Three key trends in model portfolios
![Three key trends in model portfolios](/content/dam/invesco/us/en/images/insights/ARTCL-HRO-key-trends-model-portfolios.jpg)
Key takeaways
Blended approach
Two asset allocation approaches: strategic for a disciplined long-term focus and tactical for shorter-term opportunities.
Multi-manager diversification
Diversifying provides exposure to investment managers that may complement Invesco’s portfolio managers.
Client and practice focus
Managing clients, a practice, and a team takes time. Model portfolios help free up the capacity to do it well.
For investors to succeed over the long term, their portfolio needs to be managed with discipline and thoughtful attention to risk and return opportunities. In challenging market environments, portfolio management is even more important — and more of a focus for clients. Yet just when additional time and resources are needed to identify risk/reward opportunities in turbulent markets, clients are typically most in need of additional servicing. This can create a dilemma for financial professionals: Should they spend more time with their clients and give them appropriate attention or focus on investment research and due diligence?
The investing landscape is full of uncertainty and volatility today. That’s why it’s an opportune time to consider partnering with an asset manager to help navigate volatility and identify topical opportunities. Model portfolios can help ensure that clients get the professional investment management that they want — and need — while giving a financial professional more time to nurture existing client relationships and prospect for others in need of wealth planning. We examine three key trends in model portfolios, which are particularly relevant in challenging times.
1. Blending strategic and tactical asset allocation approaches
When meeting with financial professionals, we’re frequently asked what we’ve changed or adjusted in our model portfolios and why. These questions usually relate to what’s happening in the markets and economy today or our expectations for the next few months. We believe a disciplined, long-term approach to investing is foundational for success in all market regimes. In fact, research has shown that 92% of portfolio performance variation is driven by strategic asset allocation decisions.1 That’s why we devote significant resources to forecasting long-term capital market assumptions and asset class behaviors over the complete business cycle.
We also believe that tactical views can be used to take advantage of shorter-term opportunities within a cycle. Our model portfolios blend a strategic asset allocation approach with tactical adjustments based on what we think the market will do over the shorter term. We frequently analyze various leading economic indicators and market sentiment across the globe to identify prevailing economic regimes that can inform our asset allocation decisions within a business cycle. Our tactical asset allocation macro framework is shown below.
![Graphic shows economic regime, monetary policy, and market leadership in four phases of business cycle.](/content/dam/invesco/us/en/images/insights/INLINE-1-key-trends-model-portfolios.jpg)
For illustrative purposes only. Note: Economies can move backwards and forwards in this framework. We define policy easing as the US Federal Reserve lowering interest rates and/or expanding its balance sheet. Still easy suggests that the US Federal Reserve is maintaining the lower interest rate policy and/or continuing its bond-buying program. Tightening suggests that the US Federal Reserve is tapering asset purchases and/or beginning to raise interest rates. Tight policy suggests that the US Federal Reserve is raising rates in an effort to ease inflation concerns.
2. Rise in multi-manager model portfolios
Another takeaway from meeting with financial professionals is their belief that diversification across asset managers is a way to find best-in-class strategies. We agree. While Invesco offers investment products in a variety of asset classes, vehicles, and management styles (active, passive, and factor), our models platform seeks the best possible option for every asset class, which may or may not be our own product. This approach is the primary driver of our adoption of multi-manager model portfolios, which allocate to more than one asset manager. It can provide exposure to other investment managers that are complementary to those from Invesco.
Our manager selection process focuses on meeting portfolio objectives, promoting diversification, and minimizing risk while seeking to generate better long-term risk-adjusted returns. All managers, whether external or internal, and if they manage liquid or illiquid, or public or private assets, are evaluated and selected through a rigorous qualification process, which includes quantitative and qualitative reviews. We also consider costs. Some asset managers specialize in lower-cost passive products, while others have more of a specialty in higher-cost actively managed products. Utilizing multiple managers allows us to build cost effective solutions with underlying ETFs and mutual funds with a range of fees.
![Graphic shows what’s considered when choosing a fund manager: universe screening and quantitative and qualitative fund screening.](/content/dam/invesco/us/en/images/insights/INLINE-2-key-trends-model-portfolios.jpg)
For illustrative purposes only.
3. Focus on client and practice management
Clients aren’t just asking for investment help — they want help managing their financial lives too. That takes time. Managing a practice and team does too. As you can see in the graphic below, a financial professional’s time is spent on things that are important to their clients, teams, and running their business. Professionally managed model portfolios are a way to free up the capacity to do this. The next step is to maximize that time.
![21% of time is spent in client meetings, 12% investment research, 10% prep for client meetings and managing operations, 9% for financial planning and trading, 8% for service and prospecting, 4% for Compliance, and 1% other.](/content/dam/invesco/us/en/images/insights/INLINE-3-key-trends-model-portfolios.jpg)
Source: Cerulli Associates, The Cerulli Report: U.S. Advisor Metrics 2021. Used with permission.
Invesco Global Consulting (IGC), the industry’s largest communication and consulting services group with a focus on financial professionals,2 can help financial professionals enhance their practice and better serve their clients.
We research more than investments. IGC has studied language since 2007, completing more than 20 studies, 65 focus group sessions, and over 10,000 investor surveys3 to identify what words and phrases may best help clients understand the investments that are recommended and the value that a financial professional offers. In addition to our language studies, we have comprehensive practice diagnostics and peer benchmarking anchored by third-party research and 35+ research-based programs that help support financial professionals in four key areas: new business development, wealth management, practice management, and client service. Our 20 tenured and knowledgeable consultants help financial professionals achieve their goals through presentations, customized workshops, and comprehensive one-on-one consulting.
Create a model practice
Model portfolios solve for investments. But our model portfolio offering does much more. We want to help create what we call a “model practice,” one that not only optimizes portfolios but client communication and business-building too.
Footnotes
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1
Sources: Brinson, Singer and Beebower, 1991. Ibbotson, Kaplan, 2000.
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2
Source: RA Prince & Associates, Inc. as of 3/31/20. The ranking of “largest” is based on number of full-time employees on the Invesco Global Consulting team. Any reference to a ranking provides no guarantee for future performance results and is not constant over time.
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3
Source: The largest study ever done on the language of financial services has been conducted by Invesco Global Consulting and Maslansky + Partners since 2007. Invesco Advisers, Inc. is not affiliated with Maslansky + Partners. Data shown is through 12/31/21.