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  • Home>ETF Managed Portfolios>ETF Managed Portfolios>Global All-Asset Strategies

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    Global All-Asset Strategies

    The industry’s largest portfolios vary their approach.

    Andy Gogerty, 01/30/2013

    ETF managed portfolios are investment strategies that typically invest more than 50% of portfolio assets in exchange-traded funds. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe. Morningstar has developed a proprietary classification system for ETF managed portfolios that identifies the investments’ portfolio attributes. The new structure consists of four main attributes: universe, asset breadth, portfolio implementation, and primary ETF exposure type. This system helps investors better understand the philosophies underlying these investment strategies. The latest Morningstar ETF Managed Portfolio Landscape Report (which can be accessed here) is a comprehensive industry review of strategies that report information to Morningstar’s separate account database.

    In this series we’re taking an inside look at the industry using the combination of universe and asset breadth attributes as a starting filter. This commentary is focused on global (universe) all asset (asset breadth) strategies, and upcoming commentaries will discuss other attribute combinations.

    Thank You, Technology
    Relative to other ETF managed portfolio strategies, global all asset strategies have benefited the most from the ETF boom over the past decade, particularly in the past five to six years. When viewed as a technology, rather than as an investment, the ETF has made it easy to allocate capital across asset classes in a cost-effective way that was previously available only to large institutional managers. Today, you can gain access to virtually any slice of the equity market around the globe, and product development focused on fixed-income offerings has kicked into high gear. More importantly, volatility plays and asset classes like gold and agriculture are now available with the purchase of just one share of an ETF. Previously it would have taken a combination of futures, options, swaps, and thousands of individual securities to replicate such exposures.

    The popularity and growth of the ETF market is evident in net flows into ETFs, which topped $191 billion in 2012, the highest year ever. Global asset-allocation strategies have a tool box sufficient to express their global views in a cost-effective manner and can be positioned as stand-alone strategies or complete portfolio solutions. When comparing ETF managed portfolios by Morningstar’s universe and asset breadth classifications, global all asset strategies top the total-assets list.

    The subgroup’s growth rate generally kept pace with the industry’s growth, though the acceleration of assets has slowed somewhat in recent quarters, remaining steady at approximately one third of total industry assets over the past year.

    The Top Players
    The industry is growing broadly, but assets remained concentrated. Windhaven Investment Management, the Boston-based strategist acquired by Charles Schwab in 2010, offers three strategies that collectively hold $12.5 billion as of September 2012. Windhaven’s three portfolios offer a core-satellite model, using a core sleeve of investments along with a tactical sleeve that can opportunistically invest in ETFs on a global basis as well as go to cash. The middle option—Growth—has been most popular, growing by more than $2 billion to $6.5 billion in 2012’s first three quarters. But all of the strategies remain popular within Schwab’s managed account network, and the strategies occupy three of the top seven spots among all ETF managed portfolio strategies.

    Multiple strategies from F-Squared Investments (in both the global all asset and the U.S. equity space) have seen material asset growth, as have offerings from Quantitative Advantage and Toronto-based Cougar Global Investments. QA’s Tactical All Market strategy has attracted new assets from several platforms, including LPL Model Wealth, but growth has slowed somewhat in 2012. QA’s strategies rely heavily on quantitative models, with momentum a key component in evaluating potential asset-class investments.

    Cougar Global Investment’s MAR strategies also have grown significantly. The firm’s models incorporate multiple economic scenarios and look to rebalance the portfolios on a monthly basis. Each strategy’s name includes a number--the target annualized rate of return. Looking broadly across global all-asset strategies, most include a tactical component. Windhaven’s size does distort the totals somewhat, but tactical and hybrid strategies are in demand. Among all ETF managed portfolios, there’s an approximate split of 45%/45%/10% among hybrid, tactical, and strategic strategies, but the breakdown among global all-asset strategies is 80%/19%/1% of assets on September 2012.

    What Levers Are Being Pulled, and When?
    Like the broader ETF managed portfolio universe, global all-asset strategies typically employ a combination of technical or quantitative factors. Statistics such as momentum, moving average, relative value, relative volatility, and various yield-curve scenarios often form the basis of models. Other factors such as mean reversion or mean variance optimization can also play a role in determining the asset-allocation parameters for the portfolio.

