A Purpose-Filled Portfolio

Chief Investment Officer – Model Portfolios
06/25/2020

This article is relevant to financial professionals who are considering offering model portfolios to their clients. If you are an individual investor interested in WisdomTree ETF Model Portfolios , please inquire with your financial professional. Not all financial professionals have access to these model portfolios.

To everything (turn, turn, turn)
There is a season (turn, turn, turn)
And a time to every purpose, under heaven

A time to build up, a time to break down
A time to dance, a time to mourn
A time to cast away stones, a time to gather stones together

To everything (turn, turn, turn)
There is a season (turn, turn, turn)
And a time to every purpose, under heaven

(From “Turn, Turn, Turn” by Pete Seeger, 1959, covered by The Byrds, 1965)

As advisors seek new ways of building and managing portfolios in the wake of the pandemic events of 2020, one clear trend in the advisor community is the adoption of an “outcome-focused” portfolio construction approach. What does this mean?

The high net worth consulting model is a direct descendant of the institutional model. Unfortunately, the institutional model has certain characteristics (e.g., infinite time horizon, oversight by committee and tax exemption) that do not apply to individuals—certainly not with any consistency. Rather, most individuals are goal-oriented and, in general, share the same three objectives, to differing degrees. They want to:

  1. Maintain or improve their current lifestyle,
  2. Not outlive their money and be able to fund their legacy objectives, and
  3. Optimize fees and taxes along the way.

The concept behind outcome-focused models is to build portfolio “sleeves” or modules that target specific investment objectives, rather than the usual approach of optimizing the risk/return trade-off of the overall portfolio—a statistical portfolio property that may or may not have any real meaning or relevance to the average investor.

These “outcome-focused” sleeves also align well with the fact that many advisors still want to be actively involved in the portfolio construction aspect of their practices (for many, it is why they got into the wealth management business to begin with—they love investing).

By accessing portfolio sleeves designed to meet specific objectives or outcomes, advisors have an expanded toolkit from which to choose in constructing customized client portfolios, without outsourcing the entirety of that function.

At WisdomTree, we offer a variety of outcome-focused portfolios, each designed to address targeted investor objectives. They include:

  1. Global Dividends, for advisors seeking an equity allocation that attempts to maximize current income/yield while controlling for risk. This portfolio sleeve may act as a stand-alone equity portfolio or make a nice complement to the overall equity portfolio for those advisors seeking to maximize current yield generation.
  2. Global Multi-Asset Income. In today’s yield-starved market environment, many advisors are seeking to maximize the overall current income potential of their portfolios to help end clients maintain their current lifestyle. This portfolio combines yield-focused equities, fixed income and other yield-generating strategies (e.g., master limited partnerships (MLPs), option-based strategies, preferred securities, etc.) in an attempt to maximize current income without taking unnecessary risk.
  3. Volatility Management, for advisors seeking to create a more “endowment-like” feel for their portfolios by including less traditional or lower-correlated strategies. These strategies might include, but are not limited to, short-biased, equity hedged, merger arbitrage and beta-reducing option-based strategies. We manage an overall Endowment Model that incorporates these types of strategies into a multi-asset total portfolio. This more focused portfolio sleeve is designed to complement an already existing stock/bond portfolio, allowing advisors to create a similar risk and return profile as our Endowment Model while maintaining more control over the traditional stock and bond portfolio.
  4. Multi-Factor Equity. This portfolio is explicitly diversified across multiple risk factors in an attempt to lower overall volatility. It can act as a stand-alone portfolio for advisors seeking a lower volatility equity solution or as a complementary sleeve within a broader overall equity portfolio. Over the past several years, “low volatility” has become a very popular risk factor. The result is that securities considered to be “low vol” have become increasingly expensive (i.e., valuations have increased). By diversifying across multiple risk factors (e.g., size, value, quality, momentum, etc.), we believe our multi-factor model can potentially deliver a similar “low vol” experience using much more attractively priced securities.

