Displaying items by tag: model portfolios

A lot of conventional wisdom regarding investing and wealth management has been questioned over the past couple of years. The best example is the traditional 60/40 portfolio. In the last couple of decades, this mix has been sufficient for returns and diversification. 

 

However, this is clearly not the case in the current environment of high inflation and rates, as both delivered poor returns in 2022. In recent months, long-duration bonds have added to their losses, while equity performance has been mixed. The idea that a portfolio of just bonds and equities can deliver proper diversification is no longer valid. 

 

Given that we have ostensibly entered a new era, advisors and investors have to be willing to rethink their assumptions and challenge conventional wisdom. One potential solution is the use of model portfolios. 

 

Model portfolios can be used to add exposure to more asset classes which are truly non-correlated. These include commodities, foreign currencies, real estate, quant strategies, alternative investments, private credit, etc. 

 

Allocations to these areas can lead to a truly diversified portfolio that can sustain performance in all types of environments with the appropriate level of risk. Additionally, advisors can offer more personalized products for their clients that are suitable for a wide variety of goals and needs.    


Finsum: For decades, 60/40 has worked in terms of diversification and returns. This may no longer be the case if we are in a period of entrenched inflation and higher rates.  

 

Published in Wealth Management
Monday, 02 October 2023 03:55

Model Portfolios Starting to Affect Markets

Model portfolios have been growing at a consistent rate for decades due to increasing adoption by younger advisors and more awareness among investors. Now, they have reached a size at which they are starting to affect markets especially when dealing with more illiquid securities. Currently, they collectively manage $3 trillion in assets under management (AUM).

It’s natural to consider the risks and opportunities as these ripple effects will only grow with model portfolios forecast to exceed $10 trillion in AUM over the next decade. In fact, recent unusual flows into various ETFs are often due to changes in the holdings of model portfolios.

Most model portfolios are constructed with ETFs. They are managed by investment teams of asset managers and can enable advisors to spend less time on portfolio management or security selection and more time on building their business and managing client relations. 

Since 2018, more than 400 model portfolio offerings have been launched. Most research shows that model portfolios tend to outperform advisor-managed portfolios. Ultimately, it’s an acknowledgement that beating the market is nearly impossible and that an advisors’ job is increasingly about financial planning rather than investing. 


Finsum: Model portfolio AUM is already in excess of $3 trillion. Here’s why the category is forecast to exceed $10 trillion over the next decade. 

Published in Wealth Management
Monday, 25 September 2023 11:16

Assessing Model Portfolio Performance vs Advisors

In an article for AdvisorHub, Lisa Fu covers a recent research report from Cerulli Associates which shows that portfolios managed by CIOs outperform those managed by advisors over multiple time frames. Over the last 3 years, model portfolios earned a 1.8% annual return which beat the 1% return of advisor-managed portfolios. The outperformance was similar on longer timeframes as well. 

 

Further, the outperformance was even stronger during periods of market volatility. During negative quarters over the last decade, model portfolios outperform 60% of the time. Model portfolio performance was also more consistent while advisor-led portfolios have much wider dispersion in terms of results. 

 

Of course, this is an indication that most advisors are better off using model portfolios which frees up more time to focus on operating a business, prospecting for new clients, and investing in client services and relationships. 

 

Many older advisors are resistant to giving up these responsibilities given that it was an integral part of the job for so many years. Yet, firms are encouraging younger advisors to go with model portfolios due to better outcomes for clients’ portfolios and more time and energy for tasks and actions that are more correlated with success.


Finsum: A research report from Cerulli Associates shows that model portfolios perform better than advisor-managed portfolios.

 

Published in Wealth Management
Wednesday, 20 September 2023 10:13

Markets Are Too Complacent: WisdomTree

In a strategy note, Scott Welch, the CIO of Model Portfolios at WisdomTree Investments, discusses how markets are unusually calm right now but from a seasonal perspective, investors should get ready for a surge in volatility. 

Currently, markets are at their ‘calmest’ since prior to the pandemic, this is evident through the Vix or credit spreads although bond market volatility is elevated. Historically, volatility does tend to increase between September and November especially as trading volumes increase, and people become more mindful of risks.

According to WisdomTree, markets are currently not accounting for a slowing economy, hawkish Fed, and geopolitical tensions. The firm recommends that investors prioritize quality in their portfolios by prioritizing cash flow, strong balance sheets, and operational efficiency as these companies are best suited to handle a downturn in economic conditions.

The second consideration is sufficient diversification at the asset class and risk levels. This is a necessary antidote as many investors are tempted to veer away from their plan during these periods of volatility. With proper diversification and rebalancing, these periods can be used advantageously. 

Finally, it recommends investing in less followed parts of the market like managed futures, floating rate Treasuries, or commodities. These alternative asset classes can also provide additional diversification while outperforming in volatile markets. 


Finsum: WisdomTree shares some thoughts on the current state of the market, and why investors should prepare for a surge in volatility.

Published in Wealth Management
Sunday, 10 September 2023 05:54

Understanding the ‘Efficient Frontier’

The efficient frontier is defined as the set of portfolios which maximizes expected return for a given level of risk. The theory was developed by Nobel laureate and economist, Harry Markowitz, and has become an integral part of modern portfolio theory. The most common application of the efficient frontier is to optimize the amount of diversification in each portfolio. 

 

Efficient frontier is used to figure out the ideal balance between returns and risk through the use of diversification. It’s based on historical data and correlations to calculate theoretical returns and ideal weightings in a portfolio. 

 

It can help investors figure out how much diversification is necessary given an individual’s risk tolerance. Greater diversification can dampen variance and risk while still maintaining the same level of long-term returns. 

 

Efficient frontier is used to construct model portfolios to ensure sufficient diversification and appropriate rebalancing. They can also help identify when the portfolio is getting diminishing returns from taking on risk. 

 

One drawback to the efficient frontier is that all of these calculations are based on historical data, and there is no guarantee that future returns will be similar to that of the past. It also assumes that returns follow a normal distribution, however this has simply not been the case in many years. 


Finsum: Efficient frontier is used by portfolio managers to determine the ideal balance between returns and risk. It’s an integral aspect of modern portfolio management theory.

 

Published in Wealth Management
Page 6 of 26

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