Model portfolios that provide diversified exposure to stocks, bonds, and/or other asset classes have rapidly emerged as a solution of choice for many investors and financial professionals.1 However, while model portfolios can greatly simplify the asset allocation process, they still require investors and financial professionals to evaluate a host of critical factors when selecting a model appropriate for their investment objectives and risk preferences.
Not least of these decisions is the choice of providers—both of the model itself and of the underlying components used to assemble the desired portfolio allocations. Asset allocation and portfolio design are complex processes based on extensive research and proprietary methodologies.
Ongoing portfolio management requires investors and financial professionals to consider a range of additional questions:
- What kind of support can the model provider offer to help keep financial professionals and their clients informed about their portfolios and overall market conditions?
- Does the manager seek to add value through tactical allocation—shorter‑term portfolio shifts that seek to take advantage of, or guard against, temporary market conditions?
- Who will monitor potential risk exposures within the underlying funds or ensure that they continue to provide the asset class and/or style exposures called for in the model?
In an increasingly crowded marketplace, investors and financial professionals will find many proposed answers to these questions and will be offered thousands of potential solutions by asset managers and other model portfolio providers.
Pillars of Strength
(Fig. 1) T. Rowe Price model portfolios are backed by decades of asset allocation experience
In a previous paper,2 we sought to clarify the evaluation and selection process by defining six key factors that we believe are most important for investors and financial professionals to consider when choosing model portfolios (Figure 1). In this paper, we explain how T. Rowe Price addresses these key factors and describe the resources and investment expertise we seek to apply to them.
To a large extent, these six pillars represent the core institutional strengths—as multi‑asset allocators and as investment managers—that we believe we bring to the model portfolio process.
An Experienced Provider
In our view, investment skills, resources, and experience are the foundational criteria needed in selecting a model portfolio provider. In that regard, we believe T. Rowe Price brings a compelling track record to the entire process—from strategic portfolio design to ongoing management.
The firm has more than 30 years of experience in constructing and managing multi‑asset portfolios across a range of strategies for individual and institutional investors. We apply those same advanced investment techniques to designing, managing, and supporting model portfolios.
T. Rowe Price model portfolios are managed by a dedicated team that Morningstar has cited as one of the largest and best‑resourced multi‑asset organizations in the investment industry (Figure 2). Our team understands the complexities of managing multi‑asset portfolios.
Responding to a dynamic market environment means that generating strong investment results requires thoughtful initial portfolio design and ongoing due diligence, monitoring, and revalidation of the portfolio through time. We are thorough in each step of the process—from strategic portfolio design, through the selection of the underlying components, to tactical asset allocation positioning—and we are aware of the risks and interactions across each step of the investment process.
T. Rowe Price Has Over 30 Years of Experience Managing Multi-Asset Portfolios
(Fig. 2) Experience and resources of our Multi‑Asset Division
We Believe Strategic Portfolio Designs Are Critical to Helping Clients Achieve Their Goals
(Fig. 3) T. Rowe Price’s strategic portfolio design process
Strategic Portfolio Design
Strategic portfolio design is the most critical part of the investment process and the principal driver of an investor’s risk and return outcomes. The portfolio design process establishes the long‑term neutral portfolio allocations across asset classes.
T. Rowe Price model portfolios are built upon the same design principles and disciplined, repeatable investment process used in the T. Rowe Price target allocation and target date strategies (Figure 3). Each model is designed to align with an investor’s specific investment goal, risk tolerance, and expected time horizon. Strategic asset class and sub‑asset class neutral weights are informed by a range of analysis and inputs based on the model portfolio’s unique risk/return objectives and desired outcomes.
T. Rowe Price target allocation model portfolios are broadly diversified across global equity and fixed income sectors and regions. Our goal is to build durable portfolios that can consistently perform across a range of market environments by incorporating diversified sources of potential added value and by not being overly reliant on any single environment to succeed. We routinely review these allocations to help assure their efficacy.
In our diversified portfolio designs, the equity allocation is generally intended to serve as the primary contributor to growth and capital appreciation. Within equity, our approach is generally both size and style neutral versus the market, and we advocate for global diversification while recognizing that some investors may wish to preserve a bias toward their home country. (Figure 4).
