The Art – and Science – of Building Better Model Portfolios

Model portfolios are playing an increasingly important role in many advisors’ practices, improving scalability and ensuring a more consistent client experience. There are other benefits, too. Financial professionals surveyed by the Natixis Center for Investor Insight indicate that 45% use models to access a wider range of asset classes more efficiently and 42% find that using models lowers the administrative burden.¹

But as models become more mainstream, advisors are raising the bar for their portfolio providers. These rising expectations come as no surprise to Marina Gross, Co-Head of Natixis Investment Managers Solutions. Her consulting team has analyzed more than 15,000 advisor models since 2012. “Over the years our in-depth reviews have provided some unique insights into the way advisors view risk, asset allocation, manager selection and portfolio returns,” she notes. “Advisors are growing more sophisticated in their use of models and they do expect more.” Addressing these concerns has helped guide and inform innovation and portfolio construction in the Natixis models.

Diverse Network of Managers
Gross points out that building and managing models leverages other key strengths of Natixis Investment Managers. Thanks to its multi-affiliate structure, independent thinking is part of the Natixis DNA. “We’re fortunate to have highly skilled and experienced management teams who are well-versed in multi-asset portfolio construction. We have a broad network of active managers to choose from – as well as a rigorous due diligence and manager review process to identify best-in-class passive strategies and non-affiliated managers when necessary.”

Guiding Principles: Active and Passive
The Natixis models reflect the belief that strategic, qualitative diversification is essential for pursuing alpha potential and managing risk. “Access to multiple asset managers supports meaningful diversification that reduces the chance of investments being managed in the same way,” says Christopher Sharpe, Chief Investment Officer and Portfolio Manager. He adds that as technology continues to increase the efficiency of the capital markets, restricting a portfolio to an all-active or all-passive strategy shortchanges investors because there are distinct benefits and risks associated with both investment approaches.

In Sharpe’s view, “There is significant investment value to be gained from combining active and passive strategies, not only in the form of improved cost and tax efficiencies, but also in the ability to flex the portfolio across exposures, styles and time horizons to create more balance and broaden the opportunity set.”

Diverse Range of Strategies to Target Advisors’ Needs
Differences in model type, construction and allocation in the Natixis models create a robust menu of portfolio options that can be used as core, completion, or thematic portfolios tailored to a range of risk profiles.

Once the model type has been selected, the construction approach can be either quantitative or fundamental, the allocation approach can be either dynamic or strategic, and the tax strategy can also be specified. For example, the construction approach of the Tactical Core Models is fundamental, the allocation is dynamic, and the portfolio is tax-aware.

Consistent Model Portfolio Construction Process

Source: Natixis Investment Managers Solutions

These variations result in a broad range of models suitable for almost any type of advisor practice. For example, experience from portfolio consulting has shown that advisors are least confident in choosing alternative investments – although they understand the need for them. This led to the creation of the Alternative Completion Models, designed as a “plug and play” allocation that aligns with the risk profile of a client’s core portfolio.

The offering also includes thematic models that focus on sustainable investing and income generation. “Responding to the needs of advisors and their clients has been the driving force behind growing our model business,” says Marina Gross. “We expect that advisors will continue to demand more from their model providers in the years ahead.”