Chapter 12 - Portfolio Solution Flashcards
What are the Three Main Categories of Portfolio Solutions Programs?
- Balanced funds, which are designed to meet the needs of a group of investors that share a similar investor profile (e.g. conservative, moderate, aggressive)
- Fund wraps, which are also designed to meet the needs of a group of investors that share a similar investor profile (e.g. conservative, moderate, aggressive)
- Managed accounts, which are tailored to the needs of a specific investor.
What is a Balanced Fund?
Recall that a balanced fund is a portfolio that invests in both equity and debt securities. A balanced fund is meant to provide investors with a middle ground between safety, income, and growth—all in one package.
Typically suited for investors with lower assets and more conservative objectives.
What is a Fund Wrap?
Fund Wraps provide a series of portfolios with multiple pre-selected assets allocations.
Fund wraps outsource the the management and security selection within each category to different managers.
Responsibility for the assets allocation decision falls the the wrap sponsor.
All administrative, management, and trading costs are rolled into one wrap fee.
Those who invest in fund wraps hold the unitized value of the fund of funds, but they do not hold title to the underlying funds or to the funds’ underlying securities.
- Fund of Funds
- Portfolio Allocation Services
- Traget Date Portfolio
What are Managed Accounts?
Managed accounts allow an advisor to build a personalized investment portfolio that is tailored to the specific needs of his or her client. The client retains the title to the individual underlying securities, rather than the portfolio’s unitized value, through pooled vehicles such as mutual funds.
Allows for greater customization.
Two main categories:
1. Non-Discretionary
2. Discretionary
What are Non-Discretionary Managed Accounts?
Non-discretionary managed accounts are full-service, fee-based brokerage programs that can hold a custom mix of directly held stocks, bonds, and investment funds. An advisor must obtain a client’s consent to trade each of the portfolio’s underlying components.
What are some Discretionary Managed Accounts?
- Managed Wrap Accounts
- Similar to fund wraps, except the investors owns the individual underlying securities. - Advisor-managed accounts
- Full-service brokerage programs in which an advisor acts as the portfolio manager or uses model portfolios developed by a broker’s research department. - Separately managed accounts (SMAs)
- provide fee-based management while allowing an investor to retain the title to the individual securities in their portfolio. This type of account usually requires a minimum investment of between $500,000 and $1 million.
When to, and the rational behind utilizing Portfolio Solutions.
- Liquidate the existing portfolio and replace it with the portfolio solution. Depending on the circumstances, this course of action may or may not prove feasible or desirable.
- Adopt the asset mix recommended by the portfolio solution and reconfigure (redeem and purchase) other assets so that the overall portfolio has the same asset allocation as the portfolio solution.
- Invest new cash in a portfolio solution and hold existing assets. This approach is reasonable because allocating a significant part of a client’s total assets through the portfolio solution will move additional assets closer to a proper overall asset allocation.
When might an advisor may take an active role in the asset allocation of his or her
client’s portfolio?
- When a portfolio solution is only a part of the entire portfolio
- A portfolio may contain assets, such as mutual funds, segregated funds, or structured products, that a client
may be reluctant to liquidate. - When predetermined asset mixes will not do.
- a promoter or manufacturer of a portfolio solution offers a limited ranged of asset allocations which may not be suitable for the client based on their needs. - When a portfolio solution contains objectionable assets
- Some clients may not wish to hold certain securities and follow a mandate like ESG investing. - When a portfolio solution does not provide tactical asset allocation
- A portfolio solution may only be designed to maintain a strategic asset allocation.
- if the advisor or client want to take advantage of short term opportunity they might have to make the tactical allocation themselves.
What are the Two types of fees for Portfolio Solutions?
- Embedded Fees
- With embedded fees, which are most common in fund wraps, the full cost of a portfolio solution is charged in the form of
management expense ratios (MERs). They generally include management fees, operating expenses, and taxes, and are no different from the MERs charged on traditional mutual funds. - Unbundled Fees
- the asset allocation component of a portfolio solution is charged directly to an investor. Management fees, advice fees, and operating expenses are unbundled to varying degrees. Unbundled pricing offers cost transparency and, in some cases, the fees are a tax-deductible expense. Unbundled fees are used extensively with managed accounts and fee-based fund wraps.
What are the two primary criteria when selecting a Portfolio Solution?
- Client Account Size
- Customization Requirements
What are the two types of Absolute Returns?
- Portfolio’s Absolute Return
- The Daily Time-Weighted Method
- Most accurate
What are Relative Returns?
It gauges how much value a portfolio manager is adding, performance must be compared to a relevant benchmark or standard of performance. Two main benchmark categories are peer groups and indexes.
Peer Groups: Quartile rankings (the most commonly used peer group measure) assign the first quartile ranking to managers in the top 25% of the list, with the next 25% obtaining a second quartile ranking, the next 25% a third quartile ranking, and the bottom 25% a fourth quartile ranking.
- Challenge is finding an “apples-to-apples’ comparison
Blended Benchmark: a combination of indexes that sets a realistic and
attainable performance standard for a portfolio. Appropriate indexes are selected for each underlying component of
a portfolio and are weighted accordingly.
What is Performance Attribution?
Consists of decomposing a portfolio’s total performance into specific components that can be attributed to decisions made by the overall portfolio manager (tactical asset mix decisions) or by the managers of each underlying component (regional, sector, and security).
When measuring performance, how must and advisor consider fees and taxes?
Because fees may vary, reporting returns gross of fees allows for fair comparison between managers in peer group comparisons. If the objective is to rank advisors by management ability, gross returns need to be used.
When determining if a manager is adding value over and above an alternative such as passive index investing, you should calculate returns net of fees and compare them to index performance net of fees for index funds and ETFs.
When measuring performance, an advisor should also use pre-tax returns, rather than post-tax returns. This is the case because post-tax returns are subject to an investor’s personal circumstances (province of residence, marginal tax rate, etc.) and may vary greatly from one investor to another.
What is Overlay Management?
Overlay management is a service that combines several managed investment products into a single account controlled by a single authority. Unlike overlay management, conventional portfolio construction merely combines separate accounts for each managed product, multiplying the administrative work involved. This makes it difficult for an advisor to efficiently rebalance portfolios or customize investment solutions for his or her clients. Under overlay management, customization and efficient rebalancing are possible.
