Capital Group today launched 12 new model portfolios that include both actively and passively managed components. The funds are designed to replicate the way many financial advisors invest client assets—and thus to free up advisors’ time to build client relationships.
The portfolios will use Capital Group’s actively managed mutual funds, the American Funds, combined with passively managed ETFs from other managers such as Vanguard, Schwab and BlackRock. A portfolio solutions committee will monitor the models and strategically adjust allocations as needed, said Kris Spazafumo, head of portfolio solutions and services at Capital Group.
“In our effort to continue to serve the broadest spectrum of advisors as possible, we realized that many advisors are blending active and passive in investor portfolios,” she said. “And so we felt it was time and very appropriate to design and develop a new series of model portfolios in the form of these active-passive models.”
According to Stephen Margaria, a Morningstar analyst who covers the American Funds, the active-passive hybrid is the next step in the natural evolution of model portfolios and offers a cost-effective way for advisors to provide their clients with a new option.
“This kind of hybrid solution could have a material impact on investor outcomes,” he said. “Not only does it make the overall product cheaper, but it also allows Capital Group to focus their active investment in an area where they might see they have an edge in the industry, and then complement that with passive investments.”
Increasingly, independent financial advisors are “outsourcing” their investment function for at least some of their clients to model portfolios, Margaria said, as the constraints of time conflict with an advisor’s need to build business. Meanwhile, the larger asset managers putting together these model portfolios are well-resourced and can leverage all areas of their business and expertise.
“That’s what makes these products very attractive to advisors. Instead of making your own portfolio, you can outsource to a portfolio already built, and put that time and effort into the relationship aspect that is so important to an advisor’s business,” he said.
To guide decisions on the passive component, Spazafumo said Capital Group’s portfolio solutions committee developed an “ETF eligible list” using qualitative and quantitative screening criteria. This exercise winnowed down the possibilities from thousands of ETFs to a sub-group of roughly 100, any of which can be placed into the active-passive portfolios, she said.
Within a given model portfolio, there could be a combination of 12 to 15 American Funds plus the passive ETFs, all of which could change in allocation, and new funds or ETFs can be added or even dropped.
“Our primary concern on a day-to-day basis is really understanding what financial advisors are looking for in model providers, and increasingly the inclusion of active and passive in portfolios has been very common, and also an open architecture structure that has multiple underlying investments within a single portfolio,” Spazafumo said. “But also investors might be increasingly looking for manager diversification, they might be very fee-sensitive and also are still looking for the excess returns that active portfolios can provide.”
The model portfolios include three geared for growth, four for growth and income, two for preservation and income, and three for retirement income. The pricing is somewhere between the typical fees of active and passive funds.
“We do not charge any portfolio overlay fee for the management of these models. For the new active-passive models, the expense ratios of the fees are a blend of the underlying investments,” Spazafumo said. “If you look at the spectrum of models that we’re introducing, the current expense ratios range from 28 to 42 basis points.”
By comparison, Capital Group’s all-active model portfolio expense ratios range from 38 to 55 basis points.
Capital Group has offered model portfolios for more than a decade, with a lineup of 19 active models built around the American Funds. As the model market has matured, the firm believes that advisors and investors are ready for a new level of choice, Spazafumo said.
“Among most successful practices that are growing in assets and growing in sales, we’re finding that 78% of those advisors are using model portfolios,” she said. “We found that advisors who are using models are spending 13% less time on investment management, and that frees them up to have meaningfully more time with clients.”
The inclusion of model portfolios in a practice is not an all-or-nothing decision, she said, explaining that some advisors may use models for many of their clients while reserving truly bespoke investing for top clients.
The benefit of outsourcing is pretty clear, according to a 2022 AssetMark survey, called “The Impact of Outsourcing.” The survey found that financial advisors who outsourced the investment of more than 50% of their assets under management gained back an average of eight hours per week—20% of their time that could be directed toward client interactions.
Advisors will be able to access the new Capital Group active-passive portfolios soon through Envestnet, Fidelity and Orion, and additional platforms will be added in coming months, Spazafumo said.
“The actual investors in the models own those underlying funds and ETFs, and so part of our obligation as the portfolio strategist is that we deliver those ongoing allocations to the platforms where the models reside and then those allocation instructions would be implemented at the platform level down to the investor account,” she said.