For Asset Managers, Model Portfolios Could Be the Key Driver of Future Growth

Financial advisors are increasingly focused on financial planning and client management, relying on professional managers for investment decisions. And with clients understandably demanding more attention during uncertainty, the value of models and partnership is magnified. Advisors who leverage specialists for portfolio management and investment-related services can reallocate time to client service.

“Periods of market volatility are often when we can make the biggest difference in the client experience,” says Michael Gates, Head of Model Portfolio Solutions in the Americas for BlackRock’s Multi-Asset Strategies group. “Advisors are inundated with questions and we can step in with a rebalance and an arsenal of client-ready investment insights.”

With a multi-year growth rate of 26%¹, model portfolios have firmly established themselves as an essential investment solution for asset managers to help meet the evolving demand in advisor-client relationships. Advisors using models have the ability to efficiently adjust client risk tolerances between models within the same model suite, rather than selling out of funds wholesale — an especially useful feature during volatility.

There were $349 billion in asset manager models as of March 2022, 22% of which was gained in the prior nine months². Historically, periods of market volatility have coincided with higher turnover in individual funds, leaving asset manager revenues vulnerable. Asset managers providing models, however, see much higher retention and ticket size.

Models have an average investment size 12x larger than mutual funds, and 30% higher retention, while the mutual funds held within index models have an average holding period of 3 years versus 1.7 years for those not held in models.³

“By engaging professional investment management, model portfolios can pursue active allocation tilts with the aim of enabling investors to potentially benefit from market ups and downs,” says Bruce G. Picard, Portfolio Manager and Head of Model Portfolios, Multi-Asset Solutions Team, Manulife Investment Management.

The Strategic Role of ETFs

Integral to models’ success are ETFs, which allow model providers to remain nimble and responsive to changing market dynamics. They can be quickly added and removed to express tactical views without disrupting active strategies or less liquid holdings. In fact, they were key to portfolio repositioning during recent market volatility.

During the first half of 2022, as many model managers positioned for higher inflation, flows into shorter dated TIPS ETFs spiked⁴. Then, as the front end provided attractive entry opportunities, model managers drove much of the nearly $11B of inflows into short dated Treasury ETFs⁵. These flows highlight how multi-asset managers can use ETFs to gain exposure to niche asset classes, like short dated TIPS, as well as express views along the maturity curve, as seen in the demand for low duration Treasuries.

Asset managers can blend active mutual funds with ETFs and potentially reduce overall model fees, making them attractive to both advisors and their clients, effectively unlocking a new distribution stream for asset managers.

The availability of broad and niche exposures via ETFs allows precision and flexibility as model providers can quickly take advantage of specific opportunities and respond to a rapidly changing market backdrop. Flexibility takes center stage in volatile markets. Transparency also matters: ETF transparency provides a clear signal of portfolio repositioning, which can be easily communicated to the end investor.

Finding a Fit for Fixed Income ETFs

The transparency, liquidity and efficiency of fixed income ETFs make them particularly well suited for model portfolios, helping managers efficiently implement explicit active decisions. Examples include reducing or increasing a portfolio’s duration based on interest rate forecasts; moving up or down in credit quality based on views of economic strength; disaggregating multi-sector benchmarks to tactically rotate among sectors; and gaining exposure to sectors not traditionally found in core bond allocations, such as high-yield credit, emerging markets, TIPS, bank loans and CLOs.

With over 1,500 fixed income ETFs globally, roughly 250 of which are over $1 billion in AUM, and over 100 of which trade more than 1 million shares on exchange each day, model managers have a deep bench of options.

Opportunities abound for both niche and global asset managers, but a deliberate approach to service, distribution, investment vehicle selection and differentiation is key to success. The latest evolution of financial services and the growing adoption of models present a rare circumstance where all stakeholders could benefit. The delivery of these services is a critical component to an asset manager’s business and directly impacts the ability to win and retain business.

iShares provides model managers with end-to-end-support to build, manage and distribute models. Model providers offering professionally managed asset allocation and investment solutions plus “surround sound” practice management support can be indispensable to advisors focused on holistic financial planning.

¹ Cerulli U.S. Asset Allocation Model Portfolios 2022 report based on asset manager and third party strategist model asset growth from 2020 - 2021.

² Morningstar Model Portfolio Landscape 2022 —https://www.morningstar.com/lp/model-portfolio-landscape

³ BlackRock, “Which advisors had a smoother ride during COVID-19?” 2021.

⁴ Source: Bloomberg, BlackRock, flows cover 12/31/21-6/30/22.

⁵ Source: BlackRock, based on trade confirmation data, 10/31/2022.

Carefully consider the Funds’ investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Transactions in shares of ETFs may result in brokerage commissions and may generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

TIPS can provide investors a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses. Government backing applies only to government issued securities, and does not apply to the funds.

An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency and its return and yield will fluctuate with market conditions.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). BlackRock is not affiliated with Manulife Investment Management.

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