MASTERCLASS: Model Portfolios - May 2023

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  • 01 hr 00 mins 38 secs
Two Model Portfolio Managers discuss the advantages of Model Portfolios in buffering against volatile markets, how they can help Financial Advisors focus on practice management, and ways to integrate them into portfolios. Also covered are common misconceptions surrounding use of models and how to dispel them and effectively communicate their benefits.
  • Seth Buks, CIMA, Client Portfolio Manager - Columbia Threadneedle
  • Marina Gross, Co-Head of Natixis Investment Managers Solutions - Natixis Investment Managers


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Jonathan Forsgren:

Hello and welcome to this Asset TV Model Portfolios Masterclass. Joining me today are Marina Gross, Co-Head of Natixis Investment Managers and Solutions at Natixis Investment Managers; and Seth Buks Client Portfolio Manager at Columbia Threadneedle Investments.

Marina, could you kick us off by sharing a little bit about Natixis and the firm's background with Model Portfolios and how your approach is different from other firms in the space?

Marina Gross:

Sure. I'd be happy to. Just want to start off by saying thanks for inviting me to participate in this panel discussion. I really look forward to the ... and forth into the discussion going forward.

Yeah. Natixis is a 1.3 trillion global asset management firm. We've been delivering solutions more broadly and model portfolios more specifically to the market for two decades. Beyond our longevity and experience and most importantly our talented staff, it's really the multi-affiliate model that makes us quite unique and really well suited to delivering multi-asset solutions.

Now, the multi-affiliate model itself is not particularly unique anymore. Many investment firms have been buying up smaller boutique asset managers and integrating them into an affiliate or consortium type structure. But our version is differentiated because we've been a multi-boutique firm since the very beginning for 30 plus years.

The second reason is that we really prize above all else the independence of our affiliates. We go out of our way to ensure that their investment thinking is entirely their own. When you think about it, what this results in is a fundamentally diversified range of strategies and such diversification that comes from different philosophy, different thinking, different approach to investing is really ideal for building portfolios.

For those reasons, we've been in this business for a long time. We're intent on delivering very specific and concrete value and we think we're very well suited to be a leader in the space.

Jonathan Forsgren:

Seth, what's Columbia Threadneedle's approach to Model Portfolios and could you share a little bit about Columbia Threadneedle's history in the space?

Seth Buks:

First I want to echo Marina's comments. Thanks for having us. Obviously, it's great to be back with you all at Asset TV. Jonathan, Marina, very much looking forward to this conversation. Columbia has a long and pretty deep history in the Model Portfolio space. Like Natixis, we have about a 20-year track record and experience in managing models.

We are the eighth largest provider of model delivered separate accounts and a top 10 manager of asset allocation model portfolios. Our models are managed by our global asset allocation team. The team that I'm on. We're a 30-person team. We run close to $120 billion in asset allocation portfolios for clients around the world. A lot of resources and expertise that we can bring to the table.

We categorize our models in three ways. First, asset allocation or multi-asset, and that includes some outcome-oriented portfolios like downside protection or inflation hedging. We have equity only portfolios, which I would categorize as single sleeve or completion portfolios. Lastly, income models which are both fixed income completion portfolios and then other outcome-oriented solutions like multi-asset income.

The way that we build our models is really meant to resemble the way that an advisor might. We want them to be an extension of their portfolio construction process. All of our strategies are a mix of vehicle types, mutual funds, ETFs, SMAs. Like Natixis, we take an open architecture approach. None of our models have more than 50% of our own home cooking and we don't charge any overlay fees or management fees.

Now lastly, we have live track records for all of our models. They aren't just theoretic or paper portfolio returns. As you can tell, like Marina, we're pretty passionate about this space and it is really one of our highest conviction areas.

Jonathan Forsgren:

Marina, we've heard a lot about the practice management benefits of models, what about the investment benefits?

Marina Gross:

I don't want to understate the practice management benefits because they're real and significant. Advisors need to devote more and more time to clients, more and more time to business development. One of the few ways that they can do that is to find efficiencies in their practice, particularly the parts of the practice that are most complex and time-consuming.

But to zero in on the investment benefits, particularly for clients, which are equally if not more important, I think it starts with access to resources, the kind of breadth and depth of resources, whether that's talent, whether that's tools, whether that's data as well as the experience that's resident in a dedicated full service investment management firm. That first benefit is that access.

The second benefit is an investment process that's empirically backed and consistently applied. There are so many dimensions to the investment process and all of those dimensions need to be consistently implemented on an ongoing basis, things like positioning, sizing, timing.

When you're applying a process that's rigorous and empirically vetted, then you get all those consistency benefits that come through. The greater transparency that's really important when you outsource to a professional institutional investment firm, you get transparency into the decision making process.

