Professional Financial Advisors who have implemented Short List Management into their practices may wish to take the investment management in their practices to a higher level. More often than not advisors and clients do not want to have all their investment eggs in one basket.
Advisors seeking multiple manager solutions with targeted outcomes linked to the financial and investment planning process, can implement a professionally managed solution into their practices that adds value and reduces advice, business and investment risk for clients and Advisors.
Model Portfolio Management is a further step up and requires the Advisors client to become a co-client with the Investment Manager. The risks of active portfolio management is then shifted to the Investment Manager. Model Portfolio Management can only be managed by a licensed Category II Financial Services Provider.
Model Portfolios are similar to Guided Architecture Funds, except that they are administered by a product administrator such as a LISP or a Life Assurance Company and they require investors to sign a discretionary investment mandate with an Investment Manager who, in turn, is approved by the product administrator to manager the portfolio for the client. Model Portfolios mitigate two key risks in the Advisor’s business, namely operational and TCF risks. These risks are shifted from the Advisor to the Investment Manager or product administrator, both of whom are best skilled and qualified to manage risks appropriately. Diversification is one of the key objectives of Model Portfolio Management, as over diversification is undesirable. This can result in very good level of volatility management at the expense of the desired return objectives, we refer to this as a “diworsification” and we aim to avoid this by limiting the number of underlying funds in any Model Portfolio.
The Investment Manager follows a similar initial process as is adopted in the research required for Short List Management. The primary differences are that the universe of funds is much wider and the evaluation is more complex. The multi-manager process, including the blending of single and multi-asset class portfolios and the correlation analysis are actively applied to the model.
Model Portfolios will be designed to match the desired outcome of the planning and advice process. These goals may be represented by CPI or Cash plus returns. A Strategic Asset Allocation model is built for each Model Portfolio. This forms the core of the Portfolio and acts as an internal benchmark. At this stage any specific needs will be addressed, examples of these could be currency exposure limits, sector or stock specific limits for religious reasons or even management company limits.
Once the universe of funds has been established the Quantitative Research process kicks into gear. This involves several phases and a number of analysis tools, including proprietary ones are used to screen and grade the funds in each group. This analysis looks at returns, volatility, alpha generated, duration of fund histories, consistency of performance, correlations and beta. Ranking of Funds based on the selected criteria will be an output of the research process.
Based on ranking between 10 and 15 funds per category will then be drawn through to the Qualitative Research stage. Qualitative Research is the art where Quantitative Research is the science of the Research Process. This stage involves interaction between the researcher and the fund and its manager. Each fund and/or manager will be quizzed on critical operational, skill and knowledge, style and activity points. The answers are cross referenced to the information publically available and any discrepancy addressed. Unresolved discrepancies or “Red Flags” would result in a fund being removed from the prospective universe.
The Portfolio Structuring, blending and correlation modelling and stress testing of the Model Portfolios is done in all investment conditions. The outcome of the Portfolio Structuring results in several blends that would be acceptable to attaining the desired outcomes. At this stage costs become a determining factor and, typically, the lower cost blends will get the nod over the pricier options.
Portfolios are reviewed monthly in a formal process. New manager of fund research is discussed, Quarterly Model Portfolios are reviewed with potential for rebalancing, which is an essential part of risk management. Model Portfolios have a strategic allocation to various funds; if this allocation has moved materially at quarter-end, the portfolio will be re-balanced. Before such a rebalance is undertaken a CGT tax calculation is performed for each client and sent to the Advisor for their records. If required by the Advisor, the Investment Manager can address any tax issues with the client and the Advisor. Tax is a consideration but will not override an investment decision.
Model Portfolios are implemented on various Investment Platforms such as LISP’s and Life Companies. Once the Model Portfolios have been signed off by all parties the Platforms create the Models and allocate a unique numbering or naming convention to identify them. The Advisor using the Model Portfolio is given exclusive access to these Models. The Models are available on several platforms.
Advisors and clients choose the Model Portfolio when quoting. Upon acceptance of a quote, the client is required to sign the Discretionary Investment Mandate of the Investment Manager. This is submitted by the Advisor to the Investment Manager. This is co-signed by the Investment Manager and a copy is returned to the client for their records. This Mandate authorises the Investment Manager to manage the clients’ portfolio. Operational efficiency is achieved as all clients in one Model Portfolio have their portfolio changed at the same time. The Advisor no longer has to individually go to each client and obtain a signature to make changes to the portfolio. This saves time and ensures that all clients are treated equally in the practice. The Advisor no longer has responsibility for implementing portfolio changes.
Seed is an independent Multi-Manager Investment Company with extensive manager and fund research capabilities. Seed also have the skill and experience required to blend fund manager and Mandates to achieve the benefits associated with style, asset classes diversification.
Utilising industry standard and proprietary analytical tools and with 750 manager meetings already completed, Seed Investments provides a wealth of accumulated knowledge ideally suited to managing Model Portfolios for Financial Advisors. The team currently consists of six Investment Professionals with a dynamic mix of experience and qualifications, including CA’s, CFA’s and FASSA (Actuary’s). The team manage and advise on Multi-manager Collective Investment Schemes, Fund of Hedge Funds and Model Portfolios and Short List Fund Assets, both locally and globally.