Our strategic fixed income allocations generally seek to take advantage of the global opportunity set and include a combination of core and diversifying strategies (Figure 5).
- Core high‑quality fixed income asset classes (e.g., short‑term, intermediate, and long‑term U.S. investment‑grade bonds, and U.S. dollar‑hedged global ex‑U.S. bonds) can act as a ballast or counterweight to the models’ equity exposure in order to diversify sources of portfolio risk and help contribute to lower portfolio return volatility.
- Diversifying sectors (also known as plus sectors), such as high yield bonds, floating rate loans, and emerging markets debt, can provide exposure to higher‑yielding opportunities and help reduce interest rate sensitivity.
While the plus sectors complement the core bonds, we size plus sector allocations accordingly, recognizing their higher correlation with equities, particularly in periods of market stress.
How We Construct Equity Model Portfolios
(Fig. 4) T. Rowe Price’s key principles for equity allocation design
How We Construct Fixed Income Model Portfolios
(Fig. 5) T. Rowe Price’s key design principles for fixed income allocations
Selection of the Underlying Components
In addition to considering the strategic portfolio design, financial professionals also need to evaluate a model’s underlying components and their characteristics.
We believe in the potential for skilled active management to add long‑term value across multiple asset classes, and we would argue that T. Rowe Price has demonstrated that ability through the longer‑term historical performance of our target date funds relative to both industry benchmarks and their major passive competitors.3
In our view, financial professionals evaluating actively managed underlying components in a model portfolio should look for experienced management teams with a demonstrated ability to deliver strong relative performance over full market cycles. We believe T. Rowe Price is well positioned to meet this need.
The underlying components in T. Rowe Price model portfolios are typically drawn from more than 160 actively managed strategies covering virtually every major asset, sector, and geographic region. This expansive opportunity set allows us to select from a wide range of sector‑specific funds and more broadly diversified funds with greater sector representation.
Selection of the underlying components in our models is conducted in close collaboration between the model’s portfolio managers and our multi‑asset research team. We carefully consider how the underlying components could contribute to a model portfolio’s potential active risk. We may combine funds with lower and higher active risk budgets to target a specified level of overall tracking error in the portfolio. We also may combine core and style‑specific components to diversify active risk and implement tactical asset allocation decisions.
Similar to T. Rowe Price’s other multi‑asset strategies, our model portfolios seek to provide diversification and multiple sources of excess return. We seek to balance diversification across the underlying components by incorporating sector‑specific strategies and more diversified, flexible components. We believe that including a mix of sector‑specific and broad components allows us to ensure adequate diversification while avoiding unnecessary portfolio complexity as we determine the breadth of the underlying attributes and number of holdings.
In our view, the benefits of using T. Rowe Price proprietary strategies in our model portfolios include:
- direct access to the expertise and capabilities of the underlying portfolio management teams;
- a focus on style consistency, making it more likely that strategies will remain consistent to their mandate;
- accurate, timely information on underlying holdings, which can facilitate risk management and tactical positioning;
- a consistent process for risk management oversight;
- shared corporate values among investment professionals, all of whom must meet T. Rowe Price’s rigorous standards for integrity, ethical behavior, and putting client interests first.
Tactical Asset Allocation
T. Rowe Price believes that a risk‑aware approach to tactical asset allocation can provide opportunities to add value by leaning in to areas where market conditions have resulted in asset mispricing or created potential opportunities to reduce exposure to perceived risks. Accordingly, T. Rowe Price’s model portfolios incorporate tactical asset allocation decisions as an additional source of potential value added.
Active management and in‑depth research are core capabilities for T. Rowe Price. Our global research platform is staffed by more than 380 research professionals worldwide, while our portfolio managers average 22 years of investment experience and 17 years of tenure with the firm.4
Our research teams include specialists across the capitalization and style spectrums who use fundamental, bottom‑up analysis to evaluate companies and inform security selection.
Extensive interaction among analysts across asset classes, sectors, and industries promotes a broad perspective and timely decision‑making, in our view.
Our tactical asset allocation approach is driven by fundamentals and supported by a range of quantitative tools and inputs. Tactical decisions are made by the T. Rowe Price Asset Allocation Committee (AAC), which is composed of senior investors across the firm’s multi‑asset, equity, and fixed income divisions.
