A Roadmap to Personalizing Model Portfolios: Scaling with Purpose

A Roadmap to Personalizing Model Portfolios: Scaling with Purpose

Looking beyond traditional diversification in HNW portfolio customization to add factors, themes and sustainable investments.

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Executive summary

The investment landscape for wealth managers and their clients is evolving. Generic, one-size-fits-all model portfolios are losing their appeal as investors seek more personalized investment solutions tailored to their unique needs and goals. In response, wealth managers are seeking scalable solutions to craft portfolios that align with their client’s distinct preferences.

Technological advancements have empowered wealth managers to efficiently offer bespoke investment solutions. Analytical tools and risk models enable them to identify and serve groups of investors with shared objectives by scaling portfolio construction that targets similar objectives. Additionally, reporting capabilities have progressed to track the achievement of a client’s specific goals, strengthening the adviser-client relationship.

This report explores the options available to wealth managers for creating personalized portfolios. In addition to the traditional equity-bond mix for model portfolios, wealth managers can turn to factor, thematic or sustainability investments to customize portfolios. We explore strategic integration of these approaches and analyze the risk and return characteristics of the resulting wealth portfolios.

Client-desired outcomes could align with one or more of the following investment strategies:

  • Factor-based preferences. For example, an investor may seek exposure to undervalued stocks, those with strong fundamentals or high-dividend-yielding assets.
  • Thematic interests. Some clients are interested in companies aligned with emerging trends such as fintech, cybersecurity and healthcare innovation.
  • Sustainable characteristics. Investors may prioritize environmentally conscious or ethically aligned investments.

To address such preferences, wealth managers can allocate portfolios to one or more of these strategies, taking personalization a step beyond traditional diversification. Achieving effective personalization requires a delicate balance between the house view and the client’s objectives. Based on our analysis, we found that incorporating factor, thematic and sustainability strategies into personalized model portfolios presents opportunities for enhancement without adverse effects on wealth portfolios. Wealth managers may consider these factors and strike a harmonious balance that aligns with each client’s risk tolerance and financial objectives.

And while the demand for bespoke investment solutions for wealth clients is rising, wealth managers are adapting by exploring innovative ways to efficiently deliver personalized investment strategies at scale. Customization at scale is becoming a crucial tool in the wealth-manager’s toolkit, offering a bridge between client-desired outcomes and portfolio performance, while deepening the adviser-client relationship. We showcase a potential roadmap for scaling personalized model portfolios for clients who share interests that fall within similar strategic investment approaches — such as factor, thematic and sustainability investments — aimed at achieving the client’s long-term financial goals. 

Introduction

In the evolving landscape of wealth management, individual investors are increasingly becoming outcome oriented, seeking personalized portfolio solutions that align with their unique goals, values and tax circumstances. According to the PwC HNW Investor Survey 2022 (PwC 2022), 66% of U.S.- based high-net-worth (HNW) individuals look for increased personalization in their wealth- management relationship. Furthermore, 46% of HNW individuals planned to change existing or add new wealth relationships over the next year or two.

As personalized investment solutions gain traction, wealth managers are seeking scalable solutions to meet their clients’ demands. In this environment, wealth managers may have to design a new model portfolio, modify an existing one or personalize client reports to explain relevant portfolio characteristics (Ohm 2022). Personalized solutions should promote closer relationships between advisers and clients, opening the door to distinctive investment product combinations and eliminating the need to squeeze clients into a preset model portfolio. A key element in the evolving wealth-management landscape is the ability for wealth managers to meet their clients’ demands for personalization efficiently and at scale.

Exhibit 1: Inputs to a personalized investment solution 

Venn Diagram

Technological advancements have made it easier for wealth managers to offer and scale bespoke investment solutions. Using analytical tools and risk models, they can identify and serve groups of investors with shared goals, allowing for more efficient portfolio management.1 Similarly, reporting has evolved to facilitate tracking clients' specific goals, reinforcing the benefits of personalized portfolio management and deepening the adviser-client bond.

In this report, we explore certain aspects of personalization available to wealth managers. First, we illustrate how wealth managers can strategically integrate factor-, thematic- and sustainable-investing approaches to personalize model portfolios. We then study the historical risk-and-return profiles of sample portfolios constructed using allocations to and blends of these strategies.

