For most of investing history, buying a balanced portfolio of about 50 percent stocks and 50 percent bonds was all investors needed to do to make money. Markets, though, have become more complex and with the global economy evolving, investors need different products that are better suited for today.
One investment that’s been gaining in popularity is the managed solution, which is a balanced-like fund that takes an individual’s goals and risk tolerances into account. Balanced portfolios have traditionally been one-size-fits-all products, but this more tailored approach allows investors to choose something that’s better suited to them and their investment objectives.
“It’s a product that can be diversified across geography, management style, growth, value, and market capitalization, all tailored to an investor’s risk profile and budget,” says Bill Chornous, senior vice-president of investment strategy at IG Investments.
While stocks and bonds continue to be the portfolio’s building blocks, managed solutions can also hold myriad assets under their umbrella, such as real estate, private equity and low-volatility funds, some of which investors may not otherwise get access to, says Chornous. These funds can also hold cost efficient exchange-traded funds – a basket of stocks that track the performance of a certain index, like the S&P 500 – to increase diversification and lower expenses.
Managers can be tactical in their asset allocation decisions, meaning that if one region or sector looks better than another, then the manager is allowed to put a little more emphasis on that area.
Let the manager decide
One of the reasons why more advisors are recommending managed solutions is that they remove investor bias. Rather than having to create a portfolio yourself – or having an advisor put together a basket of separate mutual funds – investors can buy one fund, specific to their needs, and have a professional manager make sure it suits their risk level and diversification expectations.
Managers can also be tactical in their asset allocation decisions, meaning that if one region or sector looks better than another – maybe stocks in Europe start looking more attractive than U.S. equities – then the manager is allowed to put a little more emphasis on that area.
“The average investor has no idea how various asset classes interact or how much risk and reward they are exposing themselves to,” says Chornous. “The managed solution can be dynamic where a portfolio manager will strategically tilt the various components of the portfolio according to the current market environment.”
It’s all about the math
One of the big differences between a managed solution and a balanced fund is that the former is constructed using complicated mathematics that balance a variety of factors. Creating a portfolio in this way should give investors more certainty that their long-term goals will be met. Portfolios are also continuously rebalanced “and optimized to their stated goals and objectives,” says Chornous.
With instant diversification, automatic rebalancing and the ability to generate a return with less volatility, managed solutions should continue to grow in popularity. According to Chornous, they’re an ideal option for investors who have “a reasonable time horizon and are looking for an efficient and highly optimized way to achieve their long-term goals.”