Solutions - Putting It Together

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  • 52 mins 19 secs
Trends and considerations in portfolio construction, strategic and tactical asset allocation and how you can get started putting it together.

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Nuveen

Recent research indicates that nearly 80% of financial advisers have interest in receiving model portfolio allocation advice from outside asset managers. Are you one of them yet despite the stated interest? Third Party model usage is just over 21% join Nuveen for a conversation about trends and considerations in portfolio construction, strategic and tactical asset allocation and how you can get started putting it together. Section one, why incorporate outsourced to portfolio management? Many financial advisers got into the business because they are or were fascinated by financial markets and the numbers side of things. For many of them, outsourcing any part of client portfolio construction and management is the farthest thing from their minds. However many advisors got into the business because they like helping people or they just like people. Many advisers are looking to grow their practices even if they have passion and skill for the numbers side of the business as well. Requirements for documentation and substantiating your choices to the regulators are only growing. In addition, we all know that technology can and will take on part of the process of portfolio management and many advisors are making the choice to shift to activities that only people can do, which tend to be in the relationship building area, client goal setting and holistic financial planning areas.

Here is some of the rationale for outsourcing portfolio management:  to free up time for financial advisors who want to spend more time with clients; to allow more time to increase scale and better manage regulatory requirements; and to avoid technology displacement by shifting to activities only a person can perform.

Speaker 1: In addition, there is evidence that the portfolios individual advisors create are on average performing less well than those developed by Home Office and asset management teams. Teams that pretty much focus 100% of their time to portfolio construction and the inputs and risk management and analysis that surround it. If you are an advisor in a large firm, expect your Home Office to be interested in that and at the top advisers termed elite in this 2017 study by Iris are spending half as much time on portfolio management and research as the average financial advisor only 12% of their week versus 24% of the week for the average adviser. This allows them to spend nearly twice as much time on clients. Elite advisors spend 49% of their time on client service and acquisition. While average advisors are spending only 26% of their time on direct client activities. You may ask, can you do this yourself to construct portfolios for all of your clients? Do you have the skill, the tools, the time? Can someone on your team do this? Does your firm provide this? Does what my firm provides fit with what my clients need? Do I even like doing this myself?

Speaker 2: I was down at a financial adviser conference earlier this year in Nashville to speak to financial advisors about model portfolios and before my breakout session I decided to walk the floor at breakfast. I was trying to get some advisors interested in coming to my session to hear about model portfolios. The first advisor I happened to sit next to, we exchange some small talk and I started talking to them about why I was there to talk about model portfolios and how Nuveen can help and with portfolio construction. And he said to me that he has no need for model portfolios because he develops custom portfolios for his clients on an individual basis. So I got up from that discussion a little frustrated kind of expecting I was going to be speaking to an empty room later that day. However, the next 20 advisors I spoke to said the exact opposite. They love model portfolios because it frees them up to spend more time out talking to clients and growing their business. And it turns out that on average the average financial adviser spends less than a third of their time on actual investment activities. Um, I thought that was a good example that shows that, you know, every financial advisor runs their practice a little bit differently. Some want to control portfolio construction. They think that that's where they should spend their time. Others are happy to use model portfolios so that I can spend more time outdoors.

Speaker 1:When looking at portfolio construction approaches and partners, keys to understand include what's the intended outcome. For instance, is it income or growth in a pure absolute return slash absolute cashflow sense or something more aligned with the benchmark? What are the processes behind the models? You're getting advice on how our strategic allocations developed when and how our tactical changes made. What are the practical ways you can incorporate model portfolios, products and services into your practice? What resources and service will you receive is at one time or ongoing, what is available for your clients? Let's start by discussing the process of portfolio construction. Of course, you are already doing that for your clients using one or more strategies. There are a number of approaches that financial advisors currently use to construct portfolios for their clients as of last year. Developing a strategic asset allocation and applying a tactical asset allocation overlay remains the most prevalent approach followed by simply developing a strategic allocation and sticking with that.

Speaker 1: There's not really a single right answer. However, if you are currently using a particular method and wish to access outside help, you may wish to either partner with a firm that uses a similar approach which will be familiar and perhaps enable a smooth transition or add a different approach as a compliment to your current process. Expanding the views and angles for seeking to achieve clients is investment outcomes to actually develop allocations. Many of the approaches rely on modern portfolio theory or m p T. However, modern portfolio theory isn't so modern. It was first published in 1952 as well. There are disconnections between theory and market reality. People don't always behave logically and markets don't always behave as expected or as they did in the past. Traditional correlations and variances disappeared during the 2008 financial crisis. Traditional investment theory did not adapt. Consequently, continuous and robust research is essential but not necessarily sufficient. Adaptability is also essential era at Nuveen and at other firms and perhaps in your practice. We start with quantitative research to uncover and test the key macro economic factors that drive risk and return in various asset classes as well as fundamental and behavioral research in areas that affect various investor outcomes, including things like longevity and contribution rates that affect success in converting retirement savings into retirement income. We also link these with macro views across the markets via regular meetings of our global investment committee

