Best Practices & Innovations in Model Portfolios

For insight on the evolving landscape of model portfolios, Asset TV hosted a panel talk featuring Brian Kmetz, CFA^®, CIPM^®, Portfolio Manager with Natixis Investment Managers Solutions. Here are highlights from the discussion on best practices and new developments.

Do you have any best practices you’d recommend to advisors who are using model portfolios?
Yes, and the first one is not as intuitive as you’d think. A lot of times advisors allocate to models to streamline their business, but they need to be selective. While you need enough models to accommodate the varying needs of your client base, having too many can become a management nightmare.

From a portfolio management perspective, I think you always want to do your due diligence if you’re an advisor. Like making sure that the model provider has a well-articulated management process, and that there’s a feedback loop between the asset allocation, the manager selection, and that final implemented portfolio. And then the attribution risk monitoring to make sure that all the pieces of the portfolio are acting as they should and contributing positively to returns.

It’s important to have confidence in the portfolio management team. They should be able to tell you exactly how they are monitoring and running attribution on the portfolios. To us that final step is critical.

Looking at technology and innovation, what are some of the new developments in models?
We’re seeing a growing advisor base that wants more sophisticated portfolios than just typical equity and fixed income. So liquid alternatives are really the first natural bolt-on, and some have done exceptionally well during this very difficult year when there hasn’t been much diversification available in stocks and bonds. Managed futures, for instance, was up close to 35% at one point year-to-date. It’s given back some performance, but where you could not find diversification within stocks and bonds, this liquid alternative provided a nice buffer.

And then one step out from liquid alts is illiquid alternatives, which are much harder to implement. But there are some sophisticated platforms out there that can provide exposure to private equity, private real estate, or infrastructure that can be added to a more traditional portfolio of equities and fixed income. For higher-net-worth clients, that’s very attractive.