A recent example of value added5 through T. Rowe Price’s tactical asset allocation process occurred during the COVID‑19 market sell‑off in March 2020. The model portfolio management team responded to the downturn by overweighting stocks versus bonds, reflecting a view that equity valuations looked broadly attractive after the sell‑off. Afterward, as equity markets recovered and the risk/reward profile for stocks began to look less compelling, the team moved back to a neutral stock/bond mix at the beginning of July 2020.
These moves added value for our Target Allocation Active Series Model Portfolios. Over the full calendar year 2020, for example, tactical adjustments to the stock/bond allocation added approximately 60 to 90 basis points, net of fees, to returns on the Target Allocation Active Series Model Portfolios, relative to each portfolio’s combined benchmark.
The AAC meets monthly to decide which asset classes and sub‑asset classes, if any, to overweight or underweight over a specific time horizon, typically six to 18 months (Figure 6). The committee seeks to harness the collective insights of the multi‑asset team and the proprietary views of our global research platform to identify market themes and potential opportunities and to identify possible catalysts for profit realization.
Within the T. Rowe Price model portfolios, we take a measured approach to tactical decisions. Our typical practice is to build in and out of positions rather than taking outsized investment bets over short time periods. Our process also considers the potential transaction costs of incremental trades across portfolios and applicable tax considerations.
We typically implement tactical decisions on a quarterly basis and are cognizant of risk considerations, such as tracking error relative to strategic profile, particularly in cases where the model portfolios are positioned on a risk continuum to sit within a risk/volatility band.
We Believe Risk-Aware Tactical Asset Allocation Can Add Value
(Fig. 6) Tactical positioning ranges in T. Rowe Price multi-asset model portfolios
Due Diligence
Once a model portfolio has been adopted, financial professionals need to be sure that the underlying components continue to be managed in a way that is consistent with their intended objectives and roles in the portfolio. At T. Rowe Price, providing this level of oversight is a central element in our approach. This requires ongoing monitoring of quantitative and qualitative factors, including risk/return, style, performance attribution, risk attribution and exposures, tracking error, positioning, and portfolio characteristics.
Members of the Multi‑Asset Due Diligence Committee meet regularly with the managers of the underlying strategies to ensure their continued adherence to their stated objectives and investment process; to review key drivers of recent performance; and to understand the potential implications of any changes in process, philosophy, and/or people. The models and their underlying components are also routinely evaluated by T. Rowe Price’s independent investment risk team. We believe that multiple layers of oversight may help provide a more durable investment experience for financial professionals.
Ongoing Support
Effective model portfolios require more than just strategic portfolio design and investment management expertise. T. Rowe Price recognizes how important it is for financial intermediaries to have access to marketing and distribution services to help serve their clients.
As one of the world’s largest asset management firms and a leading provider of recordkeeping and investment services to defined contribution plan sponsors, T. Rowe Price has decades of experience in investor outreach and education. We seek to provide financial professionals with timely content that will help them effectively communicate with their clients and address questions and concerns about current market events, portfolio performance, and the reasoning behind our tactical allocation decisions (Figure 7).
For example, a T. Rowe Price quarterly publication, Model Viewpoints, offers perspectives on the current market environment and tactical allocation positioning. Every issue also highlights one of the underlying components used within the model to explain the fund’s role in the portfolio and current positioning.
T. Rowe Price is Committed to Providing Ongoing Support
(Fig. 7) Actionable insights on markets, asset allocation, and portfolio positioning
More About Our Model Portfolio Services
No matter where financial professionals are in the evolution to a model‑based practice, T. Rowe Price can help.
We provide a range of services including fully outsourced model portfolios designed and managed by a dedicated team of professionals. These models seek to add value at each level of the portfolio management process:
- strategic portfolio design based on T. Rowe Price’s proprietary asset allocation methodology, which combines in‑depth capital markets research with advanced analysis of the qualitative and quantitative factors that can shape investor risk and return preferences;
- tactical asset allocation that incrementally seeks to add value through prudent, fundamentals‑based evaluation of the current market environment;
- selection of underlying portfolio components from T. Rowe Price’s extensive lineup of actively managed strategies;
- due diligence at the portfolio and component level, including ongoing risk assessment, performance attribution analysis, and monitoring of process or personnel changes in the underlying funds.
