Displaying items by tag: model portfolios

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.

Model portfolios have seen rapid adoption over the past decade as it allows advisors greater flexibility and resources to grow and manage their practices. In an article for Schroders, Gillian Hepburn discusses the growing demand for white labeling model portfolios that in some cases involves increased customization. 

For many advisors, the appeal of white labeling is to show their clients that they remain involved with the investment management process. However, there are some complications to white labeling and important considerations for advisors.

For one, it undermines the primary advantage of model portfolios which is to tap into the investment expertise and resources of asset managers so that advisors can spend more time with clients on financial planning. In the case of customized portfolios, advisors still have to ensure that portfolios are being rebalanced, results and trades are being reported, and regulations are followed.

Advisors should also think about what value is being generated by white labeling and whether clients are being charged extra fees. With increased regulations and the fiduciary rule, there needs to be a firm value proposition for clients to justify placing them in a white labeled model portfolio with higher fees.   

Finsum: Many advisors are looking to whitelabel model portfolios. However, this comes with certain considerations and may lead to additional complications. 

In an article for ETFTrends, Tidal Financial Group discussed the major challenge facing financial advisors. Clients want customized and personalized services, but growing the practice requires creating standardization of systems and processes and finding efficiencies. 

These conflicting demands tend to create a lot of stress for advisors and can limit their growth and effectiveness. Too much personalized service will impede your ability to attract new clients and grow the business while too many efficiencies will lead to unsatisfied clients and ultimately retention issues. 

Model portfolios can help advisors resolve this dilemma. They can help you offer more personalized services to clients without taxing an advisors’ time and resources. These models can be used for a variety of purposes such as reducing tax liabilities, values-based investing, more complex strategies, etc.

Instead of spending time on portfolio management, advisors can spend more time on marketing, client outreach, financial planning, etc. Advisors with a smaller practice may not appreciate the benefits of model portfolios until they get to a larger scale. Other benefits include simplifying client communication, leveraging research and education, and synergies between marketing and investing. 

Finsum: Model portfolios are one way for advisors to become more efficient while also creating a more personalized experience for their clients.