Going Under the Hood of Models-Only Programs

This is a summary of a session from the Money Management Institute’s Fall Solutions Conference that was held in October 2013 in New York City.

Moderator: Heeren Pathak, CTO, Vestmark


Are some asset classes better suited for use in models-only programs?

Asset classes that are more liquid are usually easier to trade in a model, Lasker observed.  Communication is important here since some assets can become illiquid for short periods of time and the managers need to know when there are problems implementing model changes, he stated.

While some strategies are more challenging, most obstacles can be overcome so that they can be included in a model, Overway commented.  Fixed income is a good example, since the models are often provided in the from of a list of characteristics instead of individual securities.  This entails more communication between the Natixis overlay management group and the model manager about which securities would be acceptable in the model portfolio, he pointed out. Continue reading

The Future of Advice Delivery: What Will Solutions Look Like?

This is a summary of a session from the FRA’s 11th Annual Managed Account and UMA Summit that was held in September 2013 in NYC.

Moderator: Walter Hartford, VP, Business Development, F-Squared Investments


Unified Managed Accounts (UMA’s) are not a silver bullet

What the managed accounts industry needs is new investment options, not new account types, Shkuda contented.  UMA’s are not a silver bullet that can solve all of a client’s investment needs.  What’s inside an account is more important than the account structure, she claimed.

Shkuda proposed that UMA growth has been flat for the past few years because the strategies being offered aren’t providing solutions for what clients perceive to be their needs.  Managed account providers must improve on their track record of innovation in order to increase market share, she suggested.

The following three rules were offered by Shkuda for the industry to be more innovative:

1) What has worked in the past, won’t work in the future – mainly due to increasing levels of competition
2) Firms must continually re-invent themselves – especially larger sponsors and wirehouses who are often afraid of cannibalizing their existing business
3) Think outside the box Continue reading

The Hunger for Yield

This is a summary of a session from the Money Management Institute’s 2013 Spring Convention. The panel was made up of three experts all from large, institutional asset management firms:

  • Daniel Loewy, Co-Chief Investment Officer, AllianceBernstein
  • Donald Plotsky, Head of Product Group, Western Asset Management
  • Robert McConnaughey, Head of Equity, Columbia Management

The session moderator was Kevin Keefe, Executive VP, Advisor Group.

Can you discuss some of your methodologies around asset allocation and portfolio construction?

According to Plotsky, a lot of clients are worried that fixed income is no longer a viable investment. He and his firm reject that notion and believe that investors need to re-think their approach to asset allocation. Income is a critical component of any long-term investment program, he stressed.

Loewy believes that there are three keys to successful asset allocation:

  1. pro-active – long-term assumptions about strategic asset allocation doesn’t cut it anymore, must have a pro-active approach to keep clients in the game to capture long-term risk premium
  2. flexibility – traditionally, risk was managed from the bottom-up using individual portfolio sub-components, investors want to manage absolute risk, not relative risk, requires a more flexible approach to be able to take advantage of opportunities
  3. customization – there is no one-size fits all portfolio, need to focus on individual outcomes such as growth, income, real return or capital preservation

Continue reading

Asset Allocation: Is Modern Portfolio Theory Dead? (2/2)

This is the second part of the summary of a session from the Money Management Institute’s 2012 Fall Solution Conference. You can read part 1 here.

  • Michael Jones, Chairman and Chief Investment Officer, Riverfront Investment Group
  • Colin Moore, Chief Investment Officer, Columbia Management, $339 billion AUM
  • Howard Present, President and Chief Executive Officer, F-Squared Investments
  • Steve Murray, Director of Asset Allocation Strategies, Russell Investment Group

How do fees affect your product decisions taking into consideration QE3 and a persistent low rate environment? Does paying 30-50 bps for bond allocations affect your product choices?

Murray said that fees do affect their product decisions, but that they always try to identify strong managers and the fees are a tradeoff versus the additional return that they’re expected to provide. Since Russell has a manager of managers structure allows them to move between managers with different fee levels as well as incorporate other products such as ETFs and mutual funds.

Fees have a higher impact when the product they’re attached to performs like Beta, Present ob served. Over the last decade, it was very difficult to extract value from equities as an asset class, while bonds appear that they will be difficult going forward. In 2008, the average target date fund was down 28%, so it didn’t matter if a manager was slightly above or slightly below that average. Relative performance in a down market is rarely appreciated by clients. You should be more aggressive with fees on beta products versus those that are designed to generate alpha, he said.

