SD-05.1 — Portfolio Construction

Business Domain: BD-05 Portfolio Management (Front office) · Applies: BOTH

Purpose

Builds the target portfolio — the concrete, position-level holding set the live portfolio is run toward. Portfolio Construction takes the allocation set by BD-01 and the securities, managers and assets selected by BD-02 / BD-03 / BD-04 and turns them into a target. Construction is mode-dependent: a discretionary public-markets portfolio is built by optimisation; an index portfolio by replication; a private-markets or liability-driven portfolio is assembled from a plan made elsewhere. SD-05.1 covers the modes BD-05 owns and consumes the modes other Service Domains own — it does not re-decide them.

Service Operations

Select the construction mode — optimiser-driven (mean-variance, risk-based, factor-budgeted), index replication, or the assembly of a portfolio from a pacing plan, a liability strategy or a manager structure, per what the mandate permits and what the investor controls.
Specify the objective and constraints — translate the mandate and policy into the construction objective and the constraint set (position limits, turnover caps, leverage, sector and currency bands, exclusions).
Assemble construction inputs — capital-market expectations, the covariance and factor model, the selected securities and managers.
Run optimiser-driven construction — optimise position weights for the active-risk budget; size positions and set the active-share target.
Run index-replication construction — choose the replication method (full, sampled, optimised) and build the tracking portfolio to a tracking-error budget.
Assemble plan-driven construction — for a private-markets or liability-driven mandate, build the portfolio from the commitment-pacing plan (SD-01.10), the liability strategy (SD-01.7) or the manager structure (SD-05.10).
Run pre-trade what-if analysis — test the candidate target’s risk, return, cost and compliance impact.
Produce the target portfolio and trade list — the position-level target and the orders to reach it.

Inputs and outputs

Inputs: the allocation (BD-01); the selected securities, managers and assets (BD-02 / BD-03 / BD-04); the commitment-pacing plan (SD-01.10), liability strategy (SD-01.7) and manager structure (SD-05.10); capital-market expectations; the covariance and factor model.
Outputs: the target portfolio and the trade list — consumed by SD-05.3 Rebalancing, BD-06 Trading & Execution (which executes the trades) and SD-10.1 (which clears them).

Entities

Consumes: Portfolio / Mandate (E-03), Holding / Position (E-04, book = ibor), Instrument / Asset (E-02), Benchmark / Index (E-10), Risk Limit (E-16); the SD-01.10 commitment-pacing plan; the SD-01.7 liability strategy; the SD-05.10 manager structure.
Owns: none — the target portfolio and trade list are analytical artefacts.

Standards

The CFA Institute treatment of portfolio construction — mean-variance optimisation, risk-based and risk-parity construction, factor-based risk budgeting, goals-based construction, and passive replication (full, stratified-sampled, optimised). No single standard spans the modes.

Open extensions

The interaction with SD-01.10, SD-01.7 and SD-05.10 — for a private-markets, liability-driven or multi-manager mandate, construction is largely the assembly of what those Service Domains decide.
Whether the target portfolio warrants a versioned artefact.