Speaker 3: means

Speaker 4: Global Investment Committee brings together our senior most investment leaders across the globe. We do this across traditional asset classes such as equities and fixed income as well as alternatives such as real estate, real assets, private credit, and private equity. We also look to drive alpha in our investment process. We do this by sharing asymmetric information across all the different investment capabilities that we generate. We're also looking to drive transparency in our investment process, not only to better inform our clients, but to also better inform our own investment processes. After a relatively benign start in the year 2018 proved to be a difficult investing environment and we expect 2019 to be challenging as well. We don't expect the world's major economies to enter a recession, but we do expect growth to slow in. That presents some challenges to investors as they navigate a slower growth world. At the same time, we think financial conditions will be tied around the world as interest rates rise and as we see growing trade restrictions. Importantly though slower growth and tighter financial conditions do not mean a risk off world, at least not yet.

Speaker 4: The good news is that we think valuations for many risk assets, specifically equities and fixed income are more attractive now than they were at the start of 2018 interest rates have risen, yields have climbed, credit spreads have widened, and equity valuations have fallen. That creates opportunities as a result. In most cases, our investment leaders are expecting modestly better returns across asset classes in what we saw in 2018 and as such, we are continuing to find good investments across public and private markets in some 2019 is likely to be a balancing act. Our investment teams are because on finding opportunities to buy and own high quality assets without becoming too defensive in their approach. Chiefly. We are closely watching global trade issues. We think trade restrictions in higher towers are likely to affect markets and investors for yet another year in this issue has the potential to escalate and derail our mostly pro growth outlook.

Speaker 4:  Likewise, we're worried about a messier than expected Brexit should negotiations become derailed. These sorts of geopolitical issues remain worrisome. We are genuinely cautiously optimistic about the market outlook for 2019 but we are highly focused on downside risks and think our clients should be cognizant of these risks as well. Overall, we advise our clients to strike a balance between optimism and being defensive to approach markets cautiously, but to remain invested in above all to work with an investment manager who has the tools, insights, and flexibility to manage through what could be a challenging 2019 for additional information on Nuveen's views, I'd invite you to read our complete 2019 outlook. We'd love to hear your views as well. We would welcome the opportunity to talk about your portfolio goals and challenges and how we could better help you meet your investment objectives. We encourage you to contact your Nuveen relationship manager with any feedback or questions. Thank you

Speaker 3: Nuveen investment committee.

Speaker 5:  It's a fantastic platform to discuss markets with the most senior investors across the firm. Sharing the best thinking of those investment leaders with each other. Everyone gets invaluable insights and can take those back to our own investment processes. How we then use these insights differ from each investment group and particularly for solutions. It's all about aligning portfolios with overall objectives. So solutions is very unique as we don't pick single investment securities within one asset class, but we construct portfolios across asset classes to meet client objectives. So we were looking through things as how much risk to take overall, how much stocks versus bonds, which sectors in fixed income, which parts of the equity markets do we want to invest in international versus us developed versus emerging markets value versus growth. We also look into alternatives. How do those fit into the portfolio? So for 2019 and this is expected to be a year, that is very interesting as we will expect more full utility going forward.

Speaker 5:  Cost by factors like trade risks and rising rates where we will see a return to normal interest rate environment. A couple of things on the change in his risk environment. First, we expect this to be a gradual change. There's nothing toxic that we expect of low up. Secondly, we have to monitor the environment very closely using proprietary tools and research. Assuming in on market risk factors at each stage of the market cycle, we will have a lot of choices to make risk off. Doesn't mean taking all investments off the table and covert into cash. We still want to be invested in the market to meet the longterm goals of our clients, so we need to understand which part of the markets are appropriate to allocate two at each stage. From an asset allocation perspective, there are a few initial views that we can share. However, we will be adjusting our fuse over time as actual market risks present themselves.

