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.

Moderator:
  • Michael Jones, Chairman and Chief Investment Officer, Riverfront Investment Group
Panelists:
  • 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

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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.

Moderator:
Michael Jones, Chairman and Chief Investment Officer, Riverfront Investment Group
Panelists:
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

Has Rep as PM Growth Peaked? (2/2)

This is a summary of a panel discussion from the Money Management Institute’s 2012 Spring conference held in Chicago, IL.  This is part 2 of 2.  You can read Part 1 here.

Moderator: Jay Link, Managing Director, Merrill Lynch

Panelists:
Lorna Sabia, Managing Director, Head of Managed Solutions Group, Merrill Lynch
James Walker, Head of Consulting Group, Morgan Stanley Smith Barney
Matthew Witkos, President, Eaton Vance Distributors.  Chairman of MMI.

Is your firm coming out with any new product offerings?

According to Witkos, Eaton Vance has developed a new product that they are calling Exchange Traded Managed Funds.  It is like an ETF since it trades like a stock, except without the transparency of an ETF so that the money manager’s intellectual property is protected.

What is the sponsor perspective on mutual fund velocity?  

No one wants advisors over-trading mutual funds, Walker commented.  Firms look at trade velocity and try to keep it within a certain range, he said.  The industry should be more aware of the difference between selling mutual funds individually versus fitting them into a larger portfolio.  Walker thinks that market velocity won’t be going away any time soon.
Sabia feels that velocity is a complex topic and more data is needed to determine the impact that it might have on a portfolio.  She also stated that she believes that sponsors, advisors and managers all “own” the issue of velocity and everyone should work together to deal with it.

Continue reading

Has Rep as PM Growth Peaked? (1/2)

This is a summary of a panel discussion from the Money Management Institute’s 2012 Spring conference held in Chicago, IL.  This is part 1 of 2.  You can read part 2 of 2 here.

Moderator: Jay Link, Managing Director, Merrill Lynch

Panelists:
Lorna Sabbia, Managing Director, Head of Managed Solutions Group, Merrill Lynch
James Walker, Head of Consulting Group, Morgan Stanley Smith Barney
Matthew Witkos, President, Eaton Vance Distributors.  Chairman of MMI.
Has the growth of RPM programs peaked?  According to Dover Research, five years ago, there was $1.2 trillion of client assets in managed solutions and RPM/RAA combined were less than 30% of that total.  Today, total managed assets have grown to $2.4 trillion while rep-driven programs have increased their share to 40% or almost $1 trillion.

How important is RPM to your firm?

RPM is Morgan Stanley’s fastest growing program, Walker reported, with $560 bil in all advisory programs, $150 bil in RPM globally.  Major change in past few year has been change from individual equities (now 34%) to include ETFs, mutual funds, etc.  This is a great solution for Reps that consider themselves to be active allocators.  Trend: move towards discretion, driven by FAs practice management, customers want outcome based investing.  From a regulatory sense, it’s easier to deliver on fiduciary duty.
Sabbia joined the Managed Solutions Group seven months ago.  At Merrill, RPM is called the Personal Investment Advisory (PIA) program and was launched in 1996, now $105 bil AUM.  Approximately 4,500 FAs leverage the program and they’re segmented into three buckets: it’s their fastest growing segment with a $15.7 bil net increase last year and they’re on track to beat that number this year, she said.

Continue reading

Inside the Minds of Barron’s Top Financial Advisors

This is a summary of a panel from the Fiserv Client Conference Spring 2012, which was held in Las Vegas, NV.

Moderator:

Sterling Shea, Managing Director, Head of Advisory & Wealth Management Programs, Barron’s.

Panelists:

Ed Dollinger, Edward Jones, 26 years – manages $500 mm

Theresa Chicopolos, CFP, Wells Fargo, Scottsdale, AZ, 26 years – manages $1.16 bil in Ultra-HNW and Institutional assets, she was the #1 ranked advisor in Arizona in both 2010 and 2011.

John Waldron, CFP, Founder and CEO of Waldron Investments, $2.2 bil AUM, HNW individual and institutional clients, #1 ranked advisor in Pennsylvania.

What functions are you allocating more time to now than you did five years ago?

net new flow of money is concentrated in a small number of advisors, these advisors adapted their methods of communication and internal processes to the evolving consumer needs.

Chicopolos has been steadily reducing the number of client relationships over the past ten years in order to concentrate the firm’s focus on fewer while still increasing the overall AUM. 10 years ago, she had 3,500 clients and it was mostly transactional business. 5 years ago she was down to 280 clients, and today she has just 75. She spends more time now looking at her client’s entire balance sheet and making sure that they execute the plans as they are designed.

Waldron Investments is a consulting firm with 26 employees that has an independent asset management offering that integrates with the other seven financial disciplines. Five years ago they were mostly doing the same things as today, which is understanding the client’s entire balance sheet and implementing financial strategies. What has changed significantly is their client’s psyche, he said. More clients are doing due diligence on them than five years ago.

Previously, Dollinger’s firm focused more on portfolio construction, but now they’re focusing more on strengthening client relationships. Over the past five years they’ve been trying to reduce the number of client relationships and increase the amount of assets at the ones they have, he said.

Continue reading

Is Tax Alpha a Myth or is it Real?

This blog is dedicated to a tax management as it relates to fee-based managed accounts.  I plan on researching and discussing many of the issues surrounding tax management.  I’ll look into tax management claims made by investment advisors, overlay managers and software companies.  Different methodologies of tax management are also on my radar as well as methods for validating claims that different management or optimization techniques can generate tax alpha.death_and_taxes

The reason behind the name of this blog, “The Myth of Tax Alpha” came to me while I was attending the FRA’s Managed Accounts Technology & Operations Summit in February 2009.  A number of different speakers and panelists touted their firm’s ability to generate various amounts of tax alpha for their clients.  The range went from 10 all the way up to 300 basis points.  I thought this was an interesting topic and wondered if these claims could be verified or if they were just marketing fluff.  Maybe tax alpha is just a myth and maybe it’s not.  Either way I expect to learn a lot about tax management of managed accounts, so why shouldn’t I post it allonline and share it with all of you?