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The financial advisor’s guide to model portfolios

Written by Advyzon Team

We’re all familiar with the basics of portfolio building. And while model portfolios take a cue from the basics we know, there are new strategies and opportunities that can help you get more creative with how you serve clients.

Let’s walk through some of the different approaches to model portfolios and the different options for designing them. You can build all these portfolios in Advyzon using our Quantum Rebalancer.

Asset allocation models

We have to mention this basic approach, which is popular and foundational for a reason. Portfolios grounded in asset allocation tend to look at asset class as the biggest overall factor in targeting returns and managing risk. Critics say that portfolios based solely on asset class aren’t truly diversified as it’s an overly simplistic approach. However, there’s no shortage of approaches for how to balance allocations within a given asset class, known as factors or sub-assets. With an asset allocation model, you probably use terms like conservative or aggressive, based largely on fixed income and equity allocations.

Factor models

Factor models focus on the different categories within an asset class. For stocks, this might be sector (tech versus industrials), size (large cap versus small cap), or categorization (momentum versus value). This more nuanced breakdown can help advisors and CIOs stress test their portfolios against different scenarios. For instance, higher oil prices generally drive energy stocks up but transportation stocks down, in addition to higher commodity prices. Allowing for that nuance may help you test what would happen to a client’s portfolio if oil prices jump. With factor models, you likely use terms like income or growth.

Strategic and tactical models

Strategic portfolio models refer to a long-term approach to modeling. These models prioritize the client’s risk tolerance and goals over external factors. Tactical models, on the other hand, tend to reflect a more active approach to portfolio management, with a focus on external factors, like market performance.

Momentum portfolios

These portfolios are designed to capitalize on the momentum of a security. In other words, a momentum portfolio might buy stocks or sectors that have been outperforming recently in an attempt to capture some of the momentum and a potentially outsized return. If your clients tend to follow the market and ask you about their exposure to the latest “hot stock,” a momentum-based model portfolio may make sense.

Value portfolios

These portfolios look for value stocks, i.e., any equity with a low price to earnings (PE) ratio. Value portfolios look to find stocks that are inexpensive relative to their earnings and capitalize on the classic “buy low, sell high” maxim.

ESG portfolios

These are portfolios designed based on the environmental, social, and governance scores of the underlying investments. This approach to investing is still somewhat new, meaning there is no standard definition or scoring mechanism for ESG, and not every company reports the data necessary to evaluate its governance or its environmental or social impact.

The approaches to portfolio management discussed here don’t have to be used exclusively as models. For instance, your model portfolio might be a factor portfolio with ESG, value, momentum, and income allocations.

Whichever model you use to build client portfolios, the Quantum Rebalancer can accommodate. Design your portfolios using an allocation approach, breaking down asset classes into various sub-assets all the way down to the security level. Or use a security model. With either approach, you can design models of models allowing you to layer multiple allocation models or security models.

Written by Advyzon Team