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January 08, 2013 at 12:12 PM
One of the primary ways financial advisors have added value to their client relationships has always been through investment selection and asset allocation guidance. That’s still true, of course, but it’s probably fair to say the dynamic changed a bit after the 2008 financial crisis. Not only has the investment landscape changed dramatically, so too has the compliance and regulatory backdrop. Advisors today simply have less time, and less desire perhaps, to pick investments and asset classes. Not surprisingly, the result has been a growing movement toward the use of fund strategist portfolios.
Outsourcing the Process
By definition, fund strategist portfolios are asset-allocated investment solutions comprising some combination of mutual funds, exchange-traded funds (ETF) and individual securities. While a host of different types of shops have emerged to meet the growing demand, there are basically four forms of allocation strategies being employed:
- Strategic: A long-term, fixed target asset allocation where a strategist attempts to achieve a risk/return profile that mimics a point along the efficient frontier.
- Tactical: An approach in which the strategist can quickly change a portfolio’s risk profile and actively allocate to a range anywhere from 100% allocation to equities to 100% allocation to cash, depending on the strategist’s outlook. A tactical strategist may have the ability to actively move in and out of sectors, asset classes or countries based on their evaluations. These types of portfolios are typically used as complements to investors’ existing strategic asset allocation rather than replacements.
- Dynamic: An approach in which the strategist utilizes a combination of tactical and strategic elements within a constrained range around a target allocation.
- Asset Class Specific: A self-described approach that will utilize specific asset class segments like High Yield, TIPS, Global Equity, Emerging Markets, Alternatives, etc.
A Rapidly Growing Space
In just the last few years, the investment outsourcing marketplace has exploded from just a few, relatively inflexible funds-of-funds to a wide variety of products and providers. In fact, the investment and consulting industries have been creating products at a rapid pace in an effort to meet growing demand for more efficient and effective products. According to Cerulli Associates, Packaged Mutual Fund Advisory Assets have increased from $141 billion in 2006 to $332 billion as of end of the year 2011.
But both investor education and research on these popular products remains a near-term hurdle. According to Morningstar, nearly two-thirds of these strategist solutions started in 2005 or later and roughly 30% of the strategies have a track record less than three years old. Utilizing the traditional elements of manager research and due diligence are critical, but only to a certain extent as a result of the limited performance track records for most strategist portfolios.
A Higher Level of Due Diligence