It creates accountability and it creates clear rationale for results. Risk management is really important part of the process and accrues to the benefit of clients. When I think of risk management, I think of it as a two-dimensional or almost a matrix system where we are deploying risk management in a vertical way, meaning starting at the very top of the portfolio at the total portfolio level all the way down to the constituent level and measuring and managing risk at each level in between.

There's also risk management that we apply in a lateral way. Ensuring that risk is properly aligned and calibrated to indices, benchmarks, peers, factors. This idea of a matrix system where risk is measured and managed in absolute terms and relative terms is a really important benefit for clients.

Then lastly, going back to this institutional quality process, the way I think of what constitutes institutional quality is there are three features that all overlap in many ways. First of all, an institutional process has a high frequency feedback loop associated with it.

Institutional portfolio management teams are constantly taking stock of the results, what drove the results, what conditions were present at the time that those results were generated. That feedback loop, continuous feedback loop feeds into, number two, regular reviews. Taking stock of all those inputs or along that value chain, thinking about what drove the results that were generated.

Thirdly, that leads itself to incremental improvements. You're constantly thinking about ways in which you tweak just and hone that process to deliver more value to clients on a go forward basis.

Jonathan Forsgren:

Seth, given the challenging market environment over the past few years, how has that changed advisor's perceptions of utilizing models for their clients?

Seth Buks:

Yeah. It's certainly been a challenging environment. We had the fastest bear market and then recovery in history back in 2020 and we had this turbocharged 2021 because of monetary and fiscal policy and that was followed by 2022, which was the worst year for asset allocation portfolios in 50 years.

Not to mention we now seem to have investment cycles that move faster than ever before even going back before 2020. Then when we consider client's responses to those cycles, it tends to unfortunately be a move to cash. If you look at the data, what we found is that clients tend to move to cash at an accelerated pace right as volatility is nearing its peak.

When you look at the last two major economic cycles here, coming off the bottom in 2009 and 2020, clients were at peak cash allocations right when the market's turned really missing out on some of that significant upside that followed. Now the data is still coming out about 2022, but I suspect something similar is happening anecdotally with flows we're seeing to cash right now.

To come back to your question for many advisors using models has been a way to help clients stay invested and not have that gut reaction to move to cash, which again is normally at the wrong time. A model provider who can be tactical, try to protect when markets are volatile, but at the same time participate when opportunities present themselves is really what clients want.

Many of the advisors that I speak to have really found value in using models which can rebalance or make those tactical decisions more quickly and implement them across their book, not having to worry about any operational or trading hurdles. That can be really beneficial, especially in times of market stress.

Jonathan Forsgren:

Marina, why should an advisor be comfortable outsourcing the portfolio management and what should they be looking for in a provider?

Marina Gross:

Yeah. Sure. Seth touched on a few of these things, too. Well, first I would say that I go even beyond suggesting that an advisor, is she comfortable outsourcing, I might assert that it's a necessity to consider outsourcing. Now, I don't want to be presumptuous and say that it's a necessity or appropriate for an advisor to outsource all the investment management or for all the clients, but certainly to consider outsourcing as a part of the overall practice management.

I think right now is more important than ever. It really comes down to a few things that are a few structural things that are happening in our industry. Certainly, the challenges in the market environment and in the macro are ever present today. They're ever acute today. They're forever a feature of the investing environment.

Today, we're dealing with, of course, inflation and rates and volatility and so forth. They're always a set of challenges that face us from the macro and economic perspective. But the structural challenges I think are more significant and more in enduring. These are, to me, the catalysts for why an advisor ought to strongly consider some degree of outsourcing.

The first is complexity. Complexity in our industry has been increasing exponentially. You can find complexity across three different dimensions. First of all, complexity has been increasing in the form of more products, more vehicle types, more liquidity provisions, more tax considerations, and more ways to deal with tax liability.

All those have been proliferating over time and have added to the complexity. Certainly, there have been additions to styles. We have the active and passive approaches, but then there are all these gradients in between, systematic indexing, enhanced indexing and so forth.

Then there's based investing, there's thematic, a whole new class of investments called thematic investing, ESG. The complexity there arose and has continued to grow. Waiting through all of these takes a great deal of time, energy, and resources. [inaudible] that if you will alone, even if you have a team-based practice approach, I think gets more and more difficult.

The second factor is client expectations. Again, Seth alluded to this as well. Clients expect more and more from their advisors. Their expectations continue to grow, they want more face-to-face time, they want more personalization, and they want more value to be delivered and they want that value to be measurable.