    This group’s global focus sets it apart. The strategies look across asset classes as well as market economies, so macroeconomic data plays a larger role here than with most other universe and asset breadth combinations. Individual country, and even small regional, GDP consumption and export data are often key factors in the strategies’ models, sitting alongside the data mentioned above. The managers are aiming to minimize relative risk or even anticipate price momentum or asset-class appreciation. In addition to the quantitative signals, the strategists may inject a qualitative idea from an investment committee or portfolio manager. In these cases the portfolio manager should be able to clearly demonstrate how such qualitative inputs have improved the strategy and the structure that allows for consistent application of these views going forward. , and should be a key discussion point for potential investors.

    Understanding the strategy’s scope is also important because the meaning of “Global All Asset” or “Global Tactical Asset Allocation” can differ widely across strategies and firms. Strategies can simply combine stocks, bonds, cash, and broad commodities or expand to smaller categories such as gold, silver, and agriculture products like corn and cocoa. Other portfolios have a dedicated income component, containing investments such as preferred or convertible preferred stock as well as a potential REIT allocation.

    A Cursory Look at the Portfolios
    At a quick glance, SPDR ETFs are a common choice for gold (GLD) and S&P 500 Index (SPY) as well as equity sector exposure. Vanguard ETFs are used frequently for U.S. real estate exposure (VNQ) as well as broad stock (VTI) and bond (BND) allocations. IShares ETFs dominate the single-country exposure as well as the different ranges of U.S. Treasury duration offerings. Within broad commodities, PowerShares DB Commodity (DBC) appears to be the top choice for broad basket exposure.

    A few managers also are adding volatility exposures to their portfolio as a way to hedge downside risk or as a potential indirect play on equity appreciation. Longview Capital Management’s Global Allocation strategy, for example, had a 9% allocation to the iPath S&P 500 Dynamic VIX (XVZ) in its most recently disclosed portfolio.

    Things to Know
    Before choosing a global all asset strategy, determine its starting universe of asset classes and the potential allocation swings. Knowing which asset classes may be in the portfolio and how big (and small) they may be will help you determine if the strategy is right for you and will help set expectations for returns and volatility. Ask if there are set allocation bands and how large a strategy’s tactical cash holding may become. Finally, discuss the degree to which the strategy uses non-typical asset classes or ETF types, such as uncommon commodities and volatility ETFs, as well as the use of leveraged ETFs and options. Even in small doses, these stakes can have a big impact on returns.

    How They Can Be Used
    Global all asset strategies are flexible and can accomplish multiple roles inside a broader portfolio. Most commonly, advisors use the strategies in the core part of clients’ portfolios, but institutions and other large investors often use them for portfolio correlation diversification as well as risk management. Below we highlight the top strategies based on risk-adjusted return, core/alpha, and diversification.




    The blended benchmark composition for the correlation calculation is below. Benchmark weights were rebalanced quarterly.

    • 55.0% iShares MSCI ACWI Index ACWI
    • 17.5% Vanguard Total Bond Market ETF BND
    • 12.5% SPDR Barclays International Treasury Bd BWX
    • 10.0% PowerShares DB Commodity Index Tracking DBC
    • 5.0% iShares JPMorgan USD Emerg Markets Bond EMB

      Click to enlarge image.



    The Next Phase
    Global all asset strategies are likely to grow in number and assets. As the ETF universe expands, money managers have even more tools to express and refine their views on the market. The next wave (we’re already starting to see this trend) will likely be all-asset strategies concentrated on income generation. The strategies will differ by their starting universe of asset classes and the method for determining relative attractiveness of income. Within the global asset group, the Sage Tactical ETF Multi Asset Income, The Windham Retirement Income Portfolio, and WELA Agg Yield strategies emphasize income generation. 

    We also expect to see strategies dedicated to managing volatility and risk. These will likely be stand-alone strategies as well as overlay strategies in these portfolios. Or strategists may combine multiple strategies into one portfolio, a la a mini UMA. The combination of one or more individual strategies gives rise to true multimanager options, while the combining of multiple strategies from the same manager (or multiple managers) in varying weights creates a lineup of strategies across the risk spectrum.

    Andy Gogerty