Speaker 5:  So we generally believe equity markets present better opportunities than fixed income markets. Despite the increased volatility. We're still not at the end of the full market cycle and short term corrections like an October could be buying opportunities that are interesting that said actual earnings growth will need to come through during 2019 within equities, there are bigger opportunities in developed international given the valuations, but it's very hard to see what catalysts will actually drive to us. Price increases until that becomes clear. We remained bias to the u s for now within the equity platform. We particularly like high quality growth stocks. We think that's an attractive area to invest in at this stage of the cycle. Within fixed income, we believe there are attractive opportunities in emerging market debt, so we have to look at that very carefully. We do believe that alternatives can be a very attractive option to include in the portfolios at this stage of the cycle. Strategies like equity, long short or market neutral are very interesting given the low beta. Now real estate is another interesting option given it's a great diversifier for portfolio risk as well. Maybe it would encourage clients who can actually access to real estate investments to include that as an allocation in their portfolio?

Speaker 1: Yeah.

Speaker 5:  Currency risks are probably the most difficult wants to predict, but the impact on portfolios is increasing so we will focus more on embedded currency risks in portfolios versus the objectives in the liabilities of the end investor and adjust where needed. Lastly, with a lot of the relocations of capital across the portfolios, we think it's interesting to keep in mind responsible investment options. As a firm, we believe that having an responsible investment few during our investment processes will help portfolio managers differentiated across investment options, which can be a very valuable approach in his market environment. Overall we believed are still attractive opportunities to capture. Yet we have to closely monitor the markets to adjust to portfolios when risks develop over the course of the year. We will connect with the global investment committee frequently to discuss these developments and jointly come to insights that are invaluable for us to adjust the portfolios to meet our client objectives for the longer term. Thank you

Speaker 1: macro views. Plus the results of our different areas of research come together to form capital markets, assumptions for the future that drive both strategic and tactical asset allocation timeframes matter. Capital markets assumptions are typically over longer periods of time but can vary from five to 10 to even 75 years out. Strategic Asset allocation connects these capital markets assumptions with investor outcomes and preferences. Tactical asset allocation considers where various asset class factors are relative to the longer term allocations. For instance, within an asset class like municipal bonds where our credit spreads relative to the longer term assumptions or averages and across asset classes are their relative value trades possible that may contribute positively to the desired client outcome within the client's preferences. Whether you are doing this yourself or partnering with others, you'll want to know and be comfortable with the process of when, why and how the allocations take advantage of tactical opportunities in the markets.

Speaker 1: Implementation is an important component of the process as it also affects both outcomes and to preferences. For instance, a tactical opportunity may present itself that quantitatively improves the portfolio outcome, but may have secondary effects that should considered and obvious example would be tax consequences. Depending on how the portfolio is delivered, tactical changes may create less desirable short term taxable gains. Even in strategic allocations though, consider how implementation works. Are there areas where a derivative exposure to an asset class may be cheaper or more liquid? If you or the portfolio manager wants to express a more negative view than previously on an asset class are holding? Do you trim, hedge, sell or short?

Speaker 1: There's probably not a universal answer, but when considering a portfolio construction partner, just like any other investment, it is wise to understand the process. It's limits its implementation and its related risks. Let's look at different ways portfolio construction intelligence can be available and delivered to you. Many firms offer white papers and other intellectual capital on a variety of topics specific to portfolio construction. You might seek out ideas on how to construct portfolios current and longer term views from respected authorities, new ideas on risk management and drivers of risk education and important news and interpretation that can affect investment portfolios. As noted earlier, interest in and use of model portfolios is rising.

Speaker 1: A model portfolio can include only asset allocations, allowing flexibility to actually construct the portfolio using a variety of product structures such as mutual funds, ETFs, separately managed accounts or nonpublic alternative investments. Model portfolios are also available that include both allocation percentages and specific investments for those allocations. Depending on what's offered to you at your firm and investment platform, you may be able to access model portfolios through a single unified managed account or you may wish to build an even customize it yourself. A third method to access portfolio construction expertise is through multi-asset products. These can take a variety of forms, mutual funds, closed end funds, or separate accounts and address a variety of investor outcomes. One very important and popular multi-asset product is the target date fund prevalent in employer offered retirement plans because they are appropriate qualified default investment alternatives for employees. Signing up for 401k plans. They can also be an attractive one stop shop portfolio for investors outside of a qualified plan.

Speaker 1:  Not all target date funds are alike. While fees are often used as the sole differentiator performance, the menu of underlying investments available research and investing process and experience managing through a variety of market cycles are all factors to consider for what can be a very long term investment for institutional or for individual investor portfolios of sufficient size or in need of specific tailored investment components or outcomes. Custom portfolios may be the most appropriate choice, full or partial portfolio management managed to adhere to a benchmark or to a specific outcomes such as liability matching or specific responsible investment parameters.

Speaker 3: [inaudible]

Speaker 6:  mandates can often tapped into an expanded universe of investment options such as private equity, real assets, and other alternatives. Since alternative investments may not neatly fit into common. Yeah,

Speaker 1:  tools and investment profiles, experience and skill as well as research and risk management tools are critical.