The best case scenario is that advisor is forced to do all of this more with the same number of resources, but the worst case scenario is that they have to deliver all this more with fewer resources. The reason for that is because the cost of doing business is going up, labor costs arising, cost of data, cost of tools, competition is increasing, there are more alternatives, human alternatives, technology-driven alternatives.

There's this compression, compression in time and compression and margins that has to be weighed against this greater set of or level expectations. Then the last, and certainly Seth touched on this, is this idea that the investing ecosystem or marketplace is, in my view, buckling under the weight of all the information, or actually I should say it's not all information, data that's swirling around.

Each one of us are inundated with a flow of data, whether it be charts or commentary or regressions or data sets. The challenge for all of us is to try to separate that noise, the distraction from what's actually valuable, that signal. Being able to separate those two and in doing so be able to parse, process and prioritize all that data and information presents a huge challenge.

The thing is that data in its abundance is flowing a lot faster than it ever flowed before. It's getting priced into markets faster than it ever was priced before. Oftentimes you might have conviction on a certain idea, but you run out of time to act on that eviction or manifest that conviction in your portfolios because the market recognizes that very same dynamic that you do and you don't have time to express it in your portfolio.

The moral of the story is you really have to have the depth of experience, of knowledge, of training to be able to do all of this, meaning to be able to parse through all the information, to be able to just determine what's valuable and what's not, and to be able to act on it very quickly and decisively to get, to garner the full value of that dynamic that's playing out in the marketplace.

Jonathan Forsgren:

Seth, what have you found to be the top reasons advisors outsource investment management?

Seth Buks:

Sure. I'll build on a few of the points that Marina was mentioning. There's a lot of recognition in the industry right now that the reasons that clients engage with their advisors have changed. Sure. Some clients still just want stock picks and help with trade execution.

But most clients now are much more interested in creating a financial plan, having someone to talk to about their goals and their family needs, et cetera. Studies have shown that that is what clients actually believe they are paying for. Advisors who use models spend on average less than 10% of their time on those, call them in some cases menial investment management activities.

All that time saved on things like research, due diligence, trading, rebalancing, et cetera allows them to focus on these other areas that add value to their practice and their clients. I mentioned before that we try to construct portfolios in line with the way that advisors do, and I also mentioned that to do that, we conduct a lot of surveys.

From these surveys, three things really stand out and receive the highest percentage of reason why advisors might choose a model. They are practice management, risk management, and access to professional management. Since I like sticky catchphrases, I'm going to paraphrase these to grow, protect, and connect.

Models can offer advisors a way to help grow their practice by freeing up time to focus on more client engagement activities and really have a much more efficient practice management overall. The second is models can protect the assets that advisors currently have through strong risk management processes.

Finally, be able to connect advisors to the professional management and research that Marina was talking about offered by world-class organizations like ours and many others that provide model portfolios.

Jonathan Forsgren:

Marina, what are the top reasons advisors tell you they're using models?

Marina Gross:

Yeah. I think most of them are practice management reasons. Some of those structural issues that I cited earlier on, particularly those that are emanating from client expectations I think are fueling the interest in models. This need to get more efficient, just simply put. This need to find scale to reduce complexity, to increase consistency.

All of that is essential or those are key ingredients into a practice that can balance the rising client expectations with the greater complexity in terms of managing a portfolio in a tough investment environment. I think a lot of it is practice management benefits. The other is perhaps an increase in the recognition that it's just so time-consuming and so labor-intensive, the investment management work.

It's become so much more so over time that they need to staff up within their team in a way that increases the complexity of their business. Just the talent that they have to go find and developing that talent and retaining that talent so forth on the team, that is also a dimension that is really challenging for advisors.

Outsourcing, at least partially, reduces the necessity for having all those resources on staff and needing to do all the HR related work to keep those resources engaged, challenged and motivated over time.

Jonathan Forsgren:

Seth, when it comes to the attributes of model portfolios, what are some of the key features or benefits that resonate most with advisors?

Seth Buks:

Yeah. Absolutely. Going back to some of those advisor surveys that I mentioned, first and foremost, performance is obviously critical. It's the most often cited piece of why an advisor might choose a particular model in these surveys. That's certainly number one. But that is not necessarily an attribute or a feature.

What we're hearing from advisors in these same surveys is that they want really, I would say, three key features. The first is a portfolio that tends to be more global, multi-asset, or broadly diversified in nature. Advisors want access to asset classes that they might not invest in themselves or don't have a solid process around when to get in or out of or when to overweight or underweight things like commodities or emerging market debt or REITs, et cetera.

This goes back to an earlier comment that we made around the fact that the environment really has changed and advisors recognize that. They know that they're always going to have a very large portion of a client account in, say, US large cap. Oftentimes, they like to be able to pick those individual managers, but at the same time they want a model that can help them lean towards having that more diversified overall approach.

