Advisors are paying lower fees on their model portfolios, increasing their use of ETFs but improperly using factor products, according to BlackRock.
Their average model portfolio fees fell below 50 basis points in 2019 from 54 basis points in 2018 while average ETF usage rose to 38% of portfolios from 36.1%, according to BlackRock’s Advisor Insights Guide, which is based on thousands of advisor investment models collected from the firm’s Aladdin risk management platform over the 12 months ended Sept. 30, 2019.
Despite the increasing use of ETFs, an average 54.4% of portfolio models used mutual funds. A plurality of portfolios — 35% — used a blend of passive, active and factor products rather than just a single approach, while 13% used only active mutual funds, 8% only core index products and 3% only factor products. “The old debate of ‘active versus passive’ should evolve to a framework of blending index, alphas and factors,” according to the BlackRock report.
Within equity allocations, 41% didn’t include any factor products and among those that did, the allocation was too small — just over 21% — to have any meaningful impact on a portfolio’s tilt, according to BlackRock. Either the weights of most factor products were too light or other investments diluted the effect of factor tilts. Only portfolios using the small size factor showed any meaningful difference in tilt.
The guide looked at five factors in portfolios: value, smaller size, momentum, quality and minimum volatility. The first two tend to perform best during the recovery portion of an economic cycle; momentum, during the expansion phase; and quality and minimum volatility during the slowdown and contraction phases, according to BlackRock. We are currently in the slowdown phase.
In light of these findings, BlackRock’s Portfolio Solutions team, headed by Brett Mossman, developed a four-step investing approach that it says has been effective for many advisors. It helps advisors “establish an efficient strategic asset allocation” using tilts to enhance investments.