Our analysis shows that portfolios constructed using factor, thematic and sustainable investments have historically outperformed the global-equity market. Our findings underscore the importance of strategic portfolio design in the ever-changing wealth-management landscape, a message that rings true for both savvy advisers and insightful clients. Pursuing customized investment solutions for clients is a strategic choice available to wealth managers. 

Client-desired outcomes in personalized portfolios 

Historically, model portfolios have offered individual investors and wealth managers only moderate flexibility to reflect personal preferences. Todd (2021) found that between 50% and 75% of equities in these model portfolios were domestically allocated.2 The remainder could be invested according to client-specific requirements and the wealth-manager’s house view, which typically included country and industry bets.3 Today, more opportunities exist to personalize client portfolios. Although personalization of model portfolios can be defined and executed in various ways, the process should enable the wealth manager to illustrate to the client that their portfolio’s construction reflects their goals and values and aligns with their desired outcomes.

Our study aims to assist both investors and wealth managers in better understanding how personalization can be implemented, particularly when encompassing the following types of client-desired outcomes:

  • Factor-based preferences. A client may wish to invest in companies trading below their intrinsic value or those with strong fundamentals, strong past performance or higher-than-average dividends.
  • Thematic interests. A client may wish to invest in companies whose business is focused around emerging macro trends such as fintech, cybersecurity or creating innovative solutions in healthcare.
  • Sustainability characteristics. A client may wish to invest in companies that prioritize combatting global warming or that conduct a business aligned with their ethical or religious values or seek long-term sustainable investments. 

Exhibit 2: Equity strategies can reflect a range of client preferences 

Chart 2

To address client needs for assets with the above characteristics, wealth managers may choose portfolio allocations to one or more of these investment strategies as additional tools for portfolio personalization, going beyond traditional portfolio diversification across asset classes, industries and countries.

While factor, thematic and sustainable investments have been broadly adopted by asset managers and asset owners for a long time, they might be new to some individual investors. We illustrate how these investment strategies can be used to complement client preferences and shape equity allocations in the personalized portfolios. 

Factor investing 

When investors demonstrate a preference for underpriced companies with robust fundamentals, wealth managers may interpret it as demand for assets with high value and quality characteristics and offer to allocate some of investor’s wealth to investment vehicles tracking fundamental factors, such as value or quality, or both.

Factor investing targets company characteristics that offer exposure to one or more equity risk premia such as value, quality, momentum, low volatility, growth and size. Factors’ role in explaining the sources of risk and return in equity portfolios has been supported by extensive academic research. For the period between 1988 and 2013, Bender et al. (2013) provided historical evidence for factor strategies having higher historical return-to-risk characteristics compared to market- capitalization-weighted (market-cap) strategies. Melas (2022), among others, described practical factor investing and its implementation, and Ang (2023) provided an overview of historical factor-behavior analysis. Recent work by Bessler, Taushanov and Wolff (2021), covering the period between May 2007 and November 2020, showed that over long investment horizons, factor-allocation strategies provided superior performance compared to sector-only allocations.

We consider an example of how a wealth manager could incorporate factor strategies in a personalized investment solution. If a client wants to invest in underpriced stocks, the wealth manager might adjust the allocations in the portfolio as follows. Assuming a baseline allocation of 100% to global equities, proxied by the MSCI ACWI Index,4 the wealth manager might suggest a 75% global-equity allocation and a 25% allocation to the value factor, proxied by the MSCI ACWI Enhanced Value Index, to boost the share of undervalued stocks.

If the client wishes to have exposure to both underpriced stocks and stocks with robust fundamentals, the wealth manager might suggest 20% value and 20% quality allocations and a 60% global-equity allocation. As proxies for the factors, we again use the MSCI ACWI Enhanced Value Index to represent stocks trading below their market value and the MSCI ACWI Quality Index to represent high-quality stocks. As defined by MSCI FaCS™, a security’s factor exposure is the amount the stock’s characteristic of interest (such as value or quality) deviates from the market-cap- weighted average for that characteristic for the global stock universe, expressed in units of standard deviation (Bonne et al. 2018). The amount of the deviation is the active exposure to the factor.

