Many advisors want to conduct quantitative analysis but most don't have the time. A new tool from Summit, N.J.-based Markov Processes International may help them perform more in-depth research on client portfolios and investment products.

As investment products become more complicated, portfolio managers and fund buyers are looking for better ways to understand what is happening under a fund’s surface, says Jeff Schwartz, president at MPI.

“Today’s advisors don’t have the time and money to look at the holdings of complex products down at the positions level,” says Schwartz. “A quantitative approach can give them strong insight into what is going on in these products, but it’s time consuming.”

That increasing complexity is one reason MPI is updating its Stylus Pro software to make it easier for advisors and portfolio managers to perform a decomposition of returns analysis, a quantitative approach that attributes fund returns to different factor and style exposures.

The well-documented trend towards investing in passive indexes belies another trend that is at least as prevalent, says Schwartz. Namely, there are more difficult-to-understand alternative products; more products that apply shorting, leverage and derivatives; more products that use tactical shifts; more hedge-fund like equity mutual funds; and more target-risk and target-date products are increasing the complexity of investors’ options.

“Financial advisors can’t be full-time analysts, there’s just too much that they have to do,” says Schwartz. “We encounter the full spectrum of responses, there are firms who do all of the portfolio construction at the home office level because they don’t want the advisor doing that, other advisors could do it themselves but prefer to outsource.”

While many advisors are gravitating towards third-party managers and TAMPs to run their client portfolios, Schwartz says that others are trying to improve their capabilities and market their portfolio management offerings as a differentiator by using MPI’s Stylus software.

“We’ve seen that this kind of portfolio analysis is in demand across the board, no matter how the portfolio management is being delivered to the end client,” says Schwartz. “Advisors want their clients to be able to see a CFA-caliber deep-dive analysis of portfolios that they’re not going to get with a roboadvisor or most out-of-the-box solutions.”

Using quantitative analysis, fund buyers like advisors are evolving the way they evaluate managers, alternative investments and smart and strategic beta products, according to Schwartz.

The updates in the just-released Stylus Pro Version 11.3 introduce Stylus Workspace, a quantitative research framework that allows fund buyers to assess the value and risk exposures they receive from active managers, and to help them determine whether active products and alternatives can be replaced fully or in-part by rules-based factor products.

Stylus Workspace is a highly sophisticated tool, explains Schwartz, but the business of buying and selling funds has evolved to require more sophistication, even among retail investors.

“When we first heard that wholesalers were using our tools and research to market funds to advisors, I thought that there was no way it was going to work,” says Schwartz. “Advisors, however, were willing to go along with higher levels of sophistication, I was spectacularly wrong. They wanted help in explaining all of this stuff in-depth to their clients. That brings us to today, where retail sophistication is right on the heels of the institutions.”

Powered by over a quarter century of MPI’s fund analysis and factor modeling expertise, Stylus Workspace automatically applies to funds benchmarks, peer groups and factor models when a user selects them. In addition, users can run an individual fund against the full MPI Factor Model Library to identify the best set of factors for analysis for the fund.

Stylus Workspace includes institutional quality portfolio building tools and risk-testing functionality. The new updates also allow advisors to analyze funds with non-return economic data like interest rates to examine how products perform in different scenarios.

Schwartz says that fund buyers are putting extra emphasis on the ability to assess manager performance by economic factors, especially as more developed market central banks indicate that they’re moving towards adoption of tightening monetary policy.

“Institutional folks have been using econometric factors like GDP growth, volatility, spreads and rates for years,” says Schwartz. “Now we’re seeing a lot of our advisor clients producing content that shows a portfolio’s sensitivity to econometric or non-return risk factors.”