Second is to be dynamic or really incorporate more tactical repositioning. They want something that's going to be proactive in trying to capture more upside when risk is on in the markets, but also seeking to protect when it's off. They want to know that there's a process behind those decisions that they can then articulate to their clients.

They don't just want to model that, sticks with its strategic weights when the market is falling apart. Advisors now are actually going back to see how managers navigated a recent volatility. One of the more common questions is how did you do last year? How did you do in March of 2020?

That leads us to the third point, which is around strong risk management. We've already used this phrase a few times. But advisors really want models that can provide consistent returns and consistent outcomes for their clients, really try to help them smooth out the ride through a volatile market, which in turn can help keep clients invested.

Probably the most common refrain I hear from advisors is they want a model that helps them participate but protect. They're willing to give up a little on the upside if it means having strong downside protection.

Marina Gross:

Yes. But we also find that advisors are drawn most to the core models, the most broadly diversified, the ones that take, consume that central role in a client's portfolio, and then they might allocate around that core portfolio to specific niche or opportunistic investments that either they or the client is enthusiastic about.

I think core is very common. We've also seen income models increase in popularity, namely that we're living through a mini-income renaissance. Income is now more abundant and can be found across more industries and asset class types. Income models I think are garnering a fair share of interest and enthusiasm.

Yeah. There was some inquiry. We've gotten some inquiry around thematic, some thematic portfolios, but those remain pretty narrow in terms of when investors or clients, excuse me, are interested in that. It really resonates with them. But we're not necessarily seeing thematic portfolios garner widespread interest and asset flow.

Jonathan Forsgren:

Marina, what are different types of models and use cases?

Marina Gross:

Yeah. We put it into three buckets. There might be more than just three, but at least our platform typically organizes, gets organized across three different segments. We've got core models which typically run along, a risk spectrum from conservative all the way to aggressive, and typically a number of gradients in between.

Again, core represents that complete portfolio. A portfolio that's filled out across geographic boundaries, across asset class, across capitalization and oftentimes has even nontraditional alternative exposure within it. We have thematic portfolios income might fall into a thematic portfolio.

We could also have ESG portfolios that would fall into that category. The portfolio construction and management is governed by a specific theme, a specific outcome that you're trying to achieve, and you're benchmarking yourself to that theme or that outcome.

Then lastly, completion, we have a set of alternative completion portfolios as by way of example. Completion has actually, I think, been a great advancement in model space in the market because, to Seth's earlier point, it makes it more modular, it makes these programs more flexible. You can add a piece on or take a piece off and you can also modulate the exposure to that piece.

Alternatives, by way of example, were incredible for portfolios last year, but a little bit less effective in 2021. The extent to which you have access to a completion portfolio that's designed to fit to dovetail into a core portfolio by its composition and by its structure, then you can either remove that piece entirely or you can downsize that piece or upsize that piece depending on what your view is of the market environment.

Anyway, all these things can fit together neatly or they can be used discreetly and separately depending on what the objective is.

Jonathan Forsgren:

Seth, are there any areas where you're seeing a higher adoption rate of use with model portfolios? Is there a demographic trend type of practice or something else?

Seth Buks:

Yeah. I mean, adoption is really accelerating everywhere, as I'm sure you know there's countless reports out there, whether you might read an ignites article, a fun fire article, or really any other industry type articles are always pointing towards the incredible growth in the model portfolio space. That's really regardless of firm type or practice type.

But the fastest adoption I think is with advisors that are in their growth phase that are actively trying to drive new business and client acquisition. All of the largest broker dealer firms out there have done studies that can confirm that model users typically see enormous benefits from a business building perspective in that they tend to add much more new clients than say, a non-model user.

What we've found through a lot of our surveys is that the advisor typically tends to be one who has around 10 years of experience, surprisingly not just new advisors who may in many cases want to crack at building or managing their own portfolios until they might realize it's not necessarily as good a use of their time as they originally thought.

Model users now are honestly typically on a team. It's not just a sole practitioner. It's somebody who's on a team, but still generally one that is less than five people. Another big growth area, and we've already touched on this, is in the high net worth space, RIAs, bank trust firms, et cetera.

The original thinking going back years was that models are good for FAs with smaller accounts or just qualified accounts because those larger clients required much more customization. Well, as I mentioned before, that perception is very quickly changing now, especially with the inclusion of SMAs and models being able to focus much more on tax efficiency and of course for higher net worth individuals.