The active factor exposures of the two allocations are illustrated in Exhibit 3. In the examples, the 25%/75% allocation to the value factor and global equities resulted in a positive active exposure to the value factor of 0.22. When value and quality were added in equal allocations of 20%, the active exposures to the factors were 0.14 and 0.09, respectively. The lower value-factor exposure in the second example is driven by the factor-interaction effect explained by Kulkarni, Gupta and Doole (2018). The allocations in both instances boosted the desired factor exposures compared to the baseline global-equity portfolio.

Exhibit 3: Target portfolio allocations and implied active factor exposures 

Allocations

Data as of May 31, 2023. Factor exposures are measured using MSCI FaCS. The global-equity allocation is represented by the MSCI ACWI Index, the value allocation by the MSCI ACWI Enhanced Value Index and the quality allocation by the MSCI ACWI Quality Index.

Although the wealth manager may not typically discuss factor exposures with their clients, the topic may arise if, for example, the wealth-manager’s investment strategy is inclined toward a specific factor or factors or if the client expresses an interest in factor investing. Measuring factor exposures could help wealth managers identify a portfolio’s existing exposures and help explain to the client how proposed changes in allocations could impact those exposures. Keeping track of the wealth portfolio’s factor exposures could serve as an initial step in showcasing progress toward implementing the client’s desired outcomes associated with, and put into action through, factor investing.

Recent work by Berkin (2023) highlighted a growing investor demand for factors, which have not typically been part of traditional model portfolios. Equipped with an expanding analytical toolkit, wealth managers can accommodate this demand through scaling of portfolio construction, making model-portfolio personalization accessible not only to ultra-HNW individuals,5 but to a broader range of wealth clients. Scaling opens the door to democratization of wealth portfolios.

Striking the right balance between a wealth-manager’s house view on factors and client-desired outcomes can be challenging. When factors are employed in wealth portfolios, categorizing the desired outcome in terms of specific factors, and aligning it with a predefined portfolio allocation or portfolio exposure to a factor, might help wealth managers find the right asset allocation and support the scaling of portfolio personalization. 

Thematic investing

Some investors may seek to invest in innovation-driven companies such as those focused on fintech or genomics-innovation solutions. Recognizing this, wealth managers may recommend that the client allocate some of their portfolio to financial products that track relevant thematic indexes.

Thematic investing is a top-down investment approach that identifies and capitalizes on macroeconomic, geopolitical and technological trends. These trends represent long-term structural shifts arising from innovative business models, disruptive technologies and changing consumer tastes and behaviors. In addition to fintech and innovative genomics, other examples of thematic investing are artificial intelligence, biotechnology, the sharing economy and the future of education and smart cities.

Let’s suppose the client expresses interest in investing in the rapidly evolving global financial landscape. The wealth manager could propose a 25% allocation to the fintech theme and a 75% allocation to global equities. We use the MSCI ACWI IMI Fintech Innovation Index as a proxy for fintech investment.

Alternatively, suppose the client expresses an equal interest in both fintech and genomics innovation. The manager might propose 20% portfolio allocations to each of the fintech and genomics-innovation (MSCI ACWI IMI Genomic Innovation Index) themes and a 60% allocation to global equities. Thematic exposures can be helpful in quantifying a portfolio’s exposure to a theme because they measure the economic linkage between a company and the theme. We measure this linkage using a relevance score that ranges from 0% to 100%.6

Exhibit 4: Target portfolio allocations and implied thematic exposures 

AllocationsThematic exposures

Data as of May 31, 2023. The global-equity allocation is represented by the MSCI ACWI Index, the fintech allocation by the MSCI ACWI IMI Fintech Innovation Index and the genomic-innovation allocation by the MSCI ACWI IMI Genomic Innovation Index).

The 25%/75% fintech and global-equity allocations resulted in an active exposure of 0.14 to the fintech theme. Allocating 20% to each of the fintech and genomics-innovation themes and 60% to global equities resulted in active exposures of 0.1 and 0.13 to fintech and genomics innovation, respectively, as shown in Exhibit 4. In both cases, the allocations resulted in additional exposures to the selected themes compared to the exposures of the baseline global-equity portfolio.

