An Integrated Public/Private Portfolio Analytics Framework for Wealth Managers

[The adoption of alternative investment options inside client portfolios has been driven by greater accessibility and the search for higher returns, better diversification, and enhanced risk mitigation. Additionally, the growing sophistication of investors and their desire for personalized strategies are pushing advisors to explore alternative options.

While this trend is geared to ultimately benefit the client, it is putting stress on the way home office investment teams are able to construct, manage, and rebalance these expanded and complex positions in client portfolios. In fact, most firms outside the largest global wealth institutions do not have a sound analytical framework to manage the nature of this demand at scale. The framework needed would have to enable an integrated analysis of public and private assets in portfolio construction offering wealth managers a systematic way to analyze, integrate, and optimize portfolios, including significant private holdings.

To understand the changing portfolio management landscape and how wealth management firms are responding, we reached out to Alex Kokolis, Managing Director, Head of the Wealth Management Segment at MSCI Wealth. Our conversation explored these prevailing wealth management trends and the discussion was particularly timely as MSCI had just published new research on Total Portfolio Allocation for Modern Wealth Management highlighting the benefits of better diversification and personalization of client portfolios.  This new research highlights the methodology built into the firm’s MSCI Wealth Manager platform helping their clients effectively manage portfolios across public and private allocations and communicate to their clients the value proposition of adding alternative investments to their portfolios.]

Hortz: Can you share your perspectives on the rise of alternative investment options in wealth management?

Alex Kokolis: The wealth management landscape has evolved significantly over the past few years. Alternative investments, including private equity, private credit, real estate, and infrastructure funds have become increasingly popular among wealth managers and their clients. We have seen a seismic shift in the accessibility of these assets through new delivery vehicles such as interval and evergreen funds, as well as in the demand by clients in search for higher returns, diversification, and the desire to mitigate risks associated with traditional asset classes like stocks and bonds.

Hortz: What are some of the key issues driving advisory firms to allocate more of their client portfolios into private capital funds?

Alex Kokolis: Several factors are contributing to this trend.

Firstly, the prolonged low-interest-rate environment has made traditional fixed-income investments less attractive. Advisors are looking for ways to enhance returns, and private capital funds offer the potential for higher yields.

Secondly, the increased volatility in public markets has led advisors to seek more stable and predictable investment options. Private capital funds often have longer investment horizons and can provide a buffer against market fluctuations.

Lastly, the growing sophistication of investors and their desire for personalized investment strategies have pushed advisors to explore alternative assets that align with their clients’ unique goals and risk tolerance.

Hortz: As these portfolio allocations shift, what challenges do home office investment teams face in wealth management firms?

Alex Kokolis: One of the primary challenges is the need for a new analytical framework that allows investment teams to analyze and rebalance portfolios across both public and private funds simultaneously. Traditional portfolio management tools are often designed for public market investments and may not adequately capture the complexities of private capital funds. Investment teams must develop robust methodologies to assess the performance, risk, and liquidity of these alternative assets.

Then they need to develop an integrated approach to also ensure that diversification is not just about adding more markets but about helping to manage risk more effectively through a deeper understanding of market correlations.

Additionally, they need to ensure that the integration of private capital funds into client portfolios aligns with the overall investment strategies and objectives.

Hortz: Can you elaborate on the analytical framework that wealth management firms need to adopt for this purpose?

Alex Kokolis: The analytical framework should encompass several key components.

Firstly, it must include comprehensive data collection and analysis capabilities for private capital funds. This involves gathering detailed information on fund performance, fees, liquidity, and risk factors.

Secondly, the framework should incorporate advanced modeling techniques to simulate various scenarios and assess the impact of private capital funds on the overall portfolio.

Thirdly, it should enable dynamic rebalancing, allowing investment teams to adjust allocations in response to changing market conditions and client needs.

Finally, the framework should facilitate transparent reporting and communication with clients, ensuring they understand the rationale behind all investment decisions and the benefits of including alternative assets in their portfolios.

Hortz: What has your research shown you as to how best to address these demands?

Alex Kokolis: We have taken the approach of using our factor models as a unifying method of analysis. Our research report, Total Portfolio Allocation for Modern Wealth, has shown that multi-asset-class factor models can provide a sophisticated framework for integrating private and public assets into a coherent portfolio strategy by analyzing assets based on underlying performance drivers, such as equity, interest rates, inflation, country, and industry, rather than traditional asset class analysis. This approach helps understand the fundamental drivers of portfolio risk and return, especially for private assets where historical return-based correlation estimates may not be reliable.

The MSCI MAC Factor Model is central to this framework, offering a unified method for analyzing diverse investments and estimating correlations between markets to create personalized portfolio solutions. We have built this methodology into our MSCI Wealth Manager platform and now have multiple clients utilizing this factor-based approach to analyze total portfolio allocations.

Hortz: How do you see the future of alternative investments in wealth management evolving?

Alex Kokolis: The future of alternative investments in wealth management can be an important building block of portfolios going forward. As investors continue to seek higher returns and enhanced diversification, the demand for private capital funds is likely to continue to grow. Technological advances will play a crucial role in facilitating the integration of these assets into client portfolios. Enhanced data analytics, artificial intelligence, and machine learning will enable investment teams to make more informed decisions and optimize portfolio performance.

Additionally, regulatory developments may provide greater transparency and accessibility to alternative investments, making them more attractive to a broader range of investors. Overall, I believe that alternative investments will become commonplace as part of most wealth management strategies.

Hortz: What variables should financial advisors consider when evaluating an increase in portfolio allocations to private capital funds?

Alex Kokolis: I would tell financial advisors to approach this shift with careful consideration and thorough due diligence. It is essential to understand the unique characteristics and risks associated with private capital funds. Advisors should conduct comprehensive research, evaluate fund managers’ track records, and assess the alignment of these investments with their clients’ objectives.

Additionally, advisors should communicate transparently with their clients, educating them about the benefits and potential drawbacks of alternative assets. By doing so, advisors can build trust and ensure that their clients are well-informed and comfortable with the investment decisions being made.

Ultimately, the goal is to create diversified and personalized portfolios that may enhance clients’ financial well-being and address their concerns on volatility and enhanced diversification.

This article was originally published here and is republished on Wealthtender with permission.

About the Author

Bill Hortz

Founder Institute for Innovation Development

Bill Hortz is an independent business consultant and Founder/Dean of the Institute for Innovation Development- a financial services business innovation platform and network. With over 30 years of experience in the financial services industry including expertise in sales/marketing/branding of asset management firms, as well as, creatively restructuring and developing internal/external sales and strategic account departments for 5 major financial firms, including OppenheimerFunds, Neuberger&Berman and Templeton Funds Distributors. His wide ranging experiences have led Bill to a strong belief, passion and advocation for strategic thinking, innovation creation and strategic account management as the nexus of business skills needed to address a business environment challenged by an accelerating rate of change.