Speaker 7: We take a strategic forward looking allocation approach and formed by Nuveen's global market views and deep municipal expertise. We help deliver a tax exempt income. While minimizing downside risk. Our model is also help achieve investments, income at risk objectives in an increasingly volatile and complex municipal market. They evolve with changing market dynamics and team views. Secondly, we utilize simplified diversification strategies to protect against extreme losses for resource constrained advisers. Nuveen can provide insight into constructing, managing diversified income portfolios that align with our client's risk tolerance and your cashflow needs rather than relying on a single fund. Nevine solutions is utilizing multiple Nuveen municipal strategies, each with varying duration profiles and credit exposures to build diversified portfolios to better reflect our views on future interest rate and credit spread changes. This affords greater opportunity for higher yield with similar risk or similar Yoda with lower risk when compared to individual fund constituents. Finally, Nuveen is an industry leading municipal bond market manager with abroad municipal fund offerings. We help provide diversification with access to Nuveen's municipal market thought leadership and research capability.

Speaker 3:  Ooh,

Speaker 7: we take a diversified approach. Our approach is holistic and integrated encompassing Nevine, specialized municipal market knowledge and Nevine solutions, sophisticated portfolio construction techniques. We focus on outcome oriented investing. Client outcomes drive everything we do. Our models are designed to maximize tax exempt teal and managed portfolio risk. In line with investors income goals, visors can decide which portfolio is right for their client, be a conservative, moderate, or high income. We incorporate new beans, best thinking on longterm capital market assumptions, which underpins the allocation strategy for each portfolio or continuously balancing interest rate, credit risk seeking to limit downside risk. For a given investor profile, we allocate across Nevine suite of national municipal bond funds for diversification across Muni sectors, credit quality and rates duration. Our investment process is a three step process. First, we developed foreign looking views on interest rates and credit spreads and incorporate Nuveen specialized municipal knowledge. Second, we optimize what the goal of maximizing expected return per unit of tail risk. This is an order to reduce the probability of severe losses that income investors are particularly averse to. Finally, quarterly updates are made to reflect evolving market dynamics and team views.

Speaker 1: Finally, portfolio construction insights can be incorporated into tools and consulting partnerships.

Speaker 8:  Yeah.

Speaker 1:  You may be the type of financial advisor who really takes pride in and enjoys the art and science of portfolio construction, but want a second set of eyes or help improving your own matrix. Or you may use models available at your firm but wished to get help adjusting one for a particular client. Outcome like understanding and improving your health. There are tools available that you can drive on your own or you may want deeper views. It require more professional

Speaker 9: tools, guidance, or both.

Q: How are advisors thinking about outside help with portfolio construction?

Speaker 10: Well, they're absolutely open to it. First off, it's one of those things where if you can have a second set of eyes on what you do for a living, wouldn't you want to do that? When I, when I think about, um, the idea of what these benefits are, it's really understanding portfolios at a much higher level. It's understanding what your portfolio is done and maybe more importantly, it actually helps to maybe highlight a hole or two that you just didn't realize was there. Well, when I think about it and I don't, I have a very limited bit of knowledge for this. 

Q: About how many of the advisors you know seek outside help for developing portfolios for their clients?

I would say that almost all of them do, and the reason I say that is because they look at their firms, they find out what their CIO models are. Then they go outside, they look at people like Bob Doll at Nuveen, they'll, they'll look at Jeremy Siegel, they might go to Dorsey, right?

Speaker 10: There's all these different publications that people pay for it. They go to websites, and when you think about that, it's all about trying to get to the answer to the, the place that will give them the best opportunity to succeed. I often like to use this analogy about surfing. When it come to this, you know, I'm a guy who surfs. When I go to a surf break, there might be 25 guys in the water. I mean, I think of, when I think of tied, I think of timing and then what I do is I try to find the best spot, but I end up having to paddle around all over the place. If I had an optimizer that would tell me exactly where to go, I would use that and that's what our insights program actually does for people. It provides them the ability to get right to the best spot for the clients and for the risk level.

Speaker 10: So there's really two ways to look at it. First off, if they're using office models, that would be their CIO models. In many cases what they're doing is they're saying, I'm going to go out and just get as many assets as I possibly can and then I'm going to throw him in a model because I trust my firm, which is a good thing. Many of these same advisors also have some sort of a pm model where they actually make the choices and have discretion. It's really those discretionary opportunities that a program like insights works the best. They actually provide this optimization tool or maybe an advisor, we'll, we'll look at what we have and they'll say very simply, I want to make these two changes. And with that we can use our optimization tool and take a look and see if that product is doing what the advisor wants for their clients.

Q:  Do they create their own and are they looking for a second opinion?

