of companies domiciled outside of the U.S. Similarly, some of our non-U.S. developed equity managers hold positions in companies domiciled in emerging markets, and our global equity managers have exposure in several world equity markets.

We invest bottom-up and worry top-down.”



Some numbers help to illustrate the different picture that emerges of our portfolios when looking at the asset class vs. the security level. At the BBH asset class level, we can only distinguish between U.S., non-U.S. developed, emerging markets, and global equity. At the security level, however, we can analyze the portfolio at a more granular level.

For example, as of June 30, 2023, the largest exposure within the public equity portion of a BBH Growth Model Portfoliowas the U.S. at 62.9%, followed by France (5.4%), U.K. (4.7%), Switzerland (3.5%), Netherlands (3.0%), and eight other countries that each had over a 1% weight. Our largest two emerging country exposures were India (2.4%) and China (1.8%). Looking at some of the other measures, BBH’s largest industry exposure was financial services (17.1%), our largest currency exposures were the U.S. dollar (67.1%) and euro (14%), and our largest equity holding was Mastercard Inc (3.3%).4

Having up-to-date analyses of these exposures is crucial to understanding the real risks in our portfolio and allows us to make changes to manager allocations if these exposures are out of acceptable ranges.

Portfolio Look-Through: Geographic Exposures
BBH Public Equity Managers: Asset Class Level vs. Security Level



U.S. (Large and Small Cap)




Emerging Markets








United States




















Hong Kong








South Korea


Rest of World




Stress Testing

In addition to portfolio guardrails, we utilize various quantitative modeling techniques, such as stress testing, that help us understand how clients’ portfolios might behave in different market environments.

Stress testing is important because it allows us to compare potential long-term investment returns with an estimate of what each portfolio might have returned in some of the worst historical market environments. This exercise is one of many that help us understand the risk-return trade-offs of various portfolio combinations.

Because stress testing is backward looking, it only changes when our portfolios change meaningfully, and thus is an analysis that we update only when making meaningful allocation changes or if a new market downturn occurs.


No asset allocation and portfolio construction process would be complete without considering rebalancing. Rebalancing is primarily an exercise in risk control – that is, one that keeps a client’s portfolio characteristics in line with his desired target asset allocation. Rebalancing is especially important for clients who have chosen a portfolio that includes a fixed income allocation.

If a client desires high returns, has no risk constraints, and does not have an aversion to large drawdowns, she could simply invest 100% in equities, and rebalancing would be constrained to occasional realignment of equity allocations, as there would be no equity/fixed income balance to maintain.


Rebalancing is the process that realigns the portfolio’s risk relative to the target allocation that the client specified."

Because most investors have lower risk tolerances, they will have a blend of higher-returning equity investments and lower-returning, less correlated fixed income investments. These portfolio weights will drift based on the relative performance of the various asset classes, and as a result, the portfolio will gradually take on materially different risk characteristics over time.

Rebalancing is the process that realigns the portfolio’s risk relative to the target allocation that the client specified.

Just like asset allocation, rebalancing involves various trade-offs. Adherence to policy targets would suggest more frequent rebalancing, for example, but the cost of portfolio turnover (taxes and transaction costs) would suggest less frequent rebalancing. To mitigate these trade-offs, clients can consider several “low-cost” rebalancing methods (that is, those that do not involve paying taxes), including rebalancing with new money (either inflows or various distributions or interest and dividends or distributions from private funds), gifting securities, or establishing tax-advantaged accounts (for example, IRAs that reduce the cost of rebalancing).


At BBH, we believe our investment process allows us to have the best of both worlds in that it provides us with flexibility to seek out the best managers for our clients while ensuring that we understand the key risk exposures at a portfolio level. Our approach to asset allocation is designed to ensure that our capital allocation and manager selection efforts position us as we seek to preserve and grow clients’ assets over time.

If you have questions about our asset allocation process, please reach out to your BBH relationship manager.

Up Next
Up Next

What We Believe: The 10 Ps of Manager Selection

In the feature article of this issue of InvestorView, BBH Co-Chief Investment Officer Justin Reed and Head of Investment Research Ilene Spitzer cover the “10 Ps” that are core to our manager selection process.

A drawdown refers to the peak-to-trough decline in a market, usually expressed in percentage terms.
For example, if a manager has a 5% allocation in our policy portfolio and holds a certain security at a 6% weight, then on a look-through basis that security has a 0.30% weight (0.30% = 5% * 6%).
BBH Domestic, Taxable, Qualified Growth Model Portfolio based on most recent holdings as of June 30, 2023. Data is rounded.
4 Within our equity model portfolios, the largest holding is our aggregate cash position, which is currently 5.5%.

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Investors should be able to withstand short-term fluctuations in the equity markets and fixed income markets in return for potentially higher returns over the long term. The value of portfolios changes every day and can be affected by changes in interest rates, general market conditions and other political, social and economic developments.

Portfolio holdings and characteristics are subject to change.

Diversification does not eliminate the risk of experiencing investment losses.

References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations.

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