Model Portfolio & SMA Strategists Showcase - Flipbook - Page 29
SMAs & MODEL PORTFOLIOS
toward companies scoring well on
specific environmental, social, or
governance criteria, all while retaining
direct security ownership and the taxmanagement benefits that come with
it. The due-diligence question that
matters most here is methodological
transparency. What specific criteria and
data sources does the provider use to
make ESG determinations, and can
those criteria be explained to a client in
plain language, or do they function as a
black box the manager applies without
clear rationale?
A provider that can walk through its
methodology specifically has done
real work. One that answers only with
a values statement hasn’t given an
advisor enough to explain the strategy
confidently to a client who asks a
follow-up question.
MATCHING STRATEGY TYPE TO
CLIENT NEED, NOT THE OTHER
WAY AROUND
The practical failure mode in this part of
the process is selecting a strategy type
because it’s well-marketed or recently
top-performing, rather than because it
matches what the client actually needs.
A retiree drawing down assets for
income has a fundamentally different
risk-budget requirement than an
accumulator decades from retirement,
even if both are labeled “moderate risk”
by whatever platform’s screening tool
sorted them there.
Risk tolerance questionnaires and
target-allocation labels are a starting
point, not a substitute for the judgment
this whole guide keeps returning to:
matching structure and strategy to
the specific client sitting across the
desk, rather than to whichever option
is easiest to implement on the platform
already in use.
Performance, Attribution & the
Alpha Question
T
his is the chapter where a healthy
dose of skepticism earns its
keep. Model portfolio and SMA
marketing runs almost entirely on
performance charts, and a meaningful
share of those charts are less
comparable, and less honest even when
technically accurate, than they appear.
WHY SMA PERFORMANCE
REPORTING IS STRUCTURALLY
DIFFERENT FROM A MUTUAL
FUND’S
A mutual fund has one portfolio and
one official return series, audited and
reported under a single regulatory
framework. An SMA strategy, by
contrast, is implemented separately
inside potentially thousands of
individual client accounts, each with its
own tax lots, its own funding history, its
own minor customizations. There is no
single “the account” whose return can
be reported the way a fund’s net asset
value (NAV) can.
What SMA managers typically report
instead is a composite, a theoretical
or asset-weighted average of how
the strategy performed across a
representative set of accounts, or
in some cases a single “model” or
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“golden copy” account meant to
represent the strategy’s intended
implementation. This is a reasonable
solution to a real measurement
problem, but it means SMA
performance numbers are, definitionally,
somewhat theoretical. The return
in any specific client’s account will
differ, sometimes meaningfully,
based on funding timing, tax-driven
trading restrictions, account-specific
customizations, and cash flow history.
READING ALPHA AND RISKADJUSTED METRICS HONESTLY
Alpha, the excess return a strategy
generates relative to its category
WATCH OUT FOR
A composite is an
average,
not a promise
The return in your specific client’s new
account will differ from the published
composite, sometimes meaningfully,
based on funding timing, tax restrictions,
and customizations. Treating a composite
return as a guarantee for a new account
is an error the underlying data never
supported in the first place.
