A majority of advisory firms in the U.S. and Canada are looking to model portfolios to manage a greater share of discretionary assets amid an expanding array of model options, a new survey finds.
Eighty-four percent of fund selectors in the U.S. and Canada currently offer model portfolios and more than half (52%) say that moving a larger share of client assets into models is a key objective for their firm in 2021, according to Natixis Investment Managers’ Global Survey of Professional Fund Buyers. Conducted in November and December 2020 by research firm CoreData, the survey of 400 fund selectors is comprised of independent financial advisors, wirehouses, RIAs, insurance company investment platforms, private banks and family offices across 21 countries, with 133 respondents in the U.S. and Canada.
When asked about the benefits of model portfolios, 6 in 10 professional fund selectors in the U.S. and Canada say that the primary benefit 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%).
“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,” says 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.”
Just 19% of fund selectors say they 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.
A significant majority (60%) of fund selectors also 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 offerings 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%).
Active Management and Due Diligence
Additional findings show that 84% of fund selectors say 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, the report emphasizes. Two-thirds (67%) report that in 2020, the actively managed funds on their platforms outperformed during the market downturn, while 70% expect actively managed funds will outperform passive in 2021.
When asked about their outlook for the markets and economy, half of respondents 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.
Private Asset Focus
Despite rising risks and volatility, fund selectors are optimistic about finding growth opportunities in the market. According to the findings, 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.
Additionally, 62% of fund selectors believe the demand for private equity investments will increase, particularly given their resilience during the pandemic. As they calibrate their portfolios for future growth, half 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%).