Very importantly, focusing on really bringing fees down through the use of, say, SMA, ETF models. Then this leads into the last one, and Marina touched on this already and I did earlier as well, around these single asset class solutions. These advisors that like to choose between different completion portfolio types and act as the manager of those models, not necessarily picking each underlying manager to fill out a certain bucket, large value, large growth, et cetera.

But maybe using in an equity completion portfolio together with a handful of others and being able to juggle those pursuant to certain client parameters.

Jonathan Forsgren:

Marina, are there common misconceptions about model portfolios or reasons why advisors might be hesitant about employing them?

Marina Gross:

Yeah. Perfect segue from Seth's comments. I think one of the biggest misconceptions is that model portfolios is for smaller clients or lower net worth clients, which I would've emphatically disagree with for n a number of the reasons or all the reasons that Seth cited, which are important.

I would just add to that at our firm, and I guess the same is true for Columbia, the same team that manages model portfolios manages portfolios for very large institutional clients. You're getting access to the same sophistication, the same talent, the same experience, and the same philosophy and thinking, whether that be channeled into a model portfolio or highly customized for a large discretionary multi-asset mandate.

The first is that model portfolios are not generic. They're not simple and they're not for small, unsophisticated or lower net worth clients. Another misconception I've heard is ... it's not so much a misconception, but I think we can work to dispel or a swish concern, and that is there's a worry that the advisor worries that they'll lose control.

That if I outsource assumption or all the entirety of the investment process or the portfolio management process, I'll be vulnerable to not knowing what's going on at any moment. I could be caught, if you will, flatfooted by the client if I can't answer a specific question in the context of an event that's transpiring.

It's our job as the providers to go out of our way to ensure that the client knows how we service the business and how much effort we put into making sure that the advisor never feels like there's daylight between them and what's happening in the portfolio, that they're drifting away from ... or the portfolio is drifting away from them.

It's all about the level of service that you provide. We go to great lengths to provide very frequent, very thorough and timely updates on what's happening in the portfolios so that there's never a gap that could expose the advisor and put them in a precarious position. We can talk a little bit about that later if it comes up.

The third thing that comes up is this concern that at least there'll be a perceived reduction in the value that the advisors provide so that the client will perceive the advisors being less valuable to them by virtue of outsourcing somebody in investment management or all of the investment management.

I go back to the comments that Seth made, which is there is so much that needs to be done for and on behalf of the client, and it starts with all that financial planning, all that rich work, which helps a client understand what their financial trajectory ought to look like and how their goals fit into that and what their actual risk tolerance is, because risk tolerance is an emotional thing and not just a mathematical thing.

Again, we try to assuage concerns here where each party in the partnership that advisor and the asset management firm are providing discreet and important value, but the total value isn't managing the entirety of that relationship and the advisor will always be at the front end, at the tip of the spear for that.

Jonathan Forsgren:

Seth, from a messaging perspective, what motivates advisors the most to help drive the use of models with their clients?

Seth Buks:

Yeah. Well, I'll echo a number of the points that Marina had just made. First, from the advisor's perspective, what I often try to convey is that models aren't meant to replace any of their value proposition. I think unfortunately for many, the idea of a model has become, as Marina mentioned, synonymous with outsourcing, essentially removing what many advisors still see as a very large part of their value proposition, that investment management piece.

What we like to remind our clients is that models are effectively SMAs. But instead of thinking of them as a separately managed account of, say, individual stocks or bonds, think of it as a separately managed portfolio. Models can be used as a part of the portfolio construction process no differently than any other packaged product.

The advisor's value proposition doesn't change because ultimately they're still doing a lot of those same functions, conducting some due diligence on the model, implementing it within the client's overall portfolio just as they would for a standalone fund or SMA is really just another tool in the toolkit.

From a client's perspective, there have been a number of studies that have been done that show that clients tend to have a very positive and welcome reaction to an advisor recommending or implementing a model in their account. The messaging has tended to resonate with the end user.

What advisors are asking for from us is that they want us to help educate their clients on the benefits of using models, all of this access to broader research and professional management that we've just been talking about. That's not only having your advisor managing your account, but also having this separate third party that can bring an entire team of resources on board, just like a second or maybe even third set of eyes on those clients' assets.

Jonathan Forsgren:

Marina, what are some things that you think the main street investors should know about the use of models?

Marina Gross:

Yeah. I think the most important thing to know ... This goes back to the misconceptions. I think the most important thing to know is that when you invest with an institutional caliber investment management firm, when you invest in one of their models, you're investing alongside highly sophisticated institutional clients or investors.

Like I said before, same team, same infrastructure, same philosophy, just applied in different ways as Seth described, just applied using in some cases ETFs and mutual funds. In other cases, SMAs and ETFs, different permutations. But certainly the client should feel confident and feel good about the fact that they're shoulder to shoulder with some of the largest and most sophisticated investors out there.

