Displaying items by tag: model portfolios

The tickets are going fast.

Must be a rock star in the house. Though not demanding bowls brimming exclusively with red M&Ms, of late, model portfolios have become all that and more, at least as far as some financial professionals are concerned, according to tifin.com

And, hey, they’re onto something. Besides salting away mucho time for investors, giving them all the opportunity to serve more clients with stepped up efficiency, they also play a pivotal role in their ability to ensure investment strategies remain on track throughout the client bases. What’s more, they make sure overexposure to any particular investment or asset class doesn’t burgeon into an issue.

Target risk models are a staple among a plethora of model portfolio types. Among several attributes, they’re designed to align with the goals of investors, who have specific risk tolerances. The range stretches from conservative to aggressive.

So, how popular are they? As of March of last year, assets following model portfolios hardly sat on their hands; they parachuted to $$349 billion, according to Morningstar, reported smartasset.com. That’s an approximately 22% bounce between June 30, 2021, and March 31, 2022.

Many RIAs are testing out new pricing models and moving away from the traditional practice of taking a cut of assets under management especially for placements into alternative investments. In a piece for AdvisorHub, Suman Bhattacharyya covers some examples.

Overall, there is increasing pushback from clients about paying management fees especially when the market is falling. Additionally, these annual fees can compound over time and become a significant amount especially for long-term clients. 

These concerns are magnified in years with lower or negative returns. Some advisors are choosing to take a cut on performance, between 10% and 20%, to align clients and advisors’ interests. Others are moving to a fixed-fee model which means either billing by the hour, charging a subscription or a fee per project.

According to some, 2022 which saw negative returns for stocks and bonds is simply accelerating what had been a developing trend. Despite these changes, 82% of revenue for RIAs come from fees on total assets under management. 

Therefore, RIAs reliant on these fees for their business should consider alternative models or at least prepare for conversations with clients about the matter. 

Finsum: The vast majority of RIAs are reliant on fees generated by total assets under management. However, many clients are electing to move away from this model. 

In the Financial Times, David Thorpe covered comments from John Roe, the head of multi-asset investing at Legal and General Investment Management, about why investors need to move past the 60/40 portfolio. Until recently, the 60/40 model portfolio was considered the gold standard based on the notion that stocks and bonds are inversely correlated.

According to Roe, this concept doesn’t work in higher-rate and higher inflation environments like the 70s. He added that "The idea is that if a real recession happens, then equities fall in value but bonds rise in value because the expectation is that inflation would be falling. But the reality is that in the 70s and the 80s, when we had a recession but inflation was also quite high, that inverse correlation didn’t always happen.”

He advises investors to also have a healthy allocation to more asset classes including real estate, alternatives, and emerging markets. These investments would outperform if inflation proves to be entrenched. As 2022 demonstrated, both stocks and bonds are liable to underperform when inflation surprises to the upside. 

Finsum: The 60/40 portfolio has been considered the gold standard for investors. However, this is being reconsidered especially as it has shown to underperform in periods of higher inflation.

For Vettafi’s Modern Alpha Channel, Scott Welch and Andrew Okrongly discussed how the WisdomTree Endowment Model Portfolios are faring given the volatile nature of markets over the past year. 

Endowment models have recently been introduced to individual investors, and they typically offer broad and global diversification, more use of active strategies as opposed to passive ones, non-traditional  and low correlation assets, longer term view, and a disciplined and repeatable process through multiple market cycles. The ultimate result is a portfolio that is very diversified and should deliver positive returns in all sorts of market conditions.. 

Of course, stocks and bonds continue to make up the bulk of the holdings. And, endowment portfolios typically use leverage to free up funds for investing in real assets and alternative investments for diversification and non-correlation. 

Examples of real assets include precious metals, energy commodities, and real estate. These tend to perform well in inflationary environments while adding to diversification. Alternative investments include long/short strategies, global macro, managed futures, options, short-selling, and event-driven trades. These also lead to more diversification than a standard portfolio. 

Over the last couple of decades, endowment model portfolios have accomplished its goal of blunting volatility while delivering consistent, steady returns. The one drawback is that these portfolios perform poorly during equity bull markets but tend to catch up during the ensuing bear markets. 

Finsum: Endowment model portfolios are a relatively new offering to individual investors. These portfolios mimic the style of endowments by investing in stocks, bonds, real assets, and alternative investments with the goal of smoother returns and more diversification. 

Markets often behave unexpectedly. This is certainly the case in 2023 as many have been caught off guard with strong equity markets which have sent stocks to their highest levels since the middle of last year. The S&P 500 is now nearly 20% above its October low which many would deem a new bull market.

In an article for TheStreet, Jim Collins, the founder of PortfolioGuru, discusses a model portfolio that would do very well if this unexpected return to normalcy continues. His strategy involves buying preferred shares of regional banks which have been among the hardest-hit parts of the market. The preferred shares do offer generous yield but have major upside in the event that interest rates move lower, easing the inverted yield curve which is proving to be a major challenge for the sector.

Collins says that this model portfolio is essentially a bet that the US’ financial system will remain stable and continue functioning well, meaning that we have passed the worst part of the crisis. He believes that the portfolio has considerable potential for capital gains in addition to hefty dividend payments. 

Finsum: Jim Collins shares a model portfolio that would particularly benefit if the crisis for regional banks is over and a return to normalcy is imminent for financial markets.