Getting to the Core of portfolio management

By Jayson Forrest - Managing Editor  - IMAP Perspectives

It’s no easy feat to win the prestigious Licensee Managed Account category in the IMAP Managed Accounts Awards, but Morgan Stanley Wealth Management Australia has stepped up for a third consecutive year - a first by any licensee in this category - to take out this year’s award. Alex Ventelon and Wayne Chatterjee CFA explain Morgan Stanley’s approach to managed accounts.

In a remarkable achievement, Morgan Stanley Wealth Management Australia has held onto its title as Australia’s leading licensee in managed accounts, making it three in a row by taking out the coveted category of Licensee Managed Account in the 2022 IMAP Managed Accounts Awards. 

It’s an achievement not lost on Alex Ventelon. As the Lead Asset Allocation Strategist at Morgan Stanley Wealth Management Australia, he credits the business’s consistent track record of success, its research capabilities, its people, and its approach to multi-asset portfolio solutions for its third consecutive win in the Licensee Managed Account category.

“To win this award three years in a row, really speaks to the quality of services that Morgan Stanley Wealth Management provides its clients. This is only achieved by the great collaboration between all the departments within Morgan Stanley, particularly in relation to the depth of research and range of investment solutions we can offer investors,” says Alex.

“We accept this award as a vote of confidence from our peers that we are doing the right thing for our clients in terms of the robustness of our offering, risk management, and our portfolio construction process.” 

Speaking at an IMAP webinar on Best Practice, Alex says Morgan Stanley’s multi-asset portfolios (Core series) have been developed specifically to work as the ‘core’ of an investor’s portfolio, enabling clients to then take satellite exposures of the core portfolio. “We want to think of ourselves as the steady ones. We’re the ones who set the direction for the portfolio and stick with it, and try to add outperformance on top of the client’s objectives.”

He says there are five key features that underpin Morgan Stanley’s approach to its multi-asset Core portfolios. They are:

1. A  solid track record, with consistent outperformance of its Core models against peer groups for the past 10 years;

2. An active passive model that enables it to allocate opportunistically to both active and passive strategies;

3. An investment process that is backed by Morgan Stanley’s considerable global research team, including over 700 analysts and strategists globally;

4. Regular client communication, including monthly and quarterly reporting, quarterly webinars, as well as its quarterly Research Roadshow; and

5. Attractive fees.

According to Alex, each of Morgan Stanley’s multi-asset portfolios are designed to achieve consistent returns with lower volatility than investing in single asset classes, like Australian shares. This is achieved by delivering an actively-managed diversified portfolio that invests in Australian and international assets - including shares, listed property securities, fixed interest securities and cash.

The three model portfolios in the Core series - conservative, balanced, and growth - are built by drawing on insights from Morgan Stanley’s research team, which are made available as an SMA structure through Morgan Stanley’s domestic and global wrap account, and via three retail platforms - North, Netwealth and Praemium. The Core series is available to retail investors in Australia.

The Morgan Stanley investment process for its model portfolios is built on four pillars to align with the investment goals of clients. Each of these pillars builds on the other and supports each other, “and they all loop back to check on each other as part of the overall investment process,” says Alex.

Pillar 1: Asset allocation - The strategic and tactical blending of assets seeks to align with the client’s goals.

Alex says Morgan Stanley Wealth Management Research’s strategic asset allocation (SAA) is at the foundation of every portfolio and a critical determinant of long-term risk-adjusted returns.

However, in keeping with the principle of flexibility, the Wealth Management Research team also places considerable emphasis on tactical asset allocation (TAA) as a source of value. That’s because as markets evolve, a responsive TAA is key to ensuring portfolios are appropriately positioned to capture opportunistic beta (the return delivered by market movements).

Pillar 2: Active and passive - This involves achieving the right mix of active and passive investment styles to optimise fees and which may exceed single style strategies.

According to Wayne Chatterjee CFA - an Investment Strategist at Morgan Stanley - one of the interesting things Morgan Stanley does with its investment process is the use of an active/passive model. As part of this approach to asset allocation, Morgan Stanley considers dispersion in the market, the macro environment, and the way that stocks are moving in the market.

“Our research team’s philosophy is to separate active/passive allocation decisions from manager selection, as they believe it leads to better portfolio outcomes. Their work suggests that neither active nor passive managers are categorically better. Rather, their relative attractiveness depends largely on the investment environment,” he says. “As a result, we recommend allocating opportunistically to active and passive strategies with the over-arching goal of achieving the most efficient portfolio implementation.”

Wayne confirms that currently, Morgan Stanley is weighted at about 30 per cent active and 70 per cent passive. He says this is because when looking at the cross correlations between stocks, the whole stock market is generally coming down, with the exception of resources and energy.

“As a result, a lot of active managers have been struggling through this process and many of them have been underperforming. And so, even though dispersions are high, other factors aren’t boding very well for active managers at the moment.”

But Wayne accepts that the 30 per cent position for active managers is about as low as it’s ever been for Morgan Stanley, and it’s something that is not normal. Alex agrees, adding that currently,

Morgan Stanley has no exposure to both Australian and international small caps, which tend to be buckets of the multi-asset portfolio when it goes active.  

Pillar 3: Manager selection - Selectively picking managers, ensures the managers meet Morgan Stanley’s quality standards.

According to Wayne, the potential for risk-adjusted return enhancement through solid manager selection has motivated Morgan Stanley to develop and enhance its tools and processes that are targeted to deliver risk-adjusted value in constructing investor portfolios.

“We have a comprehensive program for filtering and selecting quality fund managers to deliver exposure to each asset class. This includes quantitative tools for ranking fund managers and extensive qualitative due diligence to identify the select group of active managers most likely to deliver consistent outperformance,” he says.

Pillar 4: Portfolio construction and risk management - This pillar ensures that Morgan Stanley manages risk efficiently by combining and weighting managers.

“The portfolios at Morgan Stanley are constructed to synthesise asset allocation, active/passive and manager selection decisions,” says Wayne. “Our Investment Solutions team adheres to a strict portfolio construction methodology, which is founded in a deep understanding of investor needs, emphasises the importance of asset allocation, incorporates insight from a broad range of sources – both proprietary and external – and is acutely aware of the importance of risk management.”

Wayne adds that Morgan Stanley runs attribution analysis once a month to check that all four pillars are actually adding value to its model portfolios.

“By doing so, we make sure we can see what’s coming from asset allocation, what’s coming from our active managers - including how they are tracking against their benchmarks - and at the portfolio construction level, we do some back-testing to see how the portfolio performs in different environments,” he says. “That process ensures we are on top of exactly all the levers we can pull to make sure they are all adding value to the client’s goals, and they’re all adding to our multi-asset actively managed portfolio.”   

Sitting at the heart of Morgan Stanley’s portfolio construction process is its investment philosophy, and a key part of that philosophy is flexibility and not being tied to a particular style of investing. Alex confirms that Morgan Stanley has no strong view on active versus passive management, instead, preferring to be active when the time is right to be so.

“We’re delivering portfolios that are risk managed and fee conscious. That means paying the right amount of fees for performance at any time in the process,” he says. “We also want to consistently perform, including outperforming our competitors. We also want to have a Sharpe ratio that’s higher than the peer group. That’s the ultimate proof that the extra risk we are taking is turning into added alpha.”

Central to what Morgan Stanley does is helping its clients to grow their wealth, well in excess of inflation. And in order to achieve that, