Real-time adaptability: the secret sauce of managed accounts
Managed accounts (also known as managed portfolios) have proven to be one of the most impactful innovations to hit the wealth industry in recent times. Advisers appreciate managed accounts’ capability to help them save time by building scale, consistency, and efficiency into their practices, while offering tight alignment with clients’ objectives, risk tolerances, and specific circumstances.
Without doubt, managed accounts have made an overwhelmingly positive contribution to the wealth of many Australians. However, in the wake of seismic market events which wreaked havoc to portfolios across the nation, advisers and their clients are looking for more from their managed account provider, and this is where Russell Investments’ diverse and dynamic approach provides practices with an additional edge.
When building our managed account solution, one of the earliest pain points we sought to relieve was the static nature of the allocations many managed account options offered. As a result of clients demanding low-turnover portfolios, the managed accounts constructed by investment managers lacked any real-time adaptability to the movement of markets. These products left clients exposed to unnecessary risk when things went awry, and unable to convert opportunities requiring quick implementation when markets suddenly shifted in their favour.
To combat this, Russell Investments’ managed accounts adapt to market movements in real-time through our Dynamic Core. The Dynamic Core accounts for up to 35% of every Russell Investments managed portfolio and allows our portfolio managers to use active management to modify portfolios according to the movement of investment markets in real-time, without racking up additional transaction costs or potential tax implications for clients by making unnecessary changes at the platform level.
The Dynamic Core ensures clients remain within the active management sweet spot, offering access to institutional-quality investment managers at an attractive price point. Of the investment products held within the Dynamic Core, 50% would otherwise be inaccessible to Australian retail investors1. Fees begin at just 64.5bps, far lower than the 100bps2 typically charged by managers of totally active managed account solutions.
Over the past 12 months the Dynamic Core has helped to protect clients from the worst of the COVID-19-induced market shocks and positioned their portfolios to take advantage of the rebound as investor sentiment swung wildly.
Using the Dynamic Core, we positioned the Russell Investments Balanced Managed Portfolio (the Portfolio) to be relatively cautious in its allocation of growth and credit assets as markets continued to rise in early 2020. An initial benefit of this less aggressive stance placed Portfolios in a favourable position when investors across the globe began selling down their equity positions during the beginning of the COVID-19-related market turmoil. However, at the later stages of this sell down, it was the Dynamic Core and a robust investment process that enabled our portfolio managers to pivot and add riskier assets into the Portfolio at cheaper valuations, and benefit from the rebound.
As retail investors suddenly fled from equity markets seeking shelter in less risky assets, our Dynamic Core began to buy into growth assets again, anticipating a market bounce back. As a result, the Portfolio’s growth allocation increased to highs of 77% in May 2020. Additionally, the Dynamic Core allocation of this Portfolio was also able to take pro-active positions within fixed income, reducing cash and traditional exposures to invest in extended fixed income strategies such as high yield and loan portfolios.
With the Australian shares (S&P/ASX 300) index up 38% for the 12 months to 31 March 2020 and global high yield debt rising by 22% (BofA Merrill Lynch Global High Yield Constrained Index), the contribution of active management to the returns of our Managed Portfolios has been strong. Furthermore, active external managers within the Portfolio have been able to take advantage of the shifting dynamics. Our largest allocation to a third-party manager - an institutional Australian quantitative fund manager - is up 22% relative to the market over the last 12 months.
Over a turbulent and uncertain 12 months, the active portfolio management decisions by the Balanced Managed Portfolio’s Dynamic Core contributed to a 3.1% excess return over the portfolio’s benchmark3, while also outperforming the peer median4 by 2.2%.
Independent research house SQM Research recently recognised the high calibre of the investment management team overseeing Russell Investments’ Managed Portfolios, awarding the suite of actively managed portfolios with four out of five stars. SQM Research cited the portfolios’ rigorous investment process and Russell Investments’ world class multi-asset portfolio management capabilities, and also noted the competitive price point and lack of performance fee.
For time-poor financial advisers, managed portfolios are a critical innovation that frees up their time to be spent in more meaningful ways than filling out Records and Statements of Advice and managing the burden of unwieldy client model portfolios. Through the real-time adaptability offered by our Dynamic Core, managed portfolios are now also a cost-effective tool to help advisers protect and enhance their clients’ wealth as markets move, while also providing peace of mind.
1 Source: Russell Investments.
2 Source: Hub24.
3 Source: Morningstar AUS Multisector Growth TR AUD to 31 March 2021.
4 Source: Morningstar Peer Median - net to 31 March 2021.
The rating contained in this article is issued by SQM Research Pty Ltd ABN 93 122 592 036 AFSL 421913. SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale clients, utilising a proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to change at any time. Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure statement and consult a licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment scheme.
This article contains factual information only about the Russell Investments Managed Portfolio. The Managed Portfolio does not constitute a financial product. Performance results are net of management fees for both the Managed Portfolio and the underlying managers’ fees and costs. They assume income received is reinvested without any tax deduction. An individual investor’s performance will differ from the performance shown above depending on a range of factors. Past performance is not a reliable indicator of future performance. The source for performance figures and asset allocation is Russell Investments unless specified.