Jonathan Forsgren:

Earlier you were talking about one of the major benefits of Model Portfolios is the ability to be composed in a way that limits downside while also offering exposure to the upside. 2022 was a very challenging year across all markets and has affected clients. I'm sure their desire for risk management and risk management tools and practices.

Seth Buks:

As you can imagine, we definitely think so. The advisors watching this know better than I do. But clients don't always have a great handle on their own risk tolerance. In fact, as we all know, many of them will overstate their risk tolerance, which can be very problematic in times of market stress.

I'll give you an example. Back in 2021 after the extreme volatility we saw in 2020, we conducted a survey of thousands of clients to see how their perception of their own risk tolerance may have changed given some of that extreme volatility. The findings, as you might imagine were pretty interesting.

One of the questions we asked clients was compared to before COVID or before 2020, how has your focus on investment risk changed? As you can see from the survey here, about half of the over 1,700 respondents said that they are more focused on reducing investment risk.

The follow-up question was how long do you think this increased focus will last? Over half said at least three years, a fifth of them said forever. We could argue that 2022 was a lot worse than the market in that volatile period of 2020 when we did this research. I really think that this perception of risk and risk tolerance for clients has changed.

We're in a different market regime now. We've talked about this a little bit already. But to use the popular acronyms right now, we went from TINA to TARA where there are reasonable alternatives. Clients know that now be it bonds or maybe even cash they want, they're looking for that downside protection and they're willing to give up a little bit on the upside for that more consistent ride.

Jonathan Forsgren:

Marina, how did you navigate a year like 2022 in your models?

Marina Gross:

Sure. Yeah. Look, 2022 was as challenging a year as we've ever had, as I can ever remember in my career, certainly. It shook, I think, everybody's resolve, particularly if you didn't have the tools to navigate it effectively. One of the things that was beneficial last year, we talked about core portfolios and what that composition looks like.

One of the things that was highly beneficial was access to alternatives. The extent to which you had access to non-correlated investment strategies and asset types really dictated how well you were able to perform last year. Because as we know all very well, still have the scars to prove it, that both equities and fixed income were down anywhere between 15% and 20% last year.

The only place where you could hide last year, very few places in cash and in non-correlated assets like asset classes like alternatives. That was one tool that you could use to improve outcomes last year. The second tool we employed last year was being cautious. There were a lot of twists and turns and visibility was very limited last year. It was a very macro-driven environment, very narrative-driven environment, which still is this year to some extent.

But it didn't have a long line of sight. You couldn't see clearly around what turned out to be many sharp corners. You couldn't risk being bold last year. You had to be cautious, you had to be careful, and you had to be incremental as you were making adjustments to the portfolio.

Then the third thing that we had to contend with was our time horizon. We always thought that our tactical time horizon was very responsive, was certainly short enough that where it gave us an opportunity to find opportunities on a very opportunistic basis.

But last year we had to shorten the time horizon because like we talked about, both Seth and I earlier on in the discussion, all this information that's fed out into the market is getting priced in and getting reflected and security prices so quickly, so rapidly. Sometimes the narrative is reversing or doing a 180 in a matter of weeks, not in a matter of months and quarters.

We had to really shorten our time horizon, our window and decide whether it was even worth it to try to harvest an opportunity that we saw developing because by the time you were done implementing it across the various portfolio sets, there might not be much runway left to really see it through.

Those were the main things that we did last year. All three of them accrued to the benefit of investors. I think that's one of the advantages of having an institutional money manager working alongside you is that we can adapt a little more readily and a little bit more nimbly relative to an advisor practice that would need to change a lot of what they're doing in order to adjust to an environment like last year.

Jonathan Forsgren:

Seth, clients have been whipsawed by the bull and bear markets we saw between 2020 and 2022 where we saw sharp pullbacks, quick rallies with lots of volatility in between. How can models help smooth that ride for clients?

Seth Buks:

Yeah. I think what it really comes down to is diversification. I mean, the old adage right from Nobel Prize winner, Harry Markowitz. He said, "Diversification is the only free lunch in investing." We would agree with that and we think models can help in that surge for more efficient diversification going back to that professional management part of the attributes we talked about, and that's been a theme here throughout the conversation.

Obviously, advisors are perfectly capable of building diversified portfolios. But using models can help take those portfolios really to the next level by incorporating some of the things that Marina was just talking about, alternatives, absolute return strategies, or even just nontraditional strategies like commodities that were incredibly helpful over the past few years.