T. Rowe Price Model Portfolios
T. Rowe Price’s current lineup of model portfolios provides financial professionals and their clients with a partnership for delivering investment solutions, asset allocation insights, and access to T. Rowe Price’s global markets expertise. This allows financial professionals to simplify their investment process, potentially improving risk and return outcomes and—most importantly—increasing time available to spend with clients.
We offer a range of model portfolios designed to address a variety of objectives (Figure 8) and provide multiple potential sources of value added via top‑down strategic portfolio design, bottom‑up active security selection, and tactical views.
T. Rowe Price Model Portfolio Solutions
(Fig. 8) We offer a range of solutions to address a variety of investor objectives
Risk‑Based Portfolios
T. Rowe Price’s Target Allocation Active Series Model Portfolios seek to provide diversified asset allocations that target strong investment results across market environments. The models are built to target a range of risk/return profiles and investment objectives, ranging from conservative, income‑oriented allocations to more aggressive growth‑focused portfolios.
Equity Building Block Portfolios
T. Rowe Price’s Equity Building Block Model Portfolios seek to provide investors with diversified exposure to a specific asset class and/or geographic region. The models are designed and managed in collaboration with our multi‑asset portfolio managers and our sector specialists, enabling us to harness the best investment ideas across the firm’s entire global research platform.
The equity building block models provide breadth of diversification across investment styles and capitalizations, and feature multiple potential sources of added value, including security selection and tactical allocation.
Outcome‑Oriented Portfolios
T. Rowe Price’s outcome‑oriented model portfolios are designed to support specific investment objectives, such as income generation or capital preservation.
- Multi‑Asset Income Model Portfolios seek to provide income principally through allocation to income‑oriented equities and to U.S. and international fixed income.
- Low Duration Portfolios seek to provide income from U.S. investment‑grade securities with target duration and maturity profiles ranging from six to 18+ months and a focus on higher‑quality bond allocations.
T. Rowe Price Portfolio Construction Solutions
In addition, T. Rowe Price Portfolio Construction Solutions is a comprehensive suite of services that delivers solutions and support to help financial professionals try to improve investment outcomes. Financial professionals gain access to a dedicated team of specialists who average over 24 years of industry experience.6 To date, T. Rowe Price has worked with over 9,000 financial professionals to build, review, and adjust their model portfolios.
Model portfolio design is not always a one‑size‑fits‑all approach, and T. Rowe Price recognizes that specific client‑directed objectives and constraints may apply to the implementation of investment solutions.
We have the capabilities to collaborate with financial professionals to design models that reflect our mutual best thinking and client goals, including seeking to limit tracking error or reduce investment costs by incorporating enhanced or passive strategies, tailoring the specific line items, or incorporating a multi‑manager approach based on client’s preferences.
The principles expressed in this paper reflect our baseline philosophy, but we appreciate the value of customizing model designs to reflect specific views or objectives where appropriate.
Each program within the Portfolio Construction Solutions suite is supported by the global resources and capabilities of T. Rowe Price’s Multi‑Asset Division:
- Art of Clean Up®: Consolidate holdings and strengthen manager due diligence.
- Model Construction: Build a proprietary model or suite of model portfolios to scale an investment practice.
- Asset Allocation Model Review: Adjust models with analyses and guidance as markets change and objectives evolve.
Portfolio construction insights: Inform investment decisions with actionable insights sourced from T. Rowe Price’s multi‑asset approach as well as consultations with financial professionals.
Conclusions
Taken together, we believe our model portfolios and related services can serve as “force multipliers” that make it easier for financial professionals to offer well‑resourced, institutional‑quality investment solutions while leaving them more time to spend with their clients and to grow their practices.
T. Rowe Price also has the marketing and communications resources to help financial professionals keep their clients informed and aware of portfolio‑positioning decisions, significant market developments, and their progress toward their long‑term financial objectives.
Our financial intermediary specialists would be happy to provide additional information on T. Rowe Price model portfolio services upon request.
Search