Does your philosophy of using low cost, transparent, liquid beta in the form of ETFs make it harder for your products to coexist on a sponsor platform alongside more traditional ones? — Randy Bullard

Jones proposed that their philosophy, which combines stocks, bonds and ETFs into dynamic allocation solutions is complementary to the more traditional solutions (like Russell). there is more than one way to create value besides picking stocks from a narrow slice of an asset allocation pie chart. They added another value dimension by adjusting the amounts allocated in each slice of the market based on the prices and momentum in each asset class. It’s not an either or decision to use their products or traditional. There’s a philosophical diversification that can be complimentary instead of competitive. Continue reading

Asset Allocation: Is Modern Portfolio Theory Dead? (1/2)

This is a summary of a session of the Money Management Institute’s 2012 Fall Solution Conference.

Michael Jones, Chairman and Chief Investment Officer, Riverfront Investment Group
Colin Moore, Chief Investment Officer, Columbia Management, $339 billion AUM
Howard Present, President and Chief Executive Officer, F-Squared Investments
Steve Murray, Director of Asset Allocation Strategies, Russell Investment Group

This was an interesting discussion since each of the panelists approach asset allocation from a different perspective.  Jones believes that modern portfolio theory (MPT) is dead and that asset allocation should be more fluid and dynamic so they shift the pie chart around.  Riverfront has a simple methodology, which states that the price you pay is the number one determinate of the upside potential and downside risk of an investment.  They feed the price into a proprietary optimization process to create a portfolio that tries to make money in a worst case scenario while still maximizing the upside potential.

Moore agrees that the standard process is deeply flawed and feels you shouldn’t maximize return for a given level of risk.  Instead you should figure out what is the maximum level of return that the client can accept.

F-Squared believes that downside risk management has a disproportionate impact on clients, according to Present, so they factor it into their portfolios at a higher level.  Standard deviation is used to represent investment risk and maximum drawdown to represent the client’s perception of portfolio risk, he said.

Murray disagrees with Jones and believes there is some value in modern portfolio theory but that it is just one data point.  It’s not enough to rely on by itself.  At Russell, they know that different asset classes follow different pattens in the market so they use using different asset classes to offset each other in a portfolio by combining long and short term market processes, he stressed. Continue reading

Diversify, Diversify, Diversify – 3 Ways to Help Advisory Products Succeed in Volatile Markets

“How can clients improve diversification in their portfolios?” was the question Roger Paradiso posed to those attending this session at the MMI Tech and Ops Conference 2011.  Client’s portfolios aren’t performing as expected and their needs aren’t being met, he said, they are looking for solutions. The recent rise in volatility in the market, he explained, combined with the correlation of many previously uncorrelated asset classes, has increased the priority of diversification for many investors.


Roger Paradiso, President and Chief Investment Officer, Private Portfolio Group, Morgan Stanley Smith Barney


Mark Thomas, Senior VP, Head of Managed Accounts, PIMCO
Joe Mrak, CEO, FolioDynamix
Donna Davis, Director of Trade Management, Private Portfolio Group, Morgan Stanley Smith Barney

Alternative investments help to diversify portfolios. How are you introducing alternatives into advisory solutions?

PIMCO uses a forward-looking process when designing client solutions, Mark explained. They evaluate what vehicle, product or platform makes sense and decide on the right structure for each client. Support for 40Act funds, limited partnerships, private funds, and separate accounts are all included in their program.

One issue when introducing new products is ensuring that there is enough capacity, Mark said. PIMCO is continually looking for ways to lower the minimums in their alternative structures and vehicles to make them available to a wider audience.

Continue reading

Fee-Based Advisors Clamoring for Muni Bond Ladders

Are fee-based advisors looking to move more managed account assets into municipal bonds?  There is evidence that this is the case and that muni bonds as a percentage of managed account assets could grow over the next few years.

Research from MMI/Dover shows consistent growth of fixed-income SMA objectives that corresponds to a consistent decline in domestic equity objectives. In mid-2010, domestic equity held a scant lead, 40% to 37%. Among model portfolios, taxable fixed income leads the list with 22.4% of assets, ahead of large-cap value (19.1%) and large-cap growth (17.8%).

Some of the broad investment trends that have surfaced in recent years–alternative investments and tactical asset allocation–can be found in managed accounts.  Jean Sullivan, from Dover Research, says that these programs generally have become more conservative, with an increase in fixed-income strategies.

While taxable fixed-income SMAs are the leaders, municipal fixed income doesn’t even make the top 10, holding less than 2% of portfolio assets. “Many investors in fixed-income SMAs are nontaxable, such as 401(k)s and pension plans,” says  “They hold taxable bonds, Treasuries, agencies, corporates and some asset-backed securities.”

