Model portfolios are nearly ubiquitous on US investment advisory platforms, with assets set to rise amid an expanding array of model options, according to a survey by Natixis Investment Managers of the central gatekeepers, or professional selectors of the funds available on their firm’s investment platform. Eighty-four percent of fund selectors in the US and Canada currently offer model portfolios, and over half (52%) say that moving a larger share of client assets into models is a key objective for their firm in the year ahead.
Natixis surveyed 400 professional fund selectors globally, including 133 in North America, about business and portfolio strategies and their market outlook for 2021. Respondents include chief investment officers, directors and investment team members at independent financial advisory firms, broker-dealers/wirehouses, registered investment advisors, private banks, and family offices. The survey found greater use of model portfolios among firms in the US than in any other region, with similar trends across the US and Canada.
“Model portfolios offer the best of both worlds: scale and personalization,” said Marina Gross, Executive Vice President of Natixis’ Portfolio Research and Consulting Group. “By operationalizing portfolio construction, with centrally guided investment research, asset allocation and rebalancing, model portfolios make the investment process more efficient and responsive to changes in the market and clients’ goals.”
Six in ten (60%) professional fund selectors in the US and Canada say that the primary benefit of using model portfolios is that they provide clients across the firm with a more consistent investment experience. The next most frequently cited benefit is that by using model portfolios versus building individual investment portfolios from scratch, advisors can spend more time addressing their clients’ needs (41%).
Few fund selectors, just 19%, have experienced challenges convincing financial advisors of the merits of model portfolios for managing at least a portion of their clients’ assets. The two top challenges they cite are providing customization options within their model portfolio offering (45%), and knowing when to add new or enhanced models (39%). In rationalizing their firm’s overall investment product offering, 80% of fund selectors say their focus is on quality, not quantity.
Sixty percent (60%) of fund selectors report that they are finding a greater need for specialty models to complement the core models on their platform. As they look to enhance their offering over the next 12 to 24 months, 54% plan to add environmental, social and governance (ESG)-focused models, with nearly two-thirds (64%) agreeing that models make it easier to implement ESG across portfolios. Other planned additions include models with thematic sleeves that focus on areas such as longevity or disruptive technology (45%), alternative (36%) and tax-aware models (32%).
“The attractiveness of model portfolios reflects a heightened, industry-wide focus on the client experience and an evolving advisory business model that emphasizes the value of personalized planning and advice, including and beyond investment performance,” said Dave Goodsell, Executive Director of Natixis’ Center for Investor Insight. “Models make sense, both from a firm brand perspective and for advisors managing the growth of their practice in a market that’s increasingly complex to navigate.”
Market Outlook Calls for Opportunistic, Disciplined, Active Management
Eight in ten (84%) fund selectors say that model portfolios, whether built and rebalanced internally or by third party asset managers, provide an added layer of due diligence in investment selection. The importance of rigorous research and disciplined portfolio rebalancing could only increase in a market that 84% of fund selectors believe will favor active fund management in the year ahead. Two-thirds (67%) report that in 2020, the actively managed funds on their platforms outperformed during the market downturn. Seventy percent expect actively managed funds will outperform passive in 2021.
When asked about their outlook for the markets and economy, at least half expect increased volatility in the stock (50%) and bond (53%) markets this year, with corrections in technology (52%) and cryptocurrency (52%). Nearly two-thirds (65%) point to volatility as the top risk to portfolio performance, and many professional fund selectors wonder how investors will handle market swings. Eighty-seven percent believe that retail investors have been more apt to carelessly speculate on high-risk investments since before Covid-19. The market surged in the second half of last year, yet 68% of professional fund selectors worry many individual investors will prematurely liquidate their investments during bouts of volatility. Three-quarters (77%) fear that giving greater trading access to inexperienced retail investors could ultimately be a threat to investors’ financial security and income in retirement.
The vast majority (88%) of fund selectors think people equate a strong stock market with a strong economy, yet nearly three-quarters (74%) don’t believe the global economy can escape the consequences of Covid-19. Most (79%) don’t expect real economic recovery until they see a sign that companies are increasing capital expenditures.
Private Assets Will Be a Focus
Despite rising risks and volatility, fund selectors are optimistic about finding growth opportunities in the market. Their long-term investment return assumptions call for average annual growth of 7.6%, and 70% expect their firm’s assumed rate of return will be the same or higher in 2021. Their projections for year-end headlines suggest they will favor a risk-on approach, with 60% calling for aggressive growth strategies to outperform defensive strategies.
At the same time, their forecasts suggest a need for deep, diligent research and analysis with tactical shifts in portfolio allocations. Sixty-five percent expect small-cap and value stocks to outperform large-cap and growth stocks this year.
Six in ten (62%) fund selectors also believe the demand for private equity investments will increase in the year ahead, particularly given their resilience during the pandemic. As they calibrate their portfolios for future growth, half (50%) expect private assets to play a more prominent role. In the year ahead, they plan to increase private asset funds, including private equity (48%), private debt (46%), infrastructure (45%) and real estate (45%).
Natixis Investment Managers surveyed 400 professional fund selectors globally in 21 countries through the United States, Canada, Latin America, Asia, the United Kingdom and EMEA (Europe, Middle East and Africa). In the US and Canada combined, Natixis surveyed 133 fund selectors. Respondents included chief investment officers, directors and investment team members at independent financial advisors, wirehouses, registered investment advisors, insurance company investment platforms, private banks and family offices. Data were gathered in November and December 2020 by the research firm CoreData.