Speaker 10: In reality, yes, the answer is when you have a pm or an advisor who likes to be a portfolio manager, what they want is they want a second opinion. They want the ability to feel confident about the choices that they're making. And I've seen it firsthand where advisers didn't feel like maybe they had the right idea, they maybe they've used home models in the past and those whom models have underperformed. Not by a lot but a little, but they have to answer to that with clients. So the thinking here is that the second opinion that we can provide at Nuveen with end sites is going to give advisors the confidence to go to their client and say, hey, this is going to be a portfolio that has less risk and a better or similar opportunity for return going forward.

Q:  What sorts of challenges are they seeking help with?

Speaker 10:   Advisors today are looking for a lot of things and when it looks at the challenges that they're having might be headline risk from one situation. You know, you might have a ideas like, uh, the tariffs that are in the marketplace. You've got volatility that's happening. You're seeing a downward moves that are five times faster than upward moves and they're fearing that because they don't want to be the advisor that loses a bunch of money for their clients. And from a client standpoint, the challenges are getting enough income. We're still in a really low rate environment. And if getting enough income is what we're looking for, how much risk are they willing to take? They want the answers to those questions and they want to be able to provide clients with a few opportunities to get the right portfolio for them.

Q:  Are there particular investment outcomes they want help improving?

Speaker 10:  Um, yes to all of them. Basically every single person wants those three things mean if you can lower volatility, if you can lower downside risk, if you can increase income or get a little more income, that's exactly what something that is an optimizer can do. I mean end sites does that for people. I've seen at least five different opportunities in the last week where I used this tool where we lowered risk by 10 15 20% we created the exact same performance return and either we increased the income or kept the income and the same just by simply using a tool, putting some inputs that we're the advisor's input by the way. It was all about the advisor and what they wanted to see out of the portfolio. We did the inputs and then the output became something that provided a better outcome for clients.

Q:  Are any of them looking for help improving the income a portfolio generates?

Speaker 10: Absolutely. In fact, just yesterday we had the output from a client who was looking for a 6% income flow. What we did is we went in and we said, can we take a little bit more risk and we turn over a little bit more of the current portfolio. And at the end of the day the advisor said yes. So we came back with that output and we showed an outcome that didn't look as good as the client thought the expected tail risk or potential loss in 5% of the portfolio. Monte Carlo analysis opportunities was ah Gosh, just ridiculous. So the client saw that and said, you know, I'm more comfortable with just a four and a half percent income cause I just don't want to lose that much money. So the optimizer tool did what it's supposed to do, which is to show the potential loss and also provide the income that the client was comfortable with. It was really a great story.

Q:  How have they worked with Nuveen or other asset managers?

Speaker 10: So advisors, so there's many advisors out there who are looking for the second set of eyes. And in one case, what I've realized is that many advisors are looking to increase their time, find better ways to prospect and find better time with clients. What they don't want to be doing is analyzing products all day long to try to find the best opportunity. So by using insights are using Aladdin, which is black rock's rib or raptor, which is what wells Fargo uses. What they're doing is they're just making sure that the portfolios are doing what they're supposed to be doing and knowing what they own. One of the ideas that I've seen recently is that when looking at the insights report, there were two pages in particular that the advisers looked at. One of them was the the map factor and the second was correlation. The map factor is a home run and that is a page you want to end with or lead with every single meeting.

Speaker 10: To know that two funds had a 99% correlation when they were supposed to not be correlated at all is a pretty amazing stat and it provides information for the advisor to make a move and do something to help the portfolio. Or in another case where a multi-asset product was 78% in cash when as an income provider, it shouldn't be that much. It was supposed to only be 10 to 15% so those are the pieces of education information that these products and sites optimizers provide. Even some of the other products from other firms and advisors want that information. It helps them create better portfolios.

Q:  What was the specific story that led to an nSights portfolio analysis?

Speaker 10:  Well, the story that, uh, that I've used is that I walk in and I just say something to the effect of have you used a Latin before? Yes or no? Did you like it? Okay. Well Nuveen has one as well. And what we do is a little bit different. We have less biased towards our own products by simply going out and taking a look at your portfolios using your inputs. And what we've been told by other advisors is that our output is cleaner, easier to read, and more understandable, not only for the advisor but also for the client. I always allow the idea of a one hour time period after the first output and input input than output and then ultimately have a followup meeting. So I create a process where I'm going to get two, three, maybe even four meetings out of this one idea.

