Remember alpha? Advisors can still add value on the portfolio side, especially if the market-weight random walk has hit a wall.
Decades of statistics reinforce two basic investment lessons: nobody beats the market consistently and realistic attempts to do it aren't free.
We can't control management performance. We can control fees. The lowest-risk solution is to passively accept the market's glide path at close to zero fee drag.
But even the venerable index fund can handle a few refinements, which is where the whole "smart beta" movement emerged. Those alternatives to vanilla SPY are still available. They just aren't as aggressively marketed after the COVID crash.
I'm happy to hear from smart beta sponsors on what makes their fund special and how well it weathered an incredibly volatile year. The VIX is still above 20 as I write this. It hasn't dropped into "normal" territory since February.
Meanwhile, funds that provide market exposure while creating openings to manage tax liability more effectively have a loyal following. If and when taxes start climbing again, they'll be more popular than ever.
Several studies suggest that an active tax overlay on even a passive portfolio can generate 2-3 percentage points of real post-tax alpha under the current IRS code. That's enough to justify an advisor's fees right there.
Tax-managed and tax-efficient portfolios are practically standard operating procedure now on many platforms. Of course they really live up to their potential when the advisor can tweak the models at least a little to fit each client's tax situation . . . personalization at this level is where the real value emerges.
That generally means model-based investing or at least a strategy with some flexibility. Many of the platforms profiled in our TAMP Dashboard offer some form of tax-managed accounting.
A few that consider it a differentiating factor include Sawtooth (VIP Messenger), Dynamic Advisor Solutions (VIP Messenger), Buckingham (VIP Messenger) and Brinker Capital (VIP Messenger).
Then there's the way managers structure their exposure to "the market." Not all indices were created equal and while the S&P 500 has an attractive long-term return profile, history is no indicator of future results.
The S&P 500 may be getting a little too top-heavy to survive if any or all of the trillion-dollar giants lurch in the wrong direction. The NASDAQ, with double the Big Tech exposure, definitely qualifies.
Since stocks are traditionally all about innovation, economic dynamism and growth, there's a soft limit on how far the big benchmarks can rise as long as they're tied so closely to Apple and its peers.
Can Apple double its sales again in our lifetime and justify becoming the first $4 trillion stock? Anything can happen but if you're sticking to probabilities and likely scenarios, we're years past the glorious iPod revolution leading to the early iPhone.
Real transformational growth comes when smaller companies create new markets or disrupt old ones. There's room there for active managers who can spot opportunities early or simply realize that great companies are undervalued.
After all, it doesn't take a genius to buy Apple. Expertise comes from picking the right small-cap stock with the power to become the next Apple in 10-20 years . . . it doesn't even need to be technology.
MPMG has that level of expertise. They're not really looking for a long-term Apple replacement. If anything, they're hunting a better income solution for investors who just can't make money in Treasury debt right now. (VIP Messenger)
And then there are people who add a layer of discipline on top of the portfolio to automate advantageous allocation pivots. We'll be talking a lot about them in the next few months.
Here, it's all about minimizing drawdown and the emotional strain it creates. I've seen a few strategies that theoretically overweight hot themes while skirting obvious dead money . . . oil, for example, until OPEC gets its act back together.
In practice, it feels a lot like an old-time active fund. Robots pivot the portfolio according to pre-set rules, but it takes a human to make the rules in the first place. They're still only as good as that manager.
Again, we'll talk a lot more about this. In general, these tactical strategies did well in the pandemic crash. If they start beating the S&P 500 consistently, we'll know there's a new, better and less "random" walk on Wall Street.
