How to Slot High Conviction Strategies Into Your Portfolio

In a market dominated by the “Magnificent Seven,” looking beyond the big performers for returns is essential. High conviction strategies seek alpha by capturing often overlooked and undervalued companies with high growth potential. These strategies have several portfolio applications for investors seeking to capture tomorrow’s performers at attractive prices today.

High conviction strategies provide concentrated exposure, holding fewer securities than broad indexes. These strategies seek out companies with strong forward-looking performance potential trading at depressed valuations. While concentration creates a higher risk profile, high conviction strategies rely on a number of quantitative and qualitative factors when screening securities.

Enhanced Return Potential and Active Complement, Long-Term Play

Let’s take a fund like the Natixis Vaughan Nelson Select ETF (VNSE). It’s actively managed and works to capitalize on marketplace inefficiencies and dislocations. VNSE does so by investing in companies whose current valuations significantly lag their long-term fundamental value. Cash-flow projections, as well as the company’s balance sheets, are prioritized when determining value.

An ETF like VNSE can fit into a portfolio in a number of ways. It makes a great addition to existing equity allocations by providing enhanced returns. The companies that invest in offer undervalued earnings growth potential alongside their undervalued assets. Critically, companies that VNSE invests in are selected for their ability to correct current valuation gaps. This creates the potential for alpha generation that the strategy seeks to capture.

VNSE provides dynamic exposure via its active management. This makes it a strong accompaniment to existing passive equity strategies within the portfolio. High conviction strategies are also robust additions to active allocations. Given the improving but still uncertain macro environment this year, active strategies are strongly favored by a range of investors.

See also: “Fund Selectors Weigh In: 2024 Portfolio Construction

In ongoing market volatility, active strategies offer the potential for strong performance over their index peers. High conviction strategies could benefit in several environments, particularly during prolonged volatility.

While inflation still looms and rates remain high, opportunities abound to capture companies trading at reduced valuations. The forward-looking thesis of high conviction strategies allows investors to access tomorrow’s outperformers cheaper today. This makes them a strong complement to long-term exposures within a portfolio.

Depending on the individual fund and the desired outcome, there are several ways to slot high conviction strategies into a portfolio. Whether it’s to generate enhanced returns, boost active exposures, or capture long-term gains, they’re strategies worth considering in 2024.

VNSE carries an expense ratio of 0.80% with a contractual expiration date of 04/30/26.

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