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The Future Is Now: Institutional Asset Allocation for Retail Investors

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It’s fair to say that wealth managers are constantly looking for better investment approaches and more time to serve their clients. Similarly, investors are always looking for improved portfolios that can weather the markets’ inevitable ups and downs. Both pursuits have been especially keen since 2008, when the global meltdown so irrevocably altered the investment landscape. Virtually every piece of the investment process has been re-examined since then, from investment policy to benchmarks to risk management to the types of investment structures being used.

This scrutiny of the asset allocation process has led to the proliferation of smart, managed investment products that help facilitate the implementation of diversified portfolio strategies. As a particularly positive result, financial advisors today can easily explore the world of institutional-class asset allocation. 

Along the Frontier
It wasn’t that long ago that most ‘off-the-shelf’ retail asset allocation programs included a relatively limited number of asset classes—domestic equity, domestic fixed income, international developed equity, maybe emerging markets equity or domestic real estate. While it was true that the resulting allocation models delivered on the promise of better diversification and long-term risk management, they tended to ignore institutionally-accepted asset classes. Retail portfolios, in other words, weren’t necessarily offering the best diversification and return potential to their investors.

In the years following the financial crisis, advisors began looking for more active asset allocation approaches that allowed for greater investment flexibility as market conditions and/or client situations changed. As a result, innovative approaches moved beyond the margin, and core-and-satellite portfolios built with an emphasis on quantifying and assessing risks, manager selection, and benchmarking became the dominant construction models. Not too surprisingly, alternative investments have been playing a progressively more important role in the process.

Alternatives Go Mainstream
In no small part due to the high correlation among asset classes that manifested in the 2008 meltdown, advisors turned their attention more toward absolute returns and away from relative returns. This trend accelerated the demand for products that combine access to non-correlated strategies—emerging market debt, commodities, international small-cap equities, and floating rate loans, for example—with the liquidity and transparency of registered investment products. These factors helped drive capital into alternative strategies compliant with ’40-Act requirements, as these offerings provide regulated and well-known structures that instill investor confidence.

Today, the mainstream alternative universe as we define it includes a variety of strategies that are delivered in a mutual fund or ETF/ETN structure. These alternative products, including private equity and hedge funds, can go a long way toward providing the kind of differentiated return streams that lead toward true diversification. Some strategies offer measurable return enhancement relative to fixed income, others provide a degree of downside protection relative to equities.

It’s no surprise, then, that more and more advisors, increasingly influenced by solid academic, institutional and third-party consultants, are modifying their model portfolios and recommended lists to accommodate alternatives. With intelligent portfolio construction, the savvy advisor can adopt passive core/active satellite asset management structures that combine low-cost beta exposure with the right mix of active managers in the more inefficient areas of the market.

But completing adequate due diligence is challenging, to say the least. It takes significant time and a well-rounded process to sort through the 50,000 or so managed investment products in the marketplace to select the most suitable products for strategy implementation. As a result, advisors are rightfully looking for help with investment product analysis, multi-manager mutual fund selection, and asset allocation design. Outsource providers are increasingly filling the gap.

Into the Future
With the explosion in the number of mainstream alternative products, it’s incumbent upon advisors today to seek out institutional-grade asset allocation platforms inclusive of alternative strategies. Ideally, these programs will

  1. Utilize a conflict-free, open-architecture approach for selecting high-quality money managers
  2. Adopt passive core-active satellite portfolio construction techniques
  3. Provide an third-party firm to monitor the managers, and
  4. Regularly rebalance the portfolio. 

These types of multi-manager portfolios delivered in a cost-effective format can greatly increase the probability that investors will achieve their financial security and retirement objectives. The future of “retail” asset allocation has always been about access to the full universe of global investment opportunities. We think that future is now.

Author’s disclaimer: The views and opinions expressed are provided for general information only and do not constitute specific investment advice or recommendations from the author.


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