Speaker 10:  We've been able to do both depending on the situation and what the advisor was looking for. In one situation there was an opportunity where the advisor who was asking should I add these two products to my 20 product portfolio? And so what we did is we looked at it, we analyzed it, and ultimately what we found was that it didn't add anything substantial to the portfolio and he was actually better off taking a couple of products off the board and going to a lighter portfolio with only 17 different products because of the overlap that was in place. So that was one scenario. And the other scenario, what we did is we looked at a portfolio in most advisors have 12 to 16 different portfolios. So we always ask for the moderate 60 40 as a starting point. And in this first portfolio when we went through it, what we were able to do was change the portfolio by less than 15% and provide 20% less risk based on standard deviation. And all the tail risk numbers went down as well.

Q:  What questions did advisors have about working with Nuveen?

Speaker 10:   So, uh, with that, most of them are, it's about process and timing and how does it work and uh, is this just a onetime thing? They also asked, you know, what time horizon are you using for the, the performance, what sort of stress tests can we do? Uh, can you do individual positions, which we can't do, but it's still something that we can proxy out, which I've already seen done a couple times as well. Uh, generally speaking though, there's lots of questions and more importantly, those questions create engagement and that engagement allows us to have a conversation about whatever topics are important to that advisor and to those clients of that advisor. This tool absolutely provides a much higher conversation than just a product pitch.

Q:  What questions did advisors have about an nSights report?

Speaker 10: The aha moments are really in two slides. The first slide is that map factor slide, which shows them if they have too much high yield because the three funds that say don't say high yield on them have high yield in them. I had one specific example where the advisor group and the analyst only wanted a 10% waiting to high yield on the IO corporates. But ultimately had 16% is they're waiting and they were surprised by that because they didn't know that three other funds also had high yield in them so they were able to make changes to get back to the allocation that they wanted for their clients. You know the other one is the correlation chart and the correlation chart has anywhere from dark blue to gray and what's interesting is gray means they're highly correlated. What is also interesting about that is sometimes advisors want that they're looking, they have two funds that are both say large cap growth and they're using them in tandem because they want a high level of correlation.

Speaker 10:  They just want to use two different companies and products, so a different management styles. So using these reports, the questions and the Aha moments are numerous and it feels like in every conversation I get another one of those

Q:  What results have they experienced based on partnering with others on portfolio construction?

Well from a semi selfish perspective, the MD that I had knowing that black rock was able to raise over $900 million by using this tool is obviously self evident. My face. I want that money as well. But what I also realize is the reason that advisors did that business was because it was the right thing for the client and they were able to create portfolios that made sense and to fulfill what clients are looking for. Using an optimizer tool like this is the reason that I've wholeheartedly believe I'm going to talk about this every day for the rest of the year.

Speaker 10: Anytime an advisor and get a second set of eyes on a portfolio, it frees up their time because it gives them confidence to believe in what they've done. My good friend James from a Morgan Stanley just today was saying to me that he spends three days a month analyzing the portfolio to make sure that they've got the right portfolio at the time. With that said, they started using Aladdin and with that it's actually taken a day out of his time, so now he's got two days that he has to work on it. He said by using us, it's going to create another free day. So now he's going to work one day, have us in Aladdin work two days and he's going to now have an extra two days to go prospect and do the things he needs to do to grow his business and not just maintain the business that he has

Speaker 1:  like a good medical evaluation, diagnosis and a prescription. Right. Portfolio Diagnostics and optimization should be accompanied by clear results. Okay. Either historical or forward projections. Specific ideas for change and rationale and potential implications of change.

Speaker 11: Insights is a powerful new service from Nuveen that allows financial advisers to request an in depth holistic portfolio review driven by institutional quality analytics. Insights is a powerful new service from Nuveen that allows financial advisers to request an institutional caliber review of their clients' portfolios and models are insights. Reports are designed to assist advisors with the task of ensuring that their portfolios are outcome oriented, that they're components, strategies are working together toward meeting a client's objectives and well positioned for the markets ahead which we are finding is particularly helpful where we are at this late stage in the cycle. The financial advisor community has been successful using our insights service to provide a second opinion on the robustness of their own model or Home Office model to uncover which factors in strategies are exposing their portfolios to the most undesirable risk and gather ideas on how to rebalance their existing holdings based on their client's desired outcomes.

Speaker 11: Seeing how we might position a Nuveen strategy to complement their current strategies. The analytics involved provide advisors with a clear picture of how their portfolios are positioned today. Surfacing the asset class exposure is aggregated across all of their portfolio weights and holdings, whether there are any unintended asset class tilts and a thorough gap analysis to provide ideas for possible diversification. In addition to asset allocation insights, our reports regress the current portfolio against a series of factors to perform high quality risk decomposition. This is a particularly useful technique to uncover the hidden risks in a portfolio which can assist advisors and understanding which factors are increasing their likelihood of sustaining heavier losses. We take it a step further by drilling into the underlying strategies to analyze each holding specific contribution to the overall risk of the portfolio and which of these strategies are contributing the most to diversifying at risk.

