Optimizing Performance and Mitigating Volatility
Last May, we presented data that showed fund strategist portfolios (FSPs) producing good results with half the volatility of advisor-managed portfolios (APM). In this edition of Envestat, we’re taking another look at the portfolio performance and examining outliers to determine what may be driving either positive performance or underperformance.
The key questions we are addressing are:
- How concentrated are total returns across APM, FSP, and UMA portfolios?
- What contributes to the extreme outliers?
- How can advisors avoid excessive volatility in their clients’ portfolios?
3-Year Performance by Program for Moderate/Moderate Growth Portfolios
Source: Envestnet Analytics. Performance data from more than 500,000 accounts in the Moderate/Moderate Growth risk tier, spanning July 1, 2016, to June 30, 2019.
The scattergrams above show that FSPs had the tightest performance cluster compared to APM and UMA models, which had greater performance dispersion; that is, accounts that were two or more standard deviations from the average.
- Managed positions were the major contributor to wide performance swings in the APM program, accounting for 43% of performance outliers. Managed positions consist of individual securities held in the client’s account. These could be legacy holdings, concentrated positions, or the advisor’s favorite stock picks.
- 44% of UMA outlier account assets were driven by the Mutual Fund and ETF sleeves, suggesting that advisors may be operating as portfolio managers within the UMA framework.
- Dispersion of account returns was much higher for APM and UMA portfolios, where advisors are managing the portfolio.
- The dispersion of returns in APM portfolios was double that of FSPs, where management is outsourced to professional money managers.
- UMA dispersion was in between APM and FSP portfolios but far closer to APM (likely due to performance of the advisor managed portfolio sleeve).
Average annualized performance for the past three years was highest for the UMA program, and the dispersion was materially lower than APM portfolios. FSPs generated both attractive returns and the least variation of returns across investor accounts.
Takeaways for Advisors and Home Offices
- APM and UMA programs provide advisors discretion over investment options, and they may be more inclined to accommodate client requests - resulting in varying performance outcomes.
- Advisors need to be mindful of the time it takes to build and manage client portfolios versus spending that time deepening client relationships.
- FSPs will not only generate competitive performance results but will limit unnecessary portfolio volatility.
- Outsourcing the investment component to FSPs will give advisors additional time to focus on the issues weighing heavily on their clients.
If you are interested in comparing how advisor-managed portfolios and UMAs at your own firm performed against professional money managers, please contact Envestnet Analytics
The data provided is derived from Envestnet user data composite. Data has not been independently verified. The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this report is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
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