Model portfolios built to align with real investor outcomes

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  • 05 mins 38 secs
Advisors and clients may like the sound of model portfolios but stop short of investigating what goes into building them. Portfolio managers Brad Vogt and Wesley Phoa, both members of Capital Group’s Portfolio Oversight Committee, discuss the philosophy and process behind the American Funds Model Portfolios.®


Capital Group

American Funds video transcript: “Model portfolios built to align with real investor outcomes”

Kris Spazafumo: Let's begin with our objective-based approach to investing, both at the fund level as well as the portfolio-construction level, and tell us what that means to you. Brad, let's start with you. Brad Vogt: Sure. When you think about American Funds and Capital Group, for our whole history we've had an objective-based approach. Our first two funds seemed like, to the outside world, maybe they were U.S. equity funds. But, really, they had a combination of goals: growth and income and preservation. So, as an organization, we started from a place where we were looking for investor outcomes, not necessarily simplistic definitions of the funds. So, that's evolved [to] where we now look at [an] objective spectrum of growth (capital appreciation), growth and income (more middle of the market), equity income (higher dividend) and balanced funds for our equity funds. And we've modeled that as we've produced these models, which align with real investor outcomes and real investor challenges. Kris Spazafumo: That's great. So, Wesley, talk to us about this objective-based approach to both managing the underlying funds as well as the portfolios. Wesley Phoa: This objective-based approach, I think, is the difference between learning about portfolio construction in grad school and actually doing it for real people. We're not trying to solve some abstract math problem; we're trying to figure out what people's financial needs are at different stages in their lives and put together an appropriate portfolio for people, depending on their financial situation, and drawing on many decades of experience to do that. Kris Spazafumo: So, let's talk about the process behind building our portfolios. Walk us through that process, both in the construction elements as well as the ongoing monitoring. Brad Vogt: American Funds model portfolios are intended to be, really, a complete investment program for an investor with a specific objective. So, we look at rational investor objectives — growth/capital appreciation, more of a balance between growth and income, higher distribution income — and then we put together combinations of our funds in [a] complementary way. And that allows the investor and the advisor to have a more complete investment program. It's more diversified than a single fund, but it has the same objective approach. In that, we like to have some combination of both dedicated funds — which might be more U.S.-oriented or non-U.S. or more fixed income-oriented — with some funds that have some flex. And so, we have the underlying portfolio managers and funds creating the fine distinctions of the asset allocation, but it's within a corridor that the Portfolio Oversight Committee has defined by putting that combination of funds together. The other thing that we've done with our model portfolios — and it's similar to what we've done in our retirement glide path for target date — is that, as you move across the risk spectrum from more capital appreciation/growth to more preservation, not only does the amount of equity change in each of the portfolios, but the character of the equity changes. It changes from more growth-oriented to more blue chip to more dividend-oriented. So, the amount of equity changes, and the character of the equity changes, as you move across that spectrum. Kris Spazafumo: So, thinking about the investor that might be in a growth portfolio versus a growth and income, more conservative, why is it important that those equities are different? Brad Vogt: Well, I like to think of it where if you were doing this for your family or your friends or people you really knew well, what would you say? Well, my daughter's 20. And so, I would say to her, "Emily, you should own growth/capital appreciation stocks, maybe a little bit of bonds but not a lot. You've got a 40-, 50-year time horizon, so you can afford to take more risk." My brother is 50. He would want a mix. He would want some growth, but also some blue-chip stocks, probably a little bit more fixed income. And then my mother-in-law, my most important client, she still needs a healthy amount of equity, but it needs to be the right kind of equity. It needs to be very different types of stocks than my daughter, not just a different amount of the same stocks. So, that's what we're trying to do — both dimensions — in our model portfolios. Kris Spazafumo: That’s excellent. So, Wesley, clearly we re-characterize the equity in the portfolios. How are you thinking about the different roles that fixed income plays within the portfolios? Wesley Phoa: There are a lot of different types of bonds, and each of them does a different job. And just like with equities, we use different kinds of bonds to do different jobs. In a very growth-oriented portfolio, we'll put in some Treasury bonds to provide some equity diversification, smooth out returns a little bit. Kris Spazafumo: Right. Wesley Phoa: In an income-oriented portfolio, we'll put in some corporate bonds, which have an attractive yield. And in a portfolio for somebody maybe deep in retirement who is concerned about capital preservation, we'll use a lot of short-duration bonds. The important thing is, just as for equities, we don't think the whole universe of bonds is appropriate for everybody. We try and figure out what different kinds of bonds are good at achieving and then use them for the right kinds of people. Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. The statements expressed herein are opinions of the individuals identified, are as of the date published, and do not reflect the opinions of Capital Group or its affiliates. The information provided is intended to highlight issues and not to be comprehensive or to provide advice. Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by the distributor of the American Funds mutual funds, which receives fees for distributing and servicing the funds. Information provided on this website is intended for use by financial advisors with persons who are eligible to purchase U.S.-registered mutual funds. Securities offered through American Funds Distributors, Inc. 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