Speaker 11: Once we have that picture, we can run the portfolio through a series of historical stress tests, macro shock events to predict using Nuveen's longterm capital market assumptions, how the portfolio might perform in the future. If we went through another Lehman crisis break hike tech bubble for example, we can also compare the portfolio's forecast performance under different market scenarios such as flattening or steepening yield curves and changes in the u s dollar relative to a benchmark or proposed portfolio. The real power of the insight service is our focus on reducing downside risk. Modern portfolio theory teaches us that significantly negative events, these black swan events are difficult to predict and while rare those fat tail, the events as they are called can have devastating effects on portfolio returns. Many shops still report only on the typical measure of risk standard deviation, which takes into account both the positive and negative side of the distribution curve.

Speaker 11:  The industry has made a practice out of showing only standard deviation in essence truncating and discarding the tales of the returns distribution due to their lower probability of occurrence. But doing so ignores the impact that introducing those significantly negative drops can have on your portfolio. Truncating the historical performance can lead to overstating returns and overestimating yield potential. Nuveen prefers to focus on the left side. The downside risk. This choice allows us to better illustrate the portfolio's capability to whether a bad storm and provides the ability to optimize the portfolio holdings to minimize that expected tail loss effect that can have on a portfolio. Depends on how well it is constructed. The financial services community is fairly adept at performing individual fund comparisons. Comparing and contrasting two or three different strategies in order to arrive at a winner and swap out one for the other, but Nuveen would submit to you that this exercise performed in isolation outside of a portfolio context is ignoring a powerful diversification tool at your disposal.

Speaker 11: The impact of correlations and the benefit that they provide in decreasing overall portfolio volatility and maximizing yield relative to a specific threshold. Nuveen knows it's ideal to consider strategy changes in terms of their impact on the total portfolio. Introducing a new fund could have unintended consequences that can be difficult to recognize and it can be further complicated by the challenge of knowing where to source the allocation for the new product. Our insights service helps financial advisers answer the questions. What's the best way to fund the changes I want to make? Do you take it from one fund, multiple funds? How does this change impact my portfolio's return and risk profile? Did I shift the duration or credit quality too far out of line that I just decrease my portfolio's ability to hit its objective? Those are all important questions are insights, reports can help advisers?

Speaker 11:  Answer. The service is highly customizable. We can incorporate a series of preferences and constraints, all of which help us tailor the output to match the advisor's goals. Our dedicated team is working to provide the industry with our best thinking and customize ideas for how we might mitigate undesirable risks and better position their portfolios to achieve the desired outcomes. First, we need to get the details of your current portfolio. What are the holdings and one of the weights? Most importantly, we need to understand what outcome you are seeking to achieve for your clients. Do you want to reduce the overall risk, reduce the magnitude of a potential worst case loss, improve yield. Finally, we need to understand any other constraints. It's not practical to turn over 75% of a portfolio. For instance, if taxes are an issue, we partner with you and your Nuveen relationship team to continue the dialogue so that you ultimately have deep and high caliber understanding of your current portfolio. It's projected results and ideas for ways to potentially improve the outcomes you're seeking.

Speaker 1:  Let's take a look at how these various methods might come together for today's market environment. Two thirds of advisers in a 2018 [inaudible] survey reported that clients have asked about downside protection in the past six months, a slight uptick from the previous year. Why the increase in the fourth quarter of 2018 the s and p 500 index came within 1% of its first bear market since 2008 and higher market volatility is expected to persist in 2019 many financial professionals have asked about downside risk mitigation thoughts and ideas in response. Nuveen's solution team drew on the overall 2019 outlook from the Nuveen global investment committee and its own ongoing research offered ideas in a white paper for financial professionals and their clients implemented tactical asset allocation, changes in growth model portfolios and in certain multi-asset products for growth investors and helped financial professionals with downside risk mitigation ideas for their specific portfolios through insights, portfolio, diagnosis and analysis, starting with views intended to address the needs of a moderate oriented investor. The overall thinking and actions offer historical and forward looking insights and rationale for three important areas of asset allocation in volatile equity markets.

Speaker 1:  One, diversifying equity risk with core fixed income by taking advantage of negative historical correlations between equity and bond markets. Simple advice, yes, but after several years of positive equity market returns, investors may need a reminder to keep some insurance potential included in the form of diversifying their equity risk with fixed income. Note that diversification does not guarantee a positive investment results to balancing fixed income allocations between core bond and plus sectors. Our research has shown that a 75% 25% allocation between core bonds and plus sectors that is high yield preferred securities, floating rate loans, and emerging markets debt historically maximize the risk adjusted return within a fixed income allocation. Nuveen puts this insight to work in model portfolios and products in addition to published articles and three addressing risk on equity allocations by considering more defensive equity investments such as long short strategies or strategies that focus on identifying companies with stable earnings and consistent dividend growth.

