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Model Portfolios Keep Growing on Advisory Platforms

By Michael S. Fischer

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Eighty-four percent of fund selectors in the U.S. and Canada currently offer model portfolios, and 52% say that moving a larger share of client assets into models is a key objective for their firm in the year ahead, Natixis Investment Managers reported Thursday.

According to the report, U.S. firms use model portfolios more than firms in any other region, with assets set to rise amid an expanding array of model options.

“Model portfolios offer the best of both worlds: scale and personalization,” Marina Gross, executive vice president of Natixis’ Portfolio Research and Consulting Group, said in a statement. 

“By operationalizing portfolio construction, with centrally guided investment research, asset allocation and rebalancing, model portfolios make the investment process more efficient and responsive to changes in the market and clients’ goals.”

Natixis surveyed 400 professional fund selectors in 21 countries, including 133 in the U.S. and Canada, in November and December. Respondents worked at independent financial advisors, wirehouses, RIAs, insurance company investment platforms, private banks and family offices. 

Benefits of Model Portfolios

Three in five professional fund selectors in North America said the primary benefit of using model portfolios is that they provide clients across the firm with a more consistent investment experience. 

Forty-one percent said that by using model portfolios rather than building individual investment portfolios from scratch, advisors can spend more time addressing their clients’ needs.

Only 19% of fund selectors said they had had a hard time convincing financial advisors of the merits of model portfolios for managing at least a portion of their clients’ assets. The two top challenges they cited were providing customization options within their model portfolio offering and knowing when to add new or enhanced models. 

In rationalizing their firm’s overall investment product offering, 80% of respondents said their focus was on quality, not quantity.

Sixty percent of fund selectors reported finding a greater need for specialty models to complement the core models on their platform. More than half said they planned to add models focused on environmental, social and governance strategies over the next 12 to 24 months, with nearly two-thirds agreeing that models make it easier to implement ESG strategies across portfolios. 

Other fund selectors planned to add models with thematic sleeves that focus on areas such as longevity or disruptive technology, alternative and tax-aware models.

“The attractiveness of model portfolios reflects a heightened, industry-wide focus on the client experience and an evolving advisory business model that emphasizes the value of personalized planning and advice, including and beyond investment performance,” Dave Goodsell, executive director of Natixis’ Center for Investor Insight, said in the statement. 

“Models make sense, both from a firm brand perspective and for advisors managing the growth of their practice in a market that’s increasingly complex to navigate,” he said.

Market Outlook 

Eighty-four percent of fund selectors in the survey said model portfolios, whether built and rebalanced internally or by third-party asset managers, provide an added layer of due diligence in investment selection. 

Natixis said the importance of rigorous research and disciplined portfolio rebalancing will only increase in a market that 4 in 5 fund selectors believe will favor active fund management in the year ahead. 

Two-thirds of respondents reported that in 2020, the actively managed funds on their platforms outperformed during the market downturn. Seventy percent said they expected actively managed funds to outperform passively managed ones in 2021.

Asked about their outlook for the markets and economy, at least half expected increased volatility in the stock and bond markets this year, with corrections in technology and cryptocurrency. 

Two-thirds of respondents said volatility was the top risk to portfolio performance, and many professional fund selectors wondered how investors would handle market swings.

Eighty-seven percent believed that retail investors have been more apt to carelessly speculate on high-risk investments since before the onset of the pandemic. The market surged in the second half of last year, yet 68% of professional fund selectors worry many individual investors will prematurely liquidate their investments during bouts of volatility. 

Three-quarters feared that giving greater trading access to inexperienced retail investors could ultimately threaten these investors’ financial security and income in retirement.

Eighty-eight percent of fund selectors think that people equate a strong stock market with a strong economy, yet 74% do not believe the global economy can escape the consequences of COVID-19. 

Four in five said they did not expect real economic recovery until companies start to increase capital expenditures.

Focus on Private Assets 

Despite rising risks and volatility, fund selectors’ long-term investment return assumptions call for average annual growth of 7.6%, according to the report. Seven in 10 expect their firm’s assumed rate of return will be the same or higher in 2021. 

Their projections for year-end headlines suggest they will favor a risk-on approach, with 60% calling for aggressive growth strategies to outperform defensive strategies.

At the same time, their forecasts suggest a need for robust research and analysis with tactical shifts in portfolio allocations. Two-thirds of survey respondents said they expected small-cap and value stocks to outperform large-cap and growth stocks this year.

Six in 10 fund selectors also believed that demand for private equity investments would increase in the year ahead, particularly given their resilience during the pandemic. Half expect private assets to play a more prominent role in their portfolios. 

Over the coming year, they plan to increase private asset funds, 48% citing private equity, 46% private debt, 45% infrastructure and 45% real estate.

Michael S. Fischer

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