Recent studies, such as those by Subramanian and Rao (2021), Paikers (2022), Alighanbari et al. (2022) and King, Samouilhan and Berger (2023), underlined the growing interest in thematic investing, its implementation and the diverse investment products that offer access to thematic investing. Yet, while some themes offer potential returns, they might come with higher risks. Thus, while crafting personalized portfolios, wealth managers must strike a balance between their perspective on thematic investing and the client's goals. Proper identification and measurement of a client's thematic preferences can guide wealth managers in creating and scaling tailored investment solutions.

As with factors, wealth managers should seek to balance their house view on thematic investing with the client’s desired outcomes. Clearly identifying and measuring portfolio allocations to active thematic exposures can help wealth managers more effectively craft and scale tailored investment solutions for their clients. 

Sustainable investing

Sustainable investing is gaining traction among investors seeking exposure to companies with robust management of risks and opportunities in fields such as climate, biodiversity, ESG issues and decarbonization of the real economy. Research, including the work of Boffo and Patalano (2020) and Jaros et al. (2022), has documented the growing popularity and adoption of such investment approaches.

If an investor expresses an interest in sustainable investing, the wealth manager could propose allocating a portion of the client’s portfolio to sustainable-investing strategies. We can use the MSCI ESG Ratings to identify companies that are outperforming their peers in their ability to exploit the opportunities and mitigate the risks associated with ESG issues. The wealth manager could propose a 25% allocation of the client’s portfolio to a financial product benchmarked to an index designed to reflect these considerations. We use the MSCI ACWI ESG Leaders Index to proxy such an investment. The remaining 75% of the client’s portfolio could be allocated to global equities.

Another investor might want to consider investing in companies that have a high ESG rating and those that have lower carbon emissions. We proxy the latter with the MSCI ACWI Low Carbon Target Index. The wealth manager might propose a 20% allocation to each category and a 60% allocation to global equities.

The 25%/75% allocations to ESG and global equities, respectively, led to a 3.2% improvement in the portfolio’s ESG ratings score7 — and although not directly targeted — to a 10% decrease in carbon emissions8 and around a 2.8% improvement in implied temperature rise.9 The allocation also led to a decrease in financed carbon emissions, falling to 49 tons from 54 tons of CO2 to USD 1 million invested, and the implied temperature rise dropped to 2.45 degrees from 2.52, as Figure 5 shows.

Allocating 20% to each of the ESG and climate-related strategies resulted in less improvement in the portfolio’s overall ESG rating, but stronger improvement in carbon emissions and implied temperature rise. 

Exhibit 5: Target portfolio allocations and implied improvement of sustainability metrics 

AllocationsSustainability Metrics

Data as of May 31, 2023. The global-equity allocation is represented by the MSCI ACWI Index, the ESG allocation by the MSCI ACWI ESG Leaders Index and the low-carbon allocation by the MSCI ACWI Low Carbon Target Index. EVIC is enterprise value including cash. GHG emissions Scopes 1 and 2. Improvement of financed carbon emissions and Implied Temperature Rise is calculated as the percentage improvement of the corresponding metrics of the benchmark multiplied by -1.

The results in our examples demonstrate that changes in asset allocation may have different levels of impact on targeted portfolio characteristics. For example, we found weaker improvement in the ESG rating when the portfolio allocations were 20% to high ESG-rated companies and 20% to companies with lower carbon emissions. Measuring portfolio characteristics before potential portfolio adjustments can provide a needed foundation for portfolio personalization. 

An additional avenue for integrating sustainability preferences in wealth portfolios is applying sustainable-investing principles across all portfolio holdings, as discussed by Chandler (2021).10 Ladure and Lodh (2021) and Ladure (2022) demonstrated that sustainability adoption across all assets in wealth portfolios is flexible and, historically, has offered risk-return profiles comparable to traditional equity and fixed-income blended benchmarks, while boosting a portfolio’s sustainability characteristics.

Risk and return characteristics of personalized portfolios

To this point, our discussion has focused on showcasing how to incorporate client preferences into wealth portfolios through strategies such as factor, thematic, and sustainable investment. Now, our focus turns to the risk-and-return profiles of these strategies and portfolios that incorporate these strategies.