Speaker 1:  Such strategies have historically realized returns that are in line with broad equity markets, but with lower overall volatility as well. Dividend payers have historically achieved higher overall returns, which may in turn provide a potential buffer against market volatility affecting other parts of the equity allocation. Finally, these views make their way into the diagnostic and customization work we're currently doing to help financial professionals and minimize downside risk in specific portfolios. Rather than focus on return volatility per se, we have helped minimize expected tail loss or the magnitude of the worst case simulated portfolio returns using sophisticated optimization and simulation tools. That account for the fact that returns are not perfectly normal bell curve distributions.

Speaker 1: In conclusion, we hope you have increased your awareness and understanding of trends and reasons why many financial professionals are seeking outside partnership to construct portfolios for their clients. Approaches to portfolio construction and potential implications outside portfolio construction ideas and value added insights are delivered in thought leadership model portfolios, multi-asset products, custom mandates and portfolio diagnostic and customization services and how we at Nuveen apply our research insights and experience in portfolio construction to offer ideas in the current environment. We believe that the key hallmarks of Nuveen's solutions portfolio construction capabilities are important priorities to keep in mind when considering a partner to put it together for you and your team. We are committed to your ongoing education and support, whether it's through our single asset products, multi-asset models and products or custom mandates and services. To get started, visit nuveen.com/outcome oriented investing where you can learn about our approach to outcome oriented investing, subscribe to model allocation updates and overall asset allocation views and more. Or to discuss and ask your specific questions. Please call your Nuveen advisor consulting team at 800-752-8700.

 

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Financial professionals should independently evaluate the risks associated with products or services and exercise independent judgment with respect to their clients. 

Investing involves risk, principal loss is possible.

The correlation corecipient can vary from -1.0 to +1.0. with -1.0 indicating perfect negative correlation (variables moving in opposite directions) and +1.0 indicating perfect positive correlation (variables moving in the same direction).

Diversification does not insure against market loss. Past performance is no guarantee of future results. It is not possible to invest directly in an index. Performance assumes the reinvestment of dividends and capital gains. Deferent indices and economic periods will produce deferent results. All indices are unmanaged and unavailable for direct investment. Please see Appendix for index descriptions and end of presentation for other important disclosures.

Nuveen model portfolios (“models”) reflect exposures across asset classes and are intended to illustrate how combinations of funds could be used to achieve the stated investment objectives. Results are inherently limited and do not represent actual results and may not account for the impact of the general market. The models do not consider the financial status, investment objectives, tax situation, or other needs of specific investors or client types. Providing the models to a financial professional does not reflect, establish or evidence an advisory or fiduciary relationship between Nuveen Solutions (NS) or a Nuveen affiliate, on the one hand, and the financial professional, his or her firm or clients, on the other. Models are not automatically rebalanced; allocations may not achieve model objectives and are not guaranteed. Both the actual underlying Funds and model allocations may vary. Allocations are reviewed periodically and may change based on NS strategic and tactical views. There are no management or other fees at the model level; however fees apply for the underlying Funds as outlined in each Fund’s prospectus. The models’ risks are directly related to those of the underlying Funds, as described below. Allocations may not match a client’s actual experience from an account managed in accordance with the model portfolio allocation.

About the role of Nuveen and the financial professional

NS and its affiliates do not assume responsibility for determining the suitability of an actual portfolio based on these models for any investor, or for making specific investment decisions in connection with implementing any investment program that might be based (in whole or in part) on these models for any such investor. These responsibilities will be borne solely by the financial professional, his or her firm and clients. In addition to providing the models, Nuveen or its affiliates may also manage internal and/or client accounts (including Nuveen Funds) on a discretionary basis in a strategy similar to a model. Discretionary account management (including Nuveen Funds) by a Nuveen affiliate may vary materially from the models. Nuveen does not provide tax or legal advice. To the extent that financial professionals provide advice to a client or prospective client that is an ERISA plan, participant, beneficiary or IRA and such financial advisor is an ERISA fiduciary, the financial professional represents that it is capable of independently evaluating the merits and risks of NS and its affiliates’ products and services and is responsible for exercising independent judgment in evaluating NS and its affiliates’ products and services, and such parties should look to their own advisors for advice regarding any specific course of action.

Nuveen provides investment advisory solutions through its investment specialists.  Nuveen Securities, LLC, member FINRA and SIPC. 

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