To prove some of this, we put together a quilt chart to try to show the benefits of an Uber-diversified approach. This quilt chart here has 10 different asset classes, everything from your traditional equity and fixed income sectors to hedge funds, commodities, et cetera, and it tracks their sharp ratios instead of just returns over the last 20 years.

When we looked at these different asset classes, we tried to see whether they were in the top three or the bottom three in any given year, and that's denoted here by the green or the red colors. Then we said, "What if we took an equal weighted diversified portfolio of these 10 different sectors, just put 10% into everything. Call it a very naive way to diversify."

Well, what we found is that this very simplistic approach was never in the bottom three in any individual calendar year. It spent a handful of years in the top three. Over this 20-year period was in the top three of sharp ratios proving that over long periods of time, diversification has indeed worked and has helped clients achieve that goal of getting the return they want with less risk.

We think implementing models, many of which take this very diversified approach is a great way to get there for an advisor in the context of a broader client portfolio.

Jonathan Forsgren:

Seth, when you look at the investment landscape as Columbia sees it over the next few years, how do you suspect models will fit into the way advisors build portfolios for clients?

Seth Buks:

Sure. Before I get into the next few years, let's take a step and look backwards for a moment over the last five years. If we look at the numbers, say, the year ending 2022, the S&P returned, to many people's surprise, just under 10% per year on average over those last 5 years. Many investors think it's far less because they have that recency bias of last year weighing heavy in their mind and they forget about how great a year 2021 was, 2020, 2019, just under 10% for the S&P over the last five years.

The ag as a proxy for bonds, got you zero. Developed international over those five years, barely positive. EM was actually negative over the past five years. Basically it was a period characterized by the S&P dominating everything else by a massive margin. Dollar that you took away from US large cap hurt returns immensely.

That's actually a pretty challenging environment for a diversified portfolio or most models in general, particularly as we know clients like to compare everything back to the S&P. Not the most flattering environment for those of us building these diversified portfolios.

But to answer your question, more importantly, about the next few years, my team puts together what we call our five-year forecast. This is an average annual return expectation over the next five years, and we update it twice a year. You can see here that in our most recent numbers, what we expect over the coming five years is a much more balanced environment where really everything is contributing positively.

US large cap is not that sole driver of returns. You still do pretty good in US large cap, but we believe you can actually do better owning a number of other diversifying asset classes. That's a great environment for asset allocation, for diversification in the way that most firms, including us, are building model portfolios today.

Jonathan Forsgren:

Marina, what's your outlook for Model Portfolios?

Marina Gross:

I'll take this question and approach it a little differently. I see the future of model portfolios as evolving to ... What do I mean by that? With the advent of fractional shares, like Seth cited earlier on in the discussion, separate accounts are becoming more accessible at lower limits. With improved technology, UMA programs, Unified Managed Account programs, are becoming more ... and are accessible to more clients at more firms and more platforms.

Unified Managed Account programs, many probably know, but just in case, allow you to combine different vehicle types, different strategy types and vehicle types on platform oftentimes in one account and offer a more streamlined investment experience. With those two developments well underway, model portfolios are going to get more interesting, there'll be more flexibility, there'll be more combinations, so the use of more vehicle types.

That will allow for more customization and more personalization. There's already some customization that's happening in the form of screens, in the form of exclusions. But I think that's going to continue to grow and get richer as far as the set of options.

Tax management will become a bigger feature and tax management will be able to be deployed in a more customized way with things like gain budgets and so forth. Certainly value screens and that sort of thing, but also thematic bents and thematic tilts.

I also foresee a time in the future where they'll be hybrid options where advisors will be able to combine some of their own thinking, some of their own sub-portfolios or completion portfolios with an augmentation from an asset manager. For example, an advisor might run his or her own dividend focused stock portfolio and might complement that with an actively managed fixed income sleeve. It becomes a hybrid approach.

I think model portfolios, the whole marketplace is going to evolve very rapidly. I think that evolution will serve to offer more options to more clients and more advisors, and it will ultimately deliver a more personalized and customized experience.

Jonathan Forsgren:

Marina, what can someone expect from Natixis if they partner with them for models?

Marina Gross:

Sure. Yeah. Great question. Some of these expectations address some of the misconceptions that we talked about earlier. I think it's important for us to acknowledge the concerns. Some of them are misconceptions, some of them are legitimate concerns.

I think it's important for us to hear what the advisors are saying, to acknowledge their concerns, and then to adapt our approach and what we deliver to ensure that all those concerns are addressed. I would say to you that when you work with Natixis in the context of model portfolios, number one, you get this unwavering commitment to the pursuit of value at every stage of the investment process.

I talked about what the features of a professional process, which emphasize that feedback loop or feature that feedback loop emphasize that regular review and incremental improvements throughout time. We are unwavering and committed wholeheartedly to making sure that we're measuring the degree of value that we're adding at each stage, at each step of that investment process.

