Investments Unlocked ep4: Enhancing investor outcomes with model portfolios

Chris, welcome back episode 4 of Investments Unlocked.

How do you feel survive in advance.

Excellent.

Well, look, today we're going to talk about something that's the bread and butter of what we do day-to-day or at least what you do in the solutions business and that's model portfolios.

So would you mind just kicking off for us and what our model portfolio is, who uses them and why are they using them?

Great question.

So a model portfolio is simply a new way to deliver a classic idea and what we define.

Model portfolios are basically multi asset solutions that are delivered in a more flexible customizable way for end users that can be wealth clients as well as certain types of institutional clients.

And this is really where a lot of the growth in our multi asset solutions complex is coming from.

Clients see the flexibility of multi asset portfolios.

They see it as a way to leverage our asset allocation IP (Intellectual Property) as well as some of our innovative building blocks as a firm to build these types of solutions which can really serve as core elements of their investment platform.

Yeah, fantastic.

And you mentioned really popular with wealth clients and, we saw that, I saw that in Australia a little while back.

We see in the states as well and a little bit in Europe.

And in particular in the wealth segment, like you said, increasingly feels like institutional segments are starting to adopt portfolios to navigate markets and focus on things that might be a little bit better at.

So for example, family offices who have a range of duties to solve for their clients that aren't necessarily purely focused on investments, in which case it sounds like model portfolios make a lot of sense as well.

So, well, do you have any comments on that?

I mean, you know, I know you're speaking with a lot of family officers with myself.

So what do you think about that?

Sure.

So I think we see model portfolios as a tool to help, whether it be financial advisors or executives at family offices or even certain types of institutions to help them focus on what they're best at.

And if you think about your traditional financial advisor, they're really kind of core role is to run and operate a financial advisory business, meeting with clients, planning for clients, raising assets.

And they're leveraging us for that core asset allocation service that really serves as a bedrock of their investment platform and gives them the bandwidth and leeway to focus on other activities.

As you noted, we're starting to move kind of up market with that particular solution, family offices.

And like you mentioned family offices have a lot of different hats that they have to wear.

They have to focus on public markets, focus on private markets, engaging and servicing the principles of the family office, maybe focus on accounting and wealth planning type issues.

It's a very holistic service they're offering and they've essentially just chosen to essentially nominate whether it be us or another provider to build the poor core public market solution, that model portfolio that really serves as the core their asset allocation.

And they can focus on what they want to focus on, whether it's sourcing private market opportunities, sourcing individual esoteric deals or doing more financial planning, right.

And as part of that, I know that there are some instances where some of those family office advisors will have or multifamily offices will have high net wealth individuals or extremely high net wealth individuals and they may have lower net wealth individuals who still deserve and they want to deliver the robust diversified solutions.

The complexity of some of these model portfolios can vary pretty meaningfully as well, right?

I mean, we see some clients who have model portfolios exclusively constructed from low cost ETFs, which we can talk about in a moment, still gives you a significant amount of levers to pull to incorporate, you know, solutions into the portfolio and solve for different outcomes.

But you can also start incorporating things like, you know, alpha strategies in some instances as ETFs  for all sorts of funds and then alternatives as well.

So we will speak to that in a moment because I'm keen to get your view, but why don't we start by talking a little bit to how do you go about constructing model portfolios?

And you spoke to, you know, customization as well.

So you know, what's the first step?

Sure.

So I think what makes model portfolios unique or kind of one aspect that makes it unique, it's a very hand in glove conversation with the end client, whoever that is, whether it's a wealth client or an institutional client.

It's really kind of learning about what their goals and objectives are, if they have any particular constraints, if they have any particular preferred types of vehicles and also more traditional aspects around risk, return expectations, public privates, but things like that.

And then we can take that order, go back to our lab and leverage those key alpha levers we talked about whether it be strategic or tactical asset allocation, kind of fund selection across both the ETF space, traditional, passive, systematic as well as fundamental active.

They are using those building blocks to essentially effectuate what that clients particular objectives are with those constraints.

And that's really why you've seen it takes popularity because it scales incredibly well.

The capability is very, very scalable.

And like you said, an advisor might have clients across the spectrum and as opposed to them going in and spending a lot of time building individual portfolios for each and every single client, they have an institutional grade portfolio or a series of portfolios that's flexible and can be deployed across a large client base and give them the ability to effectively scale their business and focus on what core activities they want to focus on.

Right.

