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Strange Bedfellows in Model Portfolios

Firms are teaming up to unite their best features.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Third-party model portfolios have gained traction with financial advisors, and a few asset managers in this space are teaming up on different platforms. Joining me today to discuss some of these hookups is Jason Kephart. Jason is a strategist with Morningstar's multi-asset funds research team.

Hi, Jason. Thank you for being here today.

Jason Kephart: Thanks for having me, Susan.

Dziubinski: Let's start out by broadly discussing what model portfolios in general offer to advisors?

Kephart: Sure. Model portfolios are basically there for advisors who are looking for more free time, whether it's the focus on things like financial planning that might be a better value-add for clients than just portfolio management or if they want to focus on things like growing their business or managing their business. A lot of RIAs are basically small business owners, and time is a commodity they just really can't get enough of. So, model portfolios allow them to outsource some or all of their investment management responsibilities. We've heard anecdotally that a lot of advisors will start using them on their smaller clients, and as they get more comfortable with the models, they move them up to larger clients, while they still use the real hands-on touch for their ultra-high-net-worth clients.

Dziubinski: Now typically these model portfolios feature asset allocations and funds from a single asset manager, but we're starting to see some managers, asset managers, pair up on a few different platforms. Why is that happening, do you think?

Kephart: Yeah, it's a pretty interesting trend we're starting to see. Open architecture-- you know, asset managers using nonproprietary funds in their strategies--isn't really new, but what we're seeing that's new is more deliberate team-ups. And I think what this does is really bring to fore--you know, it's great when you can find two firms that have complementary strengths that can come together and create a really more interesting portfolio. It's rare that any one firm is going to be the best-in-class at every asset class you're going to want to have in a portfolio. So, in a lot of ways, it makes sense for these firms to collaborate and offer the strongest portfolio possible.

Dziubinski: One of those pair-ups, one of those partnerships you talked about, is WisdomTree and Pimco. How does that relationship work?

Kephart: This is more of the classic team-up I think you'd expect to see. WisdomTree has done a lot of research on factors and different active indexing strategies. And so, they're using their proprietary equity ETFs. But on the fixed-income side, they're leaning on Pimco to manage the fixed-income portfolio. So, you're getting Pimco's expertise in actively managing bond strategies paired very thoughtfully with WisdomTree's research into different equity strategies. So, that's I think the kind of classic thing you'd expect to see where passive ETFs, passive equity ETFs and active bond strategies, that's a typical hybrid approach we see, but it's not always what we're seeing in these model team-ups though, which is pretty interesting.

Dziubinski: Another example is New York Life and AMG. How is that pairing structured?

That's even more interesting because there's a third player involved, Wilshire, a very well-known investment consult. AMG and New York Life have come together and hired Wilshire collectively, and Wilshire is picking the best of funds from both New York Life's options and AMG's options to create model portfolios. Right now, they're focused on income. But it's another very interesting approach to this space that is really quickly evolving. I think we're going to see a lot of things like this where they're unusual, but there is potential there.

Dziubinski: We're also seeing some of what you've called these "super team-ups." For example, Vanguard and American Funds have joined forces on a couple of different platforms, right?

Kephart: Yeah. And so, that's I think one of the really interesting ones. We're seeing firms on the top five really start to work more collaboratively together, whereas I think it's always been a very competitive world out there in asset management. And so, what's interesting about the American Fund/Vanguard team-up as compared to the WisdomTree/Pimco one where it's your classic passive equity and active bonds--well, American Funds, their value-add really is in their really strong equity strategies. So, they're not going to give up that. So, they're pairing their active equity strategies and some active fixed-income strategies with Vanguard ETFs, which helps keep costs low, which I think advisors really like, but also doesn't give up that American Funds' strength of security selection on both the equity and fixed-income side. So, I think that's one that's still very new. So, it's yet to really be tested. But that's one I think we're going to be keeping a close eye on, because that's really--on paper--a very compelling partnership.

Dziubinski: And then, lastly, this last partnership also involves Pimco, and it's Pimco and BlackRock teaming up. How does that one work?

Kephart: Pimco's bonds are showing up everywhere. And so, for this BlackRock/Pimco one, this is another income-focused model. Outcome-oriented models are very popular, at least in the product development phase. And so, this is one that pairs BlackRock's Michael Fredericks, a well-known multi-asset income manager that we think very highly of, with his expertise but also using some Pimco bond funds to get some diversity of thought into different kind of income strategies. Obviously, BlackRock has very well renowned bond managers on their own side, like Rick Rieder. But I think just getting that diversity of thought could be really beneficial from a diversification standpoint.

Dziubinski: And lastly, Jason, do you expect to see more of these hookups going forward and why?

Kephart: I think so. I think it makes sense on a lot of levels. First, on the complementary skill-sets. If firms are really reaching out to firms that can complement each other well, that's a pretty compelling opportunity. I think on the more practical side from a servicing advisor's standpoint, when you have Vanguard and American Funds' sales teams there to be able to service an advisor, that just makes it easier to get the information to the advisor and help them understand what's going on and why and deliver that message back to their clients.

Dziubinski: Jason, thank you for your time today to help walk us through this new development, this news, in the model portfolio landscape. We appreciate it.

Kephart: Thanks for having me, Susan.

Dziubinski: I'm Susan Dziubinski. Thanks for tuning in.