The Expansion of ‘Model Portfolios’: Gaining Ground & Providing Efficiencies

Modern portfolio theory was introduced in the early ’50s and until the financial crisis in 2008 it was widely regarded as the optimal way to manage risk in a client portfolio.  Even prior to that the concept of ‘balanced investing’, leveraging a blend of stocks and bonds to allocate an investment account dates back to before the Great Depression – in fact, the first balanced mutual fund was introduced before the market crash on October 29^th back in 1929.

Since that time, we have seen the concept of ‘model portfolios’ be integrated in numerous ways – asset allocation funds gained in popularity in the ’90s and 2000s and Target Date funds are now well over $2T in AUM.

But over the last several years our industry has further evolved and although the basic principles of de-risking a portfolio and properly diversifying a client’s investments have increased in complexity, the largest change that has occurred is in the ways investors can access diversification through model portfolios and the methods asset managers can use to deliver models.

A few examples of this growth are evidenced in the number of Turnkey Asset Management Programs (TAMPs) that are now available and the remarkable assets that they have raised over the last several years.  Or the significant growth in assets that are being traded using platforms like Envestnet and Orion where hundreds of asset managers are able to deliver their model portfolios in a marketplace that allows advisers to compare and blend various model portfolios.

Model Portfolios have proven to be a powerful way for asset managers to better engage advisers and enhance the value they can deliver. Many advisers have found that by partnering with a model provider they are able to focus on other areas of their business, such as estate planning and growing their practice.

Ocean Park Asset Management, as an example, has been active with building model portfolios for many years. Their firm believes that a segment of advisers values their investment management discipline and also believes in outsourcing portfolio management as opposed to building their own portfolios. The partnerships with TAMP platforms that Ocean Park has established have allowed them to engage with a different group of potential AUM holders while continuing to focus on their core value of tactical, rules-based investing. Participating in the growth of model portfolios has brought new distribution and awareness of their solutions.

Based on some of the statistics we have seen over the past several years we highly anticipate this trend to continue.

As of year-end 2020, according to data from Cerulli Associates, asset allocation model portfolios are the primary approach to portfolio construction for 16% of U.S. financial adviser practices, representing more than $2.1 trillion in assets. Of adviser practices that do not rely on model portfolios as their primary approach to portfolio construction, Cerulli identifies adviser practices managing $7.6 trillion in assets as being model targets. These model targets represent advisers that are not currently relying on model portfolios, but likely should be, as they lack the practice level resources to efficiently grow their businesses while also constructing custom client portfolios in their practices. Several models are actually leveraging the structure of a mutual fund to enhance the efficiency of their models.  Many of the turnkey asset management programs have incorporated mutual funds to lower the cost of the portfolio, expand their access to sub-advisers and improve their trading and tax efficiency.  In addition, a number of the models created by intermediaries are also leveraging 40 Act structures to deliver their solutions, most notably Edward Jones and the Bridge Build Mutual Funds which have grown to be one of the largest fund families in the industry.

Understanding the dynamics of model portfolios and the many ways they can be delivered is incredibly important and Ultimus is working with dozens of asset managers to create solutions.

12561908 3/30/2021