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By Andrew Gogerty | 04-17-2013 12:00 PM

Expired -- A Wirehouse Perspective on ETF Managed Portfolios

UBS' Justin Demko breaks down the components in his team's managed portfolios strategy and the advantages they can have for advisors.

Andrew Gogerty: Advisor demand and interest for ETF managed portfolio strategies continued at a strong clip in 2012. These managed account strategies tracked by Morningstar grew a robust 60% last year to $63 billion through the end of the year. Joining me today for a perspective on this trend from inside the wirehouses is Justin Demko, senior portfolio manager for UBS Private Wealth Management and manager of the UBS global equity income and global balanced income Strategies.

Justin, thank you for joining me today.

Justin Demko: Thank you, Andy.

Gogerty: So, as I said in the intro, this space is growing. Education among advisors and RIAs is really out there, especially in the independent broker-dealer space. But there is a parallel shift going on inside the wirehouses where FAs and private wealth teams such as yourselves are also looking at these strategies as opposed to the historical or traditional investments. What's kind of driving that shift inside the wirehouses looking at ETF managed portfolios?

Demko: I think if you look at the history of what solutions the advisors have had to offer their clients and the model in which we've used in over the last, say, 15 years or so primarily using managed accounts and mutual funds, a number of advisors have looked to have a solution that focuses more on expanding out the number of options that they have to bring to their clients. So, with ETFs and our team, we use that as a core offering within the equity side, whereas we will use from a satellite standpoint managers and mutual finds around that core of ETF portfolios.

Gogerty: What about in terms of being inside a wirehouse, you essentially have two options. You could build it yourself or you could tap into a "home office" or like centrally provided ETF strategy. What goes into making that decision for a team inside a wirehouse such as yourself?

Demko: The good thing about being at the wirehouse is you have a lot of intellectual capital at the firm brought to the table. So, what I've seen there is a lot of advisors have used the models that are created primarily from the ground up through, for example, UBS, through the UBS wealth management research department. And an example of that would be a high-dividend strategy where the research department is doing the research on the single-issue stocks and then that's being fed up to a trading platform that the advisors can then use to implement across their portfolios.

Gogerty: What goes into going out and talking to these financial advisors? Obviously, your team has decided to go the latter route and build your own ETF strategy rather than tap into a prepackaged solution.

Demko: Right.

Gogerty: What went into that process in not only making that decision, but then deciding to take it to not only your direct clients, but other financial advisors inside your wirehouse network?

Demko: So, for us, when we made the shift from primarily using separate account managers on the equity side to using an ETF portfolio, we still use the research coming out of UBS that helps guide us for the asset-allocation decisions. That's the primary starting point for our asset allocation. Once we have the asset-allocation in place, we then use a covered-call option overlay on top of that which is proprietary to us.

In terms of the advisors using our strategy, they have, of course, the option at UBS to go a number of different routes. What we've shown over the last five years through skillfully managing the portfolio on the ETF side and on the option side with an alpha of about 6.85% annualized over last five years is, we found that advisors like to be able to tap into another team that has experience with private clients where they can then use our strategy or be partners with us to then bring to their client base or also use it as a tool to go out and acquire new clients.

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