Personalized equity plans

In practice, wealth managers execute factor-, thematic- and sustainable-investing strategies in client portfolios using a range of investment vehicles, such as ETFs, passive or active funds and individual stocks. We refer to these investments as strategic investment approaches because they are portfolio allocations of financial products benchmarked to factors, themes, and sustainability as guided by the client’s preferences and generally form a strategic investment decision. We denote investments in factor, thematic, and sustainability as holding a financial instrument benchmarked to a set of indexes representing such investments .11

For the purpose of measuring average risk and return characteristics of wealth portfolios containing these investments, we equally weighted representative sample benchmarks within each investment approach. Whereas, in practice, wealth managers would invest in different factor-, thematic-, and sustainability-benchmarked investment products, in our analysis the equally weighted mix within each block of investment strategies proxies average factor investments,12 thematic investments13 and sustainability investments.14 In our analysis, the MSCI ACWI Index represents both the global- equity market and the equity benchmark.15 

We analyzed the historical risk and return of global equities and stand-alone factor, thematic, and sustainability investments (as previously described) over the period June 2013 to May 2023. As shown in Exhibit 6, we found that these strategic investment approaches had higher average returns than global equities, but also higher average risk. The return-to-risk ratios indicated that, on average, investments in factors, themes and sustainability could be attractive (historically, higher risk has been rewarded with higher returns over longer holding periods) for an investor willing to bear higher risk than that of a global-equity portfolio. 

Exhibit 6: Historical risk-and-return characteristics of global factor, thematic and sustainable investing 

Risk Return

Risk is calculated as annualized standard deviation of monthly returns, return as annualized average monthly returns, and return/risk is a return-to-risk ratio. Data is from June 2013 through May 2023. 

We next constructed four hypothetical personalized equity plans using a combination of factor, thematic and sustainability exposures:

  • Factor-investing portfolio allocated 50% to global equities and 50% to factors.
  • Factor-/thematic-investing portfolio allocated 40% to global equities, 40% to factors and 20% to thematic.
  • Sustainable-investing portfolio allocated 50% to global equities and 50% to sustainability.
  • Factor-/sustainable-/thematic-investing portfolio allocated 30% to global equities, 30% to factors, 30% to sustainability and 10% to thematic.

The allocations in the portfolios were guided by the same considerations that inform traditional asset-allocation decisions: the resulting portfolio’s risk profile, risk contribution of the portfolio’s constituents and investor’s risk tolerance. 

Exhibit 7: Allocations and their risk contribution to four personalized portfolios 

Asset AllocationRisk Contribution

Data is from June 2013 through May 2023.

Our findings indicate that, over the 10-year period of the analysis, factor investing contributed less risk relative to its portfolio share, thematic investing contributed more risk that its allocation16 and sustainable investing aligned closely with its allocation in terms of risk contribution. 

Personalizing model portfolios

Many traditional model portfolios are composed of equity and fixed-income instruments. To assess how strategic allocations to factors, themes and sustainability might impact the risk-and-return profiles of portfolios constructed using a mix of equities and bonds, we developed three hypothetical model portfolios to reflect the following risk profiles:

  • Conservative: 80% bonds, 20% equities
  • Moderate: 50% bonds, 50% equities
  • Aggressive: 20% bonds, 80% equities

Each model portfolio’s benchmark is composed (in the respective proportions for each risk profile) of global equities, represented by the MSCI ACWI Index, and global fixed income, composed of government, high-yield and investment-grade corporate debt denominated in USD, CAD, EUR and GBP.17 The equity component ranges from a 100% allocation to global equities to various allocations that encompass factor, thematic and sustainable investing as described earlier for the personalized equity plans. 

Risk and Return

Data is from June 2013 through May 2023. Risk and return are annualized. The equity portfolio holds 100% equities. The conservative portfolio holds 80% bonds and 20% equities; the moderate portfolio holds 50% bonds and 50% equities; and the aggressive portfolio holds 20% bonds and 80% equities. Each model portfolio’s benchmark is composed (in the respective proportions for each profile) of global equities, represented by the MSCI ACWI Index, and global bonds composed of government, high-yield and investment-grade corporate debt denominated in USD, CAD, EUR and GBP. The composition of the bond allocation in all three portfolios is USD 60%, GBP 30%, CAD 6% and EUR 4%. Within each of the currency allocations, the composition is as follows: to the respective MSCI Government Bond Index 25%, MSCI Investment Grade Corporate Bond Index 50% and MSCI High Yield Bond Index 25%. 

