Products increasingly present in model portfolios but not used to their full potential, finds study
With the increased use of ETFs, the fees advisors pay on model portfolios are on the decline. But there’s still room for improvement when it comes to factor ETF usage.
According to BlackRock’s Advisor Insights Guide, the average model portfolio fees paid by advisors dropped below 50 basis points in 2019 compared to 54 basis points in 2018, reported ThinkAdvisor. The guide is based on 12 months’ worth of data gleaned from the firm’s Aladdin risk-management platform, drawn thousands of advisor investment models collected over the 12-month period through September 30 last year.
Average ETF usage increased modestly over the same period, from 36.1% to 38% of portfolios, though mutual funds still featured prominently with an average 54.4% of portfolio models using the products. Over a third (35%) adopted a blended approach of passive, active, and factor products. Just 13% focused solely on active mutual funds; 8% on just core index products; and 3% on just factor products.
Zeroing in on equity allocations, 41% did not have any factor products; those that did had an allocation of just over 21%, which BlackRock said was too small to meaningfully tilt the portfolio. Most factor products either had too-light weightings or had their effects neutralized by other investments, with the only meaningful difference in tilt observed among portfolios using the small-size factor.
Focusing on five factors in portfolios, the guide noted that value and small-size factors tend to exhibit their best performance during the recovery phase of an economic cycle; momentum shines in the expansion phase, while quality and minimum-volatility do best during the slowdown and contraction phases.
From a geographic perspective, the guide also found allocations to U.S. stocks among an average 45.5% of model portfolios, 11% to non-U.S. developed stocks, and 4.7% to emerging markets. In terms of sectors, advisors’ models tended to overweight industrials, consumer cyclicals, and basic materials, while tending to underweight technology and hurting performance as a result.
Another 39% of advisor model portfolios showed an average 28% invested in U.S. bonds; 5.4% to non-U.S. bonds; 1.4% in cash; and 4.3% in real assets, leverage, and other assets.
To help advisors “establish an efficient strategic asset allocation,” BlackRock’s Portfolio Solutions team recommended a four-step investing approach:
- Determine a benchmark as a reference for risk and return in the market over time;
- Establish a budget for risk and cost, which BlackRock said should be based on advisors’ market views;
- Set or adjust asset allocations between and within asset classes accounting for sectors, geographic locations, and weights; and
- Monitor portfolio performance against clients’ long-term goals, making adjustments accordingly to keep the portfolio on track.
“The old debate of ‘active versus passive’ should evolve to a framework of blending index, alphas and factors,” BlackRock stressed.