As with all WisdomTree Model Portfolios, these outcome-focused sleeves have certain common characteristics:

  1. They are global in nature,
  2. They consist entirely of ETFs, which helps to optimize fees and taxes,
  3. They are “open architecture”—that is, they include both WisdomTree and third-party strategies. We do this to optimize the active and passive mix of strategies within the portfolio and to make sure that the portfolios are risk factor diversified,
  4. These sleeves can be “mixed and matched” with each other to create total portfolio solutions, or they can serve as complementary “add in” sleeves within other third-party models, and
  5. They carry no strategist fee—our revenue derives entirely from the expense ratios of the WisdomTree products included in the portfolio.

We will consider adding additional outcome-focused portfolios to our solution set as our advisor clients identify specific “pain points” they want to solve for within broader investment mandates.

We think the wealth management industry is evolving away from evaluating investment performance on a benchmark-relative basis and toward an objective of solving for specific investor goals.

We believe our Outcome-Focused Model Portfolios can help advisors differentiate themselves in this evolving landscape.

 

 

Important Risks Related to this Article

There are risks associated with investing, including the possible loss of principal. Diversification does not eliminate the risk of experiencing investment losses. Using an asset allocation strategy does not assure a profit or protect against loss.

This material does not constitute any specific legal, tax or accounting advice. Please consult with qualified professionals for this type of advice. This material is not intended to be a recommendation or advice by WisdomTree. WisdomTree does not undertake to provide impartial investment advice or give advice in a fiduciary capacity. Further, WisdomTree receives revenue in the form of advisory fees for our exchange-traded funds, and WisdomTree is also entitled to receive a fee from certain model platform providers for licensing model portfolios.
WisdomTree Asset Management, Inc., is an investment advisor registered with the Securities Exchange Commission and a wholly owned subsidiary of WisdomTree Investments, Inc.

For financial professionals: In the event that you subscribe to receive a WisdomTree Model Portfolio, you will receive investment ideas from WisdomTree in the form of a model portfolio. The information is designed to be utilized by you solely as a resource, along with other potential sources you consider, in providing advisory services to your clients. WisdomTree’s Model Portfolios are not intended to constitute investment advice or investment recommendations from WisdomTree. WisdomTree is not responsible for determining the securities to be purchased, held and/or sold for your clients’ accounts, nor is WisdomTree responsible for determining the suitability or appropriateness of a model portfolio or any securities included therein for any of your clients. WisdomTree does not have investment discretion and does not place trade orders for any of your clients’ accounts. Information and other marketing materials provided to you by WisdomTree concerning a model portfolio—including holdings, performance and other characteristics—may not be indicative of your client’s actual experience from investing in one or more of the funds included in the model portfolio. The model portfolios, allocations and data are subject to change.

For end users: WisdomTree’s Model Portfolios are not intended to constitute investment advice or investment recommendations from WisdomTree. Your investment advisor may or may not implement WisdomTree’s Model Portfolios in your account. WisdomTree is not responsible for determining the suitability or appropriateness of a strategy based on WisdomTree’s Model Portfolios. WisdomTree does not have investment discretion and does not place trade orders for your account. This material has been created by WisdomTree, and the information included herein has not been verified by your investment advisor and may differ from information provided by your investment advisor. The model portfolios, allocations and data are subject to change.

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About the Contributor
Chief Investment Officer – Model Portfolios
Scott Welch is the CIO of Model Portfolios at WisdomTree Asset Management, a provider of factor-based ETFs and differentiated model portfolio solutions. In this capacity he oversees the creation and ongoing management of the WisdomTree model portfolio solution set. He is also a member of the WisdomTree Asset Allocation and Investment Committees. Prior to joining WisdomTree, Scott was the Chief Investment Officer of Dynasty Financial Partners, a provider of outsourced investment research, portfolio management, technology, and practice management solutions to RIAs and advisory teams making the move to independence. He remains an outside member of the Dynasty Investment Committee.  He sits on the Board of Directors of IWI, the Advisory Board of the ABA Wealth Management & Trust Conference, and the Editorial Advisory Boards of the Journal of Wealth Management and the IWI Investments & Wealth Monitor. Scott earned a Bachelor of Science in Mathematics from the University of California at Irvine and an MBA with a concentration in Finance from the University of Massachusetts at Amherst.