If there's a certain stage of it or a certain step that is not adding value consistently, then we're going back to the drawing board trying to understand why and read things to continue to hone and improve. The second thing that you can expect from us is a degree of creativity. This desire to search for insights in common places where everybody else is searching, but also in more obscure places.

To pursue conventional and unconventional sources of information. Because at the end of the day, it's a knowledge-based business. Because there's such a ubiquity of information, your ability to distinguish yourself from others is really grounded in your ability to draw insights, unique insights from what's happening in the investment world around you.

Drawing unique insights requires you to go places where others aren't going and look at information that others aren't looking at. We're relentlessly committed to that. Then lastly and perhaps most importantly is when you work with us, it's a partnership and our service model is reflective of that, meaning we are focused on transparency, making sure that advisors that work with us know exactly what we're doing, why we're doing it, and how that manifests in the portfolio and are getting a high frequency cadence of information from us.

Positioning, changes, rationale, impact, all of that so that there's no gap between what happens in the portfolios and an advisor's comfort and confidence in being able to articulate that. I think of it as treating the advisor like a co-pilot on the investment journey with us, on the flight path with us. If you're a co-pilot, you're sitting side by side with us what's going on at any point in time.

You never have this feeling of concern or this loss of confidence that you can't represent exactly those ... to clients in very confident ways. Those are, at a minimum, the three things that you'll get from us when you partner.

Jonathan Forsgren:

Seth, what can someone expect from Columbia Threadneedle if they partner with you for models?

Seth Buks:

Yeah. I think we can really break this down into three phases. First, during initial search, we think that advisors really value interactions with sales consultants and model or asset allocation experts really help discuss what options we can bring to the table. We have a big team of dedicated specialists who can do just that.

The next step would be while evaluating a model provider, we can highlight a lot of the different types of value added resources. We can provide things like portfolio construction guidance, educational client content, and other tools like advisor seminars and different ways to build deeper relationships with clients and prospects.

Third, perhaps most importantly, are the resources that we can bring to the table after a purchase, after an advisor decides to partner with us on models. Those are things like regular performance updates, monthly market updates, tactical portfolio changes. All of them in client approved pieces that advisors can leverage when they're having conversations with their clients or prospects.

I think really what it comes down to is that we don't just want to be a great product provider to advisors, but instead we really want to be an advisor's best business partner.

Jonathan Forsgren:

Marina, what are some concluding thoughts you'd like to leave our viewers with?

Marina Gross:

Well, we covered a lot of ground. The only thing I would say is that as you think about your options and as an advisor as you think about how you can manage all these competing priorities, namely giving client want and need, business development priorities and so forth, it's my view that Model Portfolios can be a terrific tool in helping to advance all the different aspects of the practice, help to grow the practice, help to make it more resilient to risks, help to make it more distinguished, and help to grow the practice over time.

It doesn't have to be a wholesale commitment. I think advisors that are listening that haven't delved in yet can give it a try, can survey the landscape and see what appeals to them and see which approach suits them the best, and start off small and see how it goes and see if we can ... we, the asset manager or the investment management firm can earn your trust over time through ... like both Seth and I talked about.

Frequent communication, very transparent process, lots of interaction, access to the team, access to the thinking and rationale. Again, it doesn't have to be an all or nothing decision. You can wait in slowly and decide whether it's something that works for you. But we've seen it really work for advisors. We've seen it solve a lot of problems and deliver results that clients are really satisfied with.

Jonathan Forsgren:

Seth, what are concluding thoughts that you'd like to leave our viewers with?

Seth Buks:

Sure. Like advisors, asset managers like us, we're in the business to serve our clients and help them achieve their goals. Whether that's by sitting on the same side of the table or in the driver's seat of an airplane, as Marina just mentioned, that is exactly what we aim to do.

But over the past decade, the way that we can do that is evolving. Advisors aren't just looking for more holistic solutions now, but they are even more importantly now looking for a strong partner. We believe that those are that next step in the evolution of the partnership between wealth manager and asset manager.

Firms like ours, firms like Natixis, we're working every day to help get to a point where doing businesses easier, more transparent, where we're trying to support advisors' initiatives can help them solve complex clients. Like Marina said, if you're not currently engaged with an asset manager around a model solution, we would encourage you to do so.

Jonathan Forsgren:

Seth, Marina, thank you very much for joining and sharing your insights today.

Marina Gross:

Thank you for having us.

Seth Buks:

Thank you.

Jonathan Forsgren:

To our viewers, thanks for watching. For Asset TV, I'm Jonathan Forsgren. We'll see you next time.


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