Why would investors want to hold bonds via managed accounts instead of a bond mutual fund or a low-cost ETF that tracks a bond index? Financial Planning Magazine quotes Randy Dry, managing director of the institutional group at Thornburg Investment Management in Santa Fe, N.M.:

“For the same reasons that you’d use separate accounts for equities,” Dry responds. “Investors own the underlying securities, not shares in a fund. You can make trades that improve your tax position. And you avoid the ‘flow shock’ that may affect mutual funds.”

Dry explains that investors get bond ladders with his firm’s fixed-income SMAs. About one-tenth of the portfolio matures every year and the proceeds are reinvested in 10-year bonds. This strategy, which some other fixed-income SMAs also follow, can protect long-term bond investors against rising interest rates because money would be available for reinvestment at the higher rates.

Thornburg, which offers muni bond SMAs, has a $2 million minimum. With smaller amounts, investors may have less diversification and face wider spreads on trades, Dry says.

One of my previous blog postings, Current Challenges for UMA Sponsors, covered a session from the MMI 2011 Spring Convention. Representatives from both UBS and Merrill Lynch both reported that their advisors had requested the ability to provide muni bond ladders to their managed account clients.  However, there are issues that have blocked these offerings being made available, such as determining the proper minimum account size and the amount of alpha that muni managers can bring.

While UBS and Merrill are still considering bond ladders, other large sponsors have moved ahead to make them available on their managed account platforms.

For example, in March 2010, Schwab Managed Account Services™ partnered with PIMCO and launched a bond ladder offering called the PIMCO Municipal Bond Ladder Separately Managed Accounts—five professionally managed strategies that seek to generate income by leveraging investment opportunities in the municipal bond market.

According to Schwab:

PIMCO conducts continual credit surveillance, reinvests maturing securities, and provides institutional purchasing power, all for a highly competitive fee. The SMAs have an investment minimum of $250,000 and a program management fee of 0.35% for the first $1 million invested, 0.30% for the next $4 million and 0.25% for investments above $5 million.

PIMCO selects investment-grade municipal bonds with an average credit quality rating of A- or better at purchase. These are assembled in laddered portfolios with 1- to 6-year, 1- to 12-year, or 1- to 18-year maturity rungs.

Some of the benefits of adding a muni bond strategy to a managed account include:

  • Periodic income generation—The strategies seek to generate tax-efficient, periodic interest payments, which can be distributed as they accrue1 or reinvested into new bonds in the ladder. Of course, investing in bonds carries risks, including the risk that a bond may fail to pay interest or principal, and the risk that it may lose value.
  • Ongoing credit monitoring—The manager selects investment-grade municipal bonds and regularly monitors the credit quality of your account holdings.
  • Bond replacement—When a bond matures, the manager will reinvest the principal by purchasing a new bond, typically at the longest maturity range or “rung” of the ladder. The ladder is extended until you request a payout of principal or your account balance falls below the $250,000 minimum.
  • Direct ownership and transparency—Unlike fixed income mutual funds, a municipal bond ladder offers direct ownership of the underlying bonds.

LPL Financial also claims that their proprietary fixed income trading platform that allows financial advisors to build bond ladders, select products, and process trades online for municipal bonds, corporate bonds, new issue corporate notes, and FDIC-insured CDs.

An article from AdvisorOne.com, Trends in Separately Managed Accounts: UMAs, ETFs and Alternatives, confirms that Envestnet is also seeing an uptick in requests for bond ladders.  The article quotes Mike Henkel, managing director of Envestnet/PMC and Tom Simutis, an Envestnet/PMC senior VP in charge of relations with SMA managers:

Fixed income alternatives are of particular interest to advisors now—“no one wants to be on the long side of fixed income,” says Henkel. Simutis confirms that Envestnet/PMC is always getting requests for strategies that are “noncorrelated” to the broader stock indexes, but also “replacements for fixed income. SMA managers are using ETFs, they can use synthetic shorts, can buy bundles of equities.”  There’s a growing use of ETFs as a component of a SMA manager’s strategy, he says, “where the rest of the portfolio may be invested in stocks or bonds.”

What else are advisors looking for? Simutis says that on the fixed income side, in addition to alternatives “it almost seems like a move toward a more traditional approach; we’re getting a lot of calls” for bond ladders, because “they’re cheap and easily understood.”

While this evidence is far from conclusive, it does appear to be a trend that should be monitored.  It would advisable for sponsors to investigate offering muni bond strategies on their platforms, so that they will be ready to respond when their advisors start demanding it.