Model Portfolio & SMA Strategists Showcase - Flipbook - Page 23
SMAs & MODEL PORTFOLIOS
in the past three years and whether
performance or process changed
materially afterward, and whether the
team is resourced adequately relative to
the number of strategies it runs. A fiveperson team overseeing 40 models is a
different risk profile than the same team
running four.
None of these questions has a
universally correct answer. A newer
team isn’t automatically worse, and
an established one isn’t automatically
stable. The point of asking is to surface
facts that a headline return number
obscures entirely.
KEY-PERSON CONCENTRATION
The people questions above assume
a team large enough that turnover is
a matter of degree. For a boutique
manager, it’s often a matter of kind.
A firm can be built around one or two
individuals whose departure, health,
or divided attention would materially
change the strategy overnight.
real answer has done real work here.
A firm that answers with reassurance
rather than specifics hasn’t, and that
gap belongs in the due-diligence file
regardless of how good the strategy’s
performance looks.
PROCESS: WHAT’S ACTUALLY
REPEATABLE
This is the leg most vendors are least
eager to discuss in detail, because
“process” is where marketing language
does the most work to disguise the
least amount of actual substance. A
worthwhile process discussion should
be able to answer several things: what
the actual security- or fund-selection
methodology is, in specific enough
terms that an outside analyst could
roughly replicate the logic, how and
when the strategy rebalances and
whether that schedule is fixed or
manager-discretion, and what the
sell discipline is, meaning under what
conditions a holding gets removed
separate from a rebalance.
ADVISOR LENS
One question
that covers three
ownership structures
Employee-owned boutique: “What
does succession actually look like?”
Bank-affiliated manager: “What’s
the proprietary-product incentive?”
Research-affiliated manager: “How
concentrated is ownership across the
research arm and the advisory arm?”
Same underlying question each time:
What is above the investment team, and
what does that create an incentive to do?
firm, and fees positions the portfolio to
outperform its category benchmark on a
risk-adjusted basis over a full five-to-10year market cycle.
That’s a genuinely different signal
than a trailing three-year return, and
it’s worth treating as a starting point
for internal due diligence rather than
a substitute for it. Morningstar’s own
coverage doesn’t extend to every
model or SMA strategy on the market,
and a strategy without a rating isn’t
automatically inferior, just unreviewed
by that particular research shop.
This isn’t a hypothetical. Third-party
manager research routinely flags firms
where the CEO also serves as the
strategy’s senior portfolio manager,
with no separately resourced chief
investment officer role. Nearly all
investment decision authority sits with
one person who is simultaneously
running the business. That structure
isn’t automatically disqualifying. Plenty
of excellent boutique strategies are
built exactly this way, and a founder’s
direct, undiluted involvement in the
investment process is sometimes the
whole reason the strategy works.
Morningstar’s Medalist Rating system for
model portfolios is a useful third-party
proxy here, precisely because it’s built
around this same people/process/parent
framework rather than trailing returns
alone. Morningstar assigns Gold, Silver,
or Bronze Medalist Ratings to model
portfolios when its analysts have strong
conviction that the combination of the
managing team, investment process,
GIPS COMPLIANCE DOES CONFIRM
GIPS COMPLIANCE DOES NOT CONFIRM
But it’s a fact an advisor needs on the
table before recommending the strategy
to a client, not a fact that surfaces
only after something goes wrong. The
practical question to ask directly is
what happens to this strategy if the
named decision-maker were unavailable
tomorrow, permanently. A firm with a
Performance is calculated using a standardized
methodology
The strategy is a good investment
Results are independently verifiable
Returns will continue at any historical level
Reporting avoids survivorship/cherry-picking bias
The fee is reasonable for the value delivered
A floor of reporting integrity exists
The process or team is high quality
For a boutique, concentrated strategy
specifically, process due diligence
should also cover capacity. Has the
strategy stated an asset-capacity
What GIPS® Compliance Does—and Doesn’t—Tell You
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