And we're in Asia Pacific, you know, we've got a variety of regions that we cover and their different clients have different objectives.

You can also incorporate things like, you know, sustainability objectives into the portfolios.

It sounds like Shariah compliance for example.

So significant amount of customization it sounds like.

Yeah, absolutely.

And I think what makes this region so unique if you compare it to your most wealth advisors or financial advisors in the US is they have a multi jurisdictional client base like you're saying.

So your typical financial advisor in the US only works with the US based clients.

But if you talk to a family office or a wealth advisor in this region, they might have clients in five or six different countries.

So there's different kind of regulatory regimes, there's different investment preferences styles.

And that's really where the model piece and that drive to help clients customize that we really believe there is a core central component of our DNA helps effectuate and drive those clients outcomes because it's not realistic to go in and set up an individual fund for each and every client.

There's a lot of operational expense associated with that.

And what they really want is that institutional grade asset allocation and a flexible solution in the models have really been a good pathway to doing that.

Models have really taken hold in the US market going on for about a decade.

And when we were kind of building out our model ecosystem on our team and kind of the 2016/2017 timeframe models were a fairly nascent concept in the US.

But now it's a multi billion dollar approaching on trillion dollar plus market opportunity.

Now we're seeing that start to take hold in Asia Pacific as wealth advisors see an opportunity to leverage world scale players for those public markets type solution that core asset allocation and really give them scale to focus on their best and highest use of their time.

I like that a lot.

And it sounds like that's because models democratize institutional quality solutions.

Well, clients who in the past weren't able to access those types of bespoke solutions, right?

I mean, you needed to be, if you were institutional, you were maybe trading a couple of billion dollars at a time.

You don't necessarily need to be that size these days to access.

Absolutely portfolios are at the right.

Absolutely.

I mean, it's true democratization.

So I mean, now, you know, our wealth clients are accessing pretty much the exact same level of IP that our institutional clients are.

Now maybe the vehicles are slightly different, but we're able to effectuate it to where our investment process is meant to scale and transfer across different vehicle types, right.

I want to talk a little bit about implementation as well.

You mentioned a little bit, yeah, you know about how you go about doing that utilizing your investment process and platform.

We've spoken a little bit about this in the past as well.

You know, we talk about, I like that curve where you have X axis is something like active risk or alpha opportunity.

Y axis is something like your total fees that you pay.

And we talk about or you have, you know, your core beta which is down right at the end at the intersection of the two axes.

And then you have your smart beta or common beta is like single factor ETFs for example, you know the core is S&P 500 systematic active, fundamental active or like the high conviction concentrated strategies.

And then alternatives that's something that we offer across the board our firm rather and I know that you utilize a lot of the strategies, most of that curve we offer in ETFs as well.

And then we have obviously alternatives as well.

So how do you think about implementing these model portfolios for clients?

And I know that you're also open architecture, which I think a lot of clients appreciate too.

So how do you think about that?

Yeah, So like I said, once we have a client's desired outcomes and required parameters, that kind of gives us avenue to then implement our asset allocation process.

Generally speaking, we will be investing in the public market space deploying both strategic and tactical asset allocation.

In Asia, most of the investors we engage want some elements of dynamism or attached class of tactical allocation in their portfolios.

It's a bit more common in the US to see kind of Strategic Asset Allocation (SAA) only asset allocation coming from a model provider, but in Asia, we're typically using both.

So our tracking error and our alpha is coming from strategic and tactical asset allocation.

You mentioned some other types of creative vehicles that are now available in the ETF wrapper, kind of gives us the ability to go into more of the alpha generative security selection category or premium harvesting category, just an extra component of returns we can add in the portfolio, whether it's fundamental, whether it's systematic in nature and combining those for our real, you know, risk taking budget and helping us drive alpha from that.

The last piece like you said would be privates.

So we're starting to see now the confluence of public and private in the model portfolio construct where a client can come to us and say, I want your best asset allocation ideas.

Across public and private and we are able to deliver that.

It's scale and there's a pretty unique differentiator.

You're starting to see elements of that pop up in other global markets, but this is still pretty new territory.

And what you're doing then is you're just delivering an institutional grade multi asset public private portfolio with those different building blocks.

So once you add privates to the calculus, it does change the risk budgeting mix because you obviously are big believers in if you're investing in that space, the liquidity premia, the ability to harvest alpha, the huge levels of manager selector alpha.

So return dispersion that exists in that space between like first and third quarter managers is a very large compared to public.