Our findings, illustrated in Exhibit 8, indicate that personalized model portfolios, reflecting a range of risk tolerances and incorporating factor-, thematic- and sustainable-investing objectives, have resulted in higher historical returns than their respective benchmark portfolios, as defined in our analysis.

Across all three risk profiles, when we adjusted the equity portion of the portfolios to reflect the allocations in the four personalized portfolios — 50%, 40% or 30% factor allocations, 20% or 10% thematic allocations or a 30% sustainability allocation — the historical performance improved but at the cost of higher risk.

As illustrated in Exhibit 8, we found the risk-adjusted return improvement in moving from the 100% equity benchmark to the aggressive-risk-profile portfolio. Adding a 20% fixed-income allocation and transitioning from 100% global equities to the mix of global equities (30%) and factor (30%), sustainability (30%) and thematic (10%) exposures, the 10-year annualized return remained at 9%, but the average annualized risk fell to 13.4% from 14.4%. We observed consistent results for the moderate-risk-profile portfolio and a 60% equity/40% bond mix. We do not report these results, but they are available upon request. 

Customization at scale is key

The demand for bespoke wealth investment solutions is growing and, as a result, generic model portfolios may not provide the solutions clients seek. In response, wealth managers are exploring innovative ways to efficiently deliver personalized investment strategies at scale, while balancing their house view and client-desired outcomes. This process may involve evaluation, including reporting, and potentially the fine-tuning of portfolio allocations across sectors, regions, factors, themes, sustainability as well as other considerations. From a strategic investment perspective, adding factor, thematic or sustainability investments to a wealth portfolio helps achieve the client’s desire for personalization.

Our analysis shows that portfolios with allocations to one, or a blended average, of sample factor, thematic and sustainability strategies has delivered historical risk-adjusted returns superior to a baseline allocation.18 We also found that complementing personalized equity strategies with a greater fixed-income allocation may be an effective means to harmoniously balance the overall risk profile of the portfolio.

This delicate dance between risk and return underscores the pivotal role of wealth managers, challenging them to bring their expertise to the fore while respecting client desires. The changing landscape of wealth management presents challenges and creates opportunities for those wealth managers who are open to new avenues to meet their clients' unique needs and expectations.

Customization at scale is becoming an increasingly important part of the wealth-manager’s toolkit. 


1 Tools such as MSCI’s Quantitative Investment Solutions and Client-Designed Indexes can help wealth managers define and scale personalized investment solutions as well as create or adjust reporting. 

2 Domestic allocations often refer to home bias, a preference for investing in familiar markets. This bias does not reveal other characteristics of these allocations, however, such as sector, factor, thematic, sustainability or other attributes (intentional or unintentional).

3 Research by Lapteva (2023) showed the performance benefits of industry diversification versus country diversification. 

4 Wealth managers may choose a baseline portfolio that has different allocations to countries and industries, though for simplicity, we assume 100% allocation to global equity proxied via the MSCI ACWI Index. 

5 ForbesAdvisor defines wealth thresholds as follows: high-net-worth individuals are people or households who own liquid assets valued between USD 1 and 5 million, very-high-net-worth individuals own liquid assets between USD 5 and 30 million, and ultra-high-net-worth individuals own liquid assets over USD 30 million (Curry 2023).

6 Thematic scores are calculated as MSCI Thematic Exposure Standard (TES) and they can be used to systematically measure, monitor and report on the thematic exposure of indexes, portfolios and funds, as well as provide company-level thematic exposures for a broad universe of equities.

7 A 3.2% improvement in the portfolio’s ESG rating represents an increase in the ESG ratings score to 7.0 from 6.8 and an A rating for both portfolios. Greater portfolio alignment with the client’s expressed sustainable-investing goals might require more changes to portfolio allocation after communication with the client.

8 Weighted-average scope 1, scope 2 and scope 3 carbon-emissions intensity normalized by sales measure in tons of CO2/USD million sales.

9 Implied temperature rise, measured in °C, is an aggregated measure of an index’s temperature alignment aimed at keeping the world’s temperature rise to 2°C by 2100. The calculation uses an aggregated budget approach that compares the sum of financed- emissions budget overshoot against the sum of financed carbon-emissions budgets for the underlying index constituents. The total index carbon-emissions over/undershoot is then converted to a degree of temperature rise using the science-based-ratio approach of Transient Climate Response to Cumulative Carbon Emissions. The allocation base used to define an index’s financed stake is enterprise value including cash in order to enable the analysis of equity and corporate bond portfolios.

10 MSCI (2019) outlines our sustainable investing principles. Other sources are the United Nations’ PRI and the OECD.

11 We will discuss the implications of using different investment vehicles to implement personalization in future MSCI publications.

12 The MSCI ACWI Growth Target, MSCI ACWI Minimum Volatility, MSCI ACWI Momentum, MSCI ACWI Quality, MSCI ACWI Small Cap and MSCI ACWI High Dividend Yield Indexes were used for illustration in replicating a global factor-investing strategy.

13 The MSCI ACWI IMI Cybersecurity, MSCI ACWI IMI Future Mobility, MSCI ACWI IMI Robotics and AI, MSCI ACWI Innovation, MSCI Global Thematic Sentiment Rotation, MSCI ACWI IMI Clean Energy Infrastructure, MSCI ACWI IMI Genomic Innovation and MSCI ACWI IMI Fintech Innovation Indexes were used for illustration in replicating a global thematic-investing strategy.

14 The MSCI ACWI Climate Action, MSCI ACWI Climate Paris Aligned, MSCI ACWI Low Carbon Target, MSCI ACWI ESG Leaders, MSCI ACWI ESG Focus and MSCI ACWI ESG Universal Indexes were used for illustration in replicating a global sustainable-investing strategy.

15 Wealth managers would generally not implement investments in financial products benchmarked to average representative indexes, but instead recommend investing in a subsample of benchmarks or implement timing and rotation strategies among benchmarks to achieve better portfolio risk-and-return characteristics. Implementation choices are usually based on the wealth-manager’s house view. We would expect that such wealth portfolios would demonstrate better-than-average risk and return characteristics. 

16 Subramanian and Rao (2021), Paikers (2022) and Alighanbari et al. (2022) have discussed similar findings. 

17 The composition of the bond allocation in all three portfolios is USD 60%, GBP 30%, CAD 6% and EUR 4%. Within each of the currency allocations, the composition is as follows: to the respective MSCI Government Bond Index 25%, MSCI Investment Grade Corporate Bond Index 50% and MSCI High Yield Bond Index 25%. 

18 The analysis and observations in this report are limited solely to the period of the relevant historical data, backtest or simulation. Past performance — whether actual, backtested or simulated — is no indication or guarantee of future performance. None of the information or analysis herein is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision or asset allocation and should not be relied on as such.

References

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Berkin, Andrew. 2023. “Democratizing Wealth Management.” Journal of Wealth Management 25th Anniversary Special Issue 2023 26, no. 1: 21-28.

Bessler, Wolfgang, Georgi Taushanov and Dominik Wolff. 2021. “Factor investing and asset allocation strategies: A comparison of factor versus sector optimization.” Journal of Asset Management, 22.

Boffo, Riccardo, and Robert Patalano. 2020. “ESG Investing: Practices, Progress and Challenges.” OECD.

Bonne, George, Leon Roisenberg, Raman Aylur Subramanian and Dimitris Melas. 2018. “Introducing MSCI FaCS.” MSCI Research Insight, January.

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Curry, Benjamin, ed. 2023. “HNWI: High-Net-Worth Individuals.” ForbesAdvisor, Sept. 6, 2023.

Jaros, Natalie Deak, Mike Lee, Jun Li and Ryan Munson. 2022. “Can resilience shape a shifting landscape?” EY, Nov. 15, 2022.

King, Alex, Nick Samouilhan and Adam Berger. 2023. “Adding thematic equity investments to a multi-asset portfolio: An allocator’s handbook." Wellington Management, January.

Kulkarni, Padmakar, Abhishek Gupta and Stuart Doole. 2018. “How Can Factors Be Combined?” MSCI Research Insight, June.

Ladure, Jean-Maurice. 2022. “Personalizing Climate-Focused Wealth Management Portfolios.” MSCI Research Insight, Jan. 24, 2022.

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Lapteva, Evgeniya. 2023. “Comparative Analysis of Industry and Country Diversification Benefits of the Equity Portfolio.” Journal of Wealth Management 26, no. 2: 102-122.

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MSCI. n.d. “Are Factors Too Complicated?” Accessed Sept. 13, 2023. 

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