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Global Balanced Strategies

Investors continue to think globally.

Cara Esser, 04/26/2013

ETF managed portfolios are investment strategies that typically hold more than 50% of portfolio assets in exchange-traded funds. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe. Morningstar has developed a proprietary classification system for ETF managed portfolios that identifies the investments’ portfolio attributes. The new structure consists of four main attributes: universe, asset breadth, portfolio implementation, and primary ETF exposure type. This system helps investors better understand the philosophies underlying these investment strategies. The latest Morningstar ETF Managed Portfolios Landscape Report (which can be found here) is a comprehensive industry review of strategies that report information to Morningstar’s separate account database. 

In this series we’re taking an inside look at the industry using the combination of universe and asset breadth attributes as a starting filter. This commentary is focused on global (universe) balanced (asset breadth) strategies, and upcoming commentaries will discuss other attribute combinations. 

Thinking Globally
Global investment strategies have profited from an investor base that is growing increasingly comfortable with investments beyond their own borders. Despite concerns over China’s soft landing and continued troubles in the eurozone, enticing growth prospects exist in certain developing and emerging economies. Managers and pundits also have a relatively positive view on the slow but steady recovery in the U.S. economy. What’s more, the appeal of balanced funds has grown as investors have increasingly decided to leave allocation decisions to managers. The rise of target-date mutual funds has allowed investors to become more comfortable with a relatively hands-off approach to allocation as investment horizons change. A fast-changing and interconnected global economy calls for a more balanced and nuanced approach to investing. Enter global balanced ETF managed portfolio strategies that invest across borders and asset classes. Morningstar currently tracks more than 90 of these offerings. 

Global balanced strategies are the fourth-largest universe and attribute combination, but its total assets are less than half of the top two combinations (global all-asset and U.S. equity) as of the end of 2012. Growth in the number of strategies has not been as strong as other universe and attribute combinations, but nearly all of the global balanced strategies saw an increase in assets during 2012. 

Collectively, balanced strategies have matched the growth rate of 60% seen for all ETF managed portfolios. Through December 2012 balanced strategies as a whole accounted for 9% of total ETF managed portfolio assets. But within that group global strategies have been the focal point, with assets up 70% last year and now accounting for 82% of assets in balanced strategies. 

Investing Across the Universe
The global balanced strategies are fairly top-heavy, with the 10 strategies accounting for 63% of the group’s total assets. The largest strategy, Riverfront Moderate Growth and Income, makes up 22% of assets and is nearly 3 times the size of the group’s second-and third-largest strategies from Morningstar Associates (ETF Portfolio Moderate Growth and ETF Portfolio Growth). Riverfront Moderate Growth and Income grew about 32% in 2012, a modest change in percentage terms, but one of the largest in terms of absolute dollar growth. One of the smallest global balanced strategies (Integrated Managed ETF Risk Controlled Growth) grew assets 680%, from $3 million to $24 million. The focus on risk, specifically mitigating volatility, is popular in this asset breath and universe combination. A suite of strategies from Innealta Capital (16 in all, six in the global balanced combination) concentrate on risk-adjusted returns by allocating to asset classes based on various risk/reward characteristics of the underlying securities and overall views on market movements. 

Cara Esser is a closed-end fund analyst at Morningstar.

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