So if we have that in the portfolio, we are going to then add a big piece of that to our risk budget.

I'd say most of our clients are still focused on the public space with respect to models, but I think a growing number of them are seeing that public and private now due to this kind of mass democratization exercise across vehicles can be delivered in one single solution.

Fantastic.

So we have seen a proliferation of active ETFs and all that's meant is that you still get really robust strong active strategies or capabilities being offered via transparent easy to trade instrument.

Costs come down a little bit.

We're seeing semi illiquid or you know semi private credit exposures like CLOs bank loans.

They're very liquid by definition of being offered via ETFs, but they are differentiated sources of, risk and drags of yield.

So is that changing the public / private mix?

Does that mean that more clients are able to incorporate alternative drivers of risk into the portfolios a little bit easier?

And what are you seeing in that space?

They are.

So I mean, I think some of those would call them private credit adjacent capabilities, primarily broadly syndicated loans or leverage loans as well as CLOs (Collateralized Loan Obligations).

We actually just for the sake of implementation put that in our public portfolios because when clients say public, they don't necessarily mean, you know, publicly traded on an exchange.

What they really mean is daily liquidity.

And because those assets have daily liquidity, we typically do work them into our asset allocation framework even for clients who don't want to invest in true private space.

But like you said, now that ETFs are growing in their scope of influence and now incorporate not just passive vehicles or say passive strategies and systematic strategies, but fundamental active strategies, it gives us a pretty broad toolkit to work with.

I think I mentioned this on our podcasts maybe 2 podcasts ago.

ETFs are not only the vehicle of the future, they're actually the vehicle of the present today.

So you can build a well diversified portfolio across strategic and tactical as well as different types, of underlying vehicles, whether they be systematic or fundamental active using just the ETF wrapper.

So I think one big take away from this conversation that we'd like to leave behind with listeners is don't equate ETFs with just traditional core passive, kind of broaden your scope in terms of how you think about ETFs to incorporate all types of underlying strategies and approaches.

I like that a lot.

ETFs are really convenient, robust portfolio building blocks that allow you to access all sorts of different risk drivers that you couldn't really access in the past super conveniently.

I don't know, a couple of questions that maybe you can answer at the same time.

So what's the client conversation like?

Is it often that you have a client come to you and says, I'm not really sure what I need, but these are the types of, you know, risk return objectives that I have.

How would you then work with them and would you advocate for strong mixes of alternatives as part of those portfolios?

And you know, what kind of scenarios would you do that it?

It's a great question.

So when a client comes to you with this type of request, typically they don't come to us and say I want a model portfolio.

What they do is they describe something a bit more esoteric and outcomes in written, but what they're really asking for is a solution that meets a particular typically a risk and return outcome with some parameters which we can then tie back to our asset allocation framework.

In the event a client does not lay out a daily liquidity parameter or requirement, we will typically explore their interest in private markets just because we do think there is an illiquidity premium to be harvested.

If you're willing to take that illiquidity premium.

We've seen institutions have a lot, a lot of success with that.

We've seen still relatively elevated spreads in the private market space as well.

So for clients who want to go that had the ability to go that route, we typically talk to them about doing that.

For those who just kind of want to stay, let's say, you know, in the public domain, it becomes very much an exercise about equities, core fixed income as well as some of the Asian capabilities such as loans and CLOs.

So that's, I mean, typically how we would think about it, clients use different terminology in Asia.

So they'll use terminology like discretionary portfolio management.

They don't really use the term models much.

So when you kind of talk to them, you have to kind of accept the fact they might not speak and you're like exact vernacular, which is totally OK, but you can kind of tell through enough repetition that's what they're asking for.

There's you give me your IP and a scalable solution that's customizable that I can implement as part of my investment platform.

That's really what they're asking us to do.

Fantastic.

Well, thank your time today, Chris, One last question.

Who's going to win the Super Bowl next year (2026)?

Wow.

It's a hard question because we just finished week one of the NFL season.

So we have 17 weeks to go.

I mean, my natural answer is always going to be the Houston Texans or maybe the Los Angeles Rams, kind of the two teams that I pull for.

But you might have a different answer to that question.

I mean, if you think about, I mean, the NFL is so because it's a high contact sport and so much of it is driven by injuries.

Injuries can completely change the scope and course of an entire season as well as scheduling.

Fantastic, Chris, thanks for the time and I'll get you next time.

Excellent, enjoyed it, said I look forward to another one.