Three key trends in model portfolios

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. View our tactical asset allocation macro framework.

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.

Our process:

Step 1 ‒ universe screening: Strategies are aligned by asset class and assigned to peer group
Step 2 ‒ quantitative fund screening: Identify a preliminary list of funds using quantitative criteria
Step 3 ‒ qualitative fund screening: Identify a preliminary list of funds using qualitative criteria
Step 4 ‒ fund selection: Map funds to desired exposures
Step 5 ‒ fund inclusion: Evaluate funds in the context of a combined portfolio
Step 6 – add to portfolio

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. 

3. 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.

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.