Implementing model portfolios into your business has many benefits – from improving scalability and efficiency to increasing client confidence in your process. However, given the level of interest rates and late cycle landscape, it’s imperative to consider which risks to take and avoid, and how to express them consistently across client risk levels.

Clearly, risks in today’s markets are weighing on investors’ minds. Almost 75% of institutional investors and professional buyers said they are concerned that the prolonged period of low interest rates has created asset bubbles.1 Nonetheless, clients need to take some risk to reach their goals and financial professionals need to determine the right risks to take and how to scale it in client models with varying objectives. To that end, whether you are hiring a model provider or seeking the guidance of a consultant, financial professionals should ensure the process is well-grounded in an understanding of risk, correlations and diversification, as well as insights into where the capital markets are headed.

More Measured Decision-Making

Model portfolios can offer more disciplined investing to help navigate challenging environments, if designed right. Natixis Advisors, a subsidiary of Natixis Investment Managers building customized multi-asset solutions, believes putting risk first is the only way to deliver more consistent outcomes. “Risk tolerance is the driving force behind investment decision making. Therefore risk is always the starting point for all portfolio construction and asset allocation decisions we make,” said Marina Gross, Executive Vice President and Portfolio Manager at Natixis Advisors.

Customized Diversification

More than 20 independent affiliated managers with diverse asset class expertise in Natixis Investment Managers’ multi-affiliate structure, along with over 15 years of model construction experience, puts Natixis Advisors in a unique position to build better models. Its offerings include multi-asset mutual funds, ETFs, and SMA portfolios. Core, completion, and thematic models are designed to align with specific client objectives. Customization can occur with any model type to fit platform or client needs or constraints, such as lower costs, tax-aware vehicles, and overlays. In fact, the Natixis Advisors team, which has $37 billion assets under administration,2 is working closely with several investment advisory firms to develop core models that align with clients’ risk tolerance and designed to be a fully asset-allocated, one-stop solution.

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Advanced Asset Allocation

Despite the growing demand for ETFs in modern model portfolios, actively managed mutual funds continue to play a critical role, especially flexible fixed income products in today’s uncertain markets. Christopher Sharpe, Chief Investment Officer and Portfolio Manager for Natixis Advisors, believes combining active and passive allows firms to maximize efficiency and flexibility. “We see several benefits to this approach. It enables you to modulate price, mix time horizons, use passive for short and active for long, as well as manage beta, exposure and diversification more finely,” said Sharpe.

Optimal portfolio design also requires two-dimensional decisions, believes Gross. This is why asset allocation within Natixis Advisor models is determined not only by asset class but also by risk and style factors, while investment selection is driven by strategy, manager, and time horizon. Gross co-leads the firm’s multi-asset solutions business and is responsible for the Natixis Portfolio Clarity® consulting team, which specializes in analyzing model portfolios for financial intermediaries and asset allocators. Since 2012, the team has evaluated more than 10,000 model portfolios. “The data and analysis Portfolio Clarity® captures provides us with a deeper understanding of portfolio trends and tendencies – helping to inform and validate decision making and construct better models,” said Gross.

Alternative Ways to Diversify

To add a greater level of diversification into model portfolios, many advisory firms are introducing alternatives into their models. Natixis’ alternative completion models are designed to match the risk profile of a more traditional conservative, moderate, or aggressive portfolio. They’re intended to provide a seamless fit, allocating assets to a range of liquid alternative funds from Natixis affiliates, including AlphaSimplex Group, Gateway Investment Advisers and Loomis, Sayles & Co.

At the end of the day, putting risk first in model portfolio construction and maintaining a rigorous asset allocation framework may lead to more consistent outcomes – and give clients peace of mind.
1 Natixis Investment Managers Professional Investors Survey includes Global Survey of Institutional Investors, conducted by CoreData Research in October and November 2018, including 500 institutional investors in 28 countries.

2 Assets under Administration may include assets for which non-Regulatory AUM services are provided (including assets serviced and/or administered). Non-Regulatory AUM includes assets which do not fall within the SEC’s definition of Regulatory AUM in Form ADV, Part 1. As of 6/30/19.

For Financial Professional Use Only. This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions.

Net asset value as of 6/30/2019. CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute. Natixis Advisors, L.P. provides analysis and consulting services to investment professionals through Natixis Portfolio Clarity® (“NPC”). Discretionary advisory services are generally provided with the assistance of model portfolio providers, some of which are affiliates of Natixis Investment Managers, L.P. Natixis Advisors, L.P. provides discretionary advisory services through its divisions Active Index Advisors® and Managed Portfolio Advisors® and non-discretionary advisory services through Natixis Portfolio Clarity®. Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.

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