How To Build A Robust Model Portfolio

May 15, 2017

This article is part of a regular series on thought leadership from some of the more influential ETF strategists in the money management industry. Today's article is by Andrew Gogerty, vice president of investment strategies at Boston-based Newfound Research.

The U.S. ETF market recently hit a milestone: the 2,000th ETF launch. The industry’s expanded breadth and depth have democratized investing for retail and institutional investors alike, continuing to build on the success of early pioneers like the SPDR S&P 500 ETF Trust (SPY).

In our view, an important part of this democratization has been the rapid expansion of the model portfolio space. Firms of all shapes and sizes in the asset management industry, including ETF providers, are fighting to position their model portfolios, jam-packed with proprietary products, on advisory, retirement and institutional platforms.

We are firm believers in the power of model portfolios to lower costs, improve investor outcomes and streamline advisor practices. In fact, Newfound was honored to win the 2016 Strategist of the Year award in part for our QuBe Model Portfolio Suite. Information about our suite is available here.

While we obviously have great conviction about our offering, we believe the key tenets should be the foundation of any model suite being considered. The intersection of advice and investing continues to get more complex, and a desire for simplicity, low-cost solutions and blended active/passive options remains at the forefront.

As such, we recommend that decision-makers address three crucial trends when building or evaluating a potential lineup or comprehensive suite of model portfolio solutions.

Strategic ≠ Static

Many first-generation model portfolio suites tend to be different static models offered across a range of risk profiles. However, investors should pause when looking at a blended portfolio of current stock and bond valuation metrics.

With a Shiller P/E ratio north of 29, core U.S. equities provide a low expected rate of return. An era of historically low interest rates implies low forward returns for bonds as well. More worrying, when combined together, the typical 60/40 portfolio appears more expensive than at market peaks before the tech bubble or financial crisis.

As such, model portfolios must incorporate forward-looking, flexible tools to address the future market, not simply what worked well in the past. The result is the addition of satellite asset classes and risk management philosophies to complement a traditional diversified portfolio, allowing investors to potentially thrive across varied market environments.


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