Examining factors tilts, risks and fees of asset manager model portfolios

What are the most common risks, factor tilts, and vehicles of choice in asset manager model portfolios, and how can ETFs and other vehicles be used to potentially enhance returns, diversify risk, and improve overall portfolio efficiency (including fees)? These are the questions we asked in our inaugural Invesco Asset Manager Models Benchmarking Study. This report provides a comprehensive analysis of asset manager model portfolios and offers valuable insights into allocation strategies, risk profiles, fee breakdowns, and performance metrics.

We used Invesco’s proprietary tools to provide a risk factor lens across 1,682 model portfolios in five categories: Conservative, Moderately Conservative, Moderate, Moderately Aggressive and Aggressive.

Below are four key highlights from the report. Request the full report here, which includes multiple case studies to encourage ideas and discussion.

1. Equity risk dominates most model portfolios

We found that equities are the largest contributor to total risk across all model types, outweighing the risks from rates, inflation, and credit. While equity allocations range from 24% to 91% of the portfolio’s market value across the five model types, the risk contribution from equites ranges from 55% in conservative models to 95% in aggressive models. This underscores the significant impact of equity market movements on overall portfolio risk.

Factor weights can provide valuable insights to more mindful equity exposures.

2. Models tend to take a more conservative approach to factor exposures

Compared to popular market-cap-weighted benchmarks, most of the models we studied are underweight in the information technology sector in an attempt to reduce concentration risk, and are underweight in factors like quality, growth, and momentum. ETFs can be an efficient instrument to dial up or dial down factor exposures. 

3. More risk has resulted in more returns

Conservative models have experienced lower median returns, while aggressive models have had higher median returns, reflecting their respective risk profiles and powerful broad market performance over the last five years.

4. Active mutual funds have a lower allocation but a larger fee budget

ETFs constitute a significant portion of total assets (63% average) of the models we studied, and 31% of the fee budget. Active mutual funds, despite lower asset allocations (33% weighted), contribute the most to the fee budget (67%). Average fees across the five categories studied ranged between 29 and 34 basis points. 

Looking further into the ETF exposures, index ETFs constitute a significant portion of total assets (55% average) of the models we studied, while active ETFs average just 8%. With over 1,300 active ETFs launched since 2019, there may be substantial upside for active ETFs to increase their presence in model portfolios.

How Invesco can help

We understand there is a stringent process for determining asset allocations, factor exposures, and sector selection that ultimately leads to ETF selection, both for both active and index-based strategies. It isn’t as simple as picking the cheapest product in a category. We can work with model portfolio providers to determine the best product to fit your goals — and assist in identifying both deliberate and potentially unintended factor tilts while highlighting the impact on total risk, fees, and forward-looking potential returns, before and after the addition of an ETF.

As asset manager model providers look to navigate an increasingly competitive landscape, we aim to bring increased transparency and analytics to assist our partners. Please reach out to your Invesco representative to schedule a conversation.