A Practical “How-To” for Advisors

Diversification plays a central role in managing this balance. Russell Investments approaches diversification intentionally, beginning with a mix of asset classes designed to seek to improve the probability of achieving client outcomes.

A typical diversified Russell Investments portfolio includes:

• Global equities, spanning U.S., non-U.S., and emerging markets
• Fixed income, including both investment-grade and return-seeking sectors
• Real assets, such as real estate and infrastructure, offering growth, income, and inflation sensitivity

Each asset class is included with the goal of either enhancing return potential or improving diversification, helping to smooth the overall client experience.

Identifying where active management can add value

Once the strategic asset allocation is set, the next step is determining where active management is most likely to be rewarded. While we believe active management can add value across many market segments, some areas offer more fertile ground than others.

Markets that tend to favor active management often exhibit one or more of the following characteristics:

• Greater dispersion of returns, increasing the payoff for skillful security selection
• Less analyst coverage or transparency, allowing insights to persist longer
• Evolving or less standardized market structures, making index construction more challenging

Based on these characteristics, Russell Investments’ active-passive portfolios typically emphasize active management in:

• Real assets (infrastructure and real estate)
• U.S. small-cap equities
• International equities, both developed and emerging
• Fixed income, including investment-grade and return-seeking segments

Implementing active and passive components effectively

Segments that offer attractive active opportunities often come with higher dispersion of outcomes, and that makes implementation especially critical to success. To manage this risk, Russell Investments favors a multi-manager approach, rather than relying on a single manager to deliver excess returns.

For example, instead of selecting one manager for U.S. small-cap equity exposure, we combine multiple high-conviction strategies with complementary strengths. This approach is grounded in decades of manager research and due diligence, guided by emphasis on the four “P’s”:

• People – experienced, insightful decision-makers
• Process – well-resourced, repeatable investment processes
• Philosophy – clearly articulated and empirically supported
• Performance – results that align with stated process and risk exposures

Our focus is not on chasing past performance, but on understanding how returns are generated, assessing repeatability, and evaluating risk controls, so we can identify managers that we believe may be best positioned for future success.

Effective multi-manager portfolios also require thoughtful portfolio construction. We intentionally combine managers with:

• Different investment styles (growth, value, core)
• Different decision frameworks (fundamental and quantitative)
• Different risk exposures

The goal is to reduce reliance on any single manager, style, or market outcome—while improving consistency through time.

Ongoing oversight is the unifying final element. Active portfolio construction doesn’t stop at manager selection. That is just the beginning. Russell Investments’ portfolio managers are continually reviewing the portfolios for:

• Appropriate manager sizing
• Overlap and unintended risks
• Continuous evaluation of manager changes and new opportunities

This discipline can be particularly valuable in higher-risk segments, such as emerging markets or small-cap equities, where individual security and manager risk can be elevated, even when overall portfolio allocations are modest.

And finally, don’t overlook passive implementation. While passive investing may appear straightforward, not all passive implementations are created equal. The goal of passive investing is not to outperform, but to reliably capture market returns.

That means emphasizing passive providers with:

• Strong operational capabilities
• Effective index-tracking processes
• Consistent execution

Choosing passive managers based on short-term outperformance can be counterproductive. A passive strategy that outperforms an index in one period can just as easily underperform in the next, creating outcomes clients don’t expect from their passive exposure.

Thoughtful implementation matters on both sides of the active-passive equation.

Bringing it all together

Active-passive portfolios can be a powerful way to manage client assets, but success requires more than simply choosing a split and assigning managers.

In our view, advisors and investors may benefit from:

• Goal-driven asset allocation
• Selective, research-based use of active management
• Intentional portfolio construction that integrates active and passive strategies

When implemented with care, an active-passive approach helps align portfolios with client goals while managing risk, costs, and expectations across market cycles.

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Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Model Strategies represent target allocations of Russell Investment Company funds, Russell Investments ETFs and third-party ETFs; these models are not managed and cannot be invested in directly.

Model Strategies are exposed to the specific risks of the funds directly proportionate to their fund allocation. The funds comprising the strategies and the allocations to those funds have changed over time and may change in the future.

The investment styles employed by a Fund’s money managers may not be complementary. This concentration may be beneficial or detrimental to a Fund’s performance depending upon the performance of those securities and the overall economic environment. The multi-manager approach could increase a Fund’s portfolio turnover rates which may result in higher levels of realized capital gains or losses with respect to a Fund’s portfolio securities, higher brokerage commissions and other transaction costs.

Strategic asset allocation and diversification do not assure a profit or guarantee against loss in declining markets. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.

ETF investing involves risk. Principal loss is possible. Fund shares are not individually redeemable and are issued and redeemed by the Fund at their net asset value (“NAV”) only in large, specified blocks of shares called creation units. Shares otherwise can be bought and sold only in the secondary market at market price (not NAV). Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.

Unlike passively managed ETFs, actively managed ETFs do not attempt to track or replicate an index. The Fund’s investment decisions are made at the discretion of its portfolio managers, and there is no guarantee that the strategies used will be successful. The Fund may underperform other funds with similar investment objectives, including those that track an index.

Fixed income securities involve interest rate risk, credit risk, inflation risk, reinvestment risk, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Liquidity risk exists when securities or other investments become more difficult to sell, or are unable to be sold, at the price at which they have been valued.

Small capitalization (small cap) investments involve stocks of companies with smaller levels of market capitalization (generally less than $2 billion) than larger company stocks (large cap). Small cap investments are subject to considerable price fluctuations and are more volatile than large cap stocks. Investors should consider the additional risks involved in small cap investments.

International markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation.

Emerging or frontier markets involve exposure to economic structures that are generally less diverse and mature. The less developed the market, the riskier the security. Such securities may be less liquid and more volatile.

Investments in global equity may be significantly affected by political or economic conditions and regulatory requirements in a particular country. Alternative strategies may be subject to risks related to equity securities; fixed income securities; non-U.S. and emerging markets securities; currency trading, which may involve instruments that have volatile prices, are illiquid or create economic leverage; commodity investments; illiquid securities; and derivatives including futures, options, forwards and swaps.

Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks. Investments in infrastructure-related companies have greater exposure to the potential adverse economic, regulatory, political and other changes affecting such entities.

Investment in infrastructure related companies are subject to various risks including governmental regulations, high interest costs associated with capital construction programs, costs associated with compliance and changes in environmental regulation, economic slowdown and surplus capacity, competition from other providers of services and other factors. Investment in non- U.S. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries.

INVESTMENT APPROACH

Passive investing rests on the principle that markets are efficient and therefore security selection and asset-mix timing cannot consistently beat well-designed benchmarks. It involves investing in index funds which strive to replicate the performance of a given market index. Active investing is based on the belief that markets are, to some degree, inefficient and superior managers can earn value-added returns by security selection and actively adjusting asset classes.

Active investing is based on the belief that markets are, to some degree, inefficient and superior managers can earn value-added returns by security selection and actively adjusting asset classes.

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

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Russell Investments Financial Services, LLC, member FINRA, part of Russell Investments.

The information, analyses and opinions set forth herein are intended to serve as general information only and should not be relied upon by any individual or entity as advice or recommendations specific to that individual entity. Anyone using this material should consult with their own attorney, accountant, financial or tax adviser or consultants on whom they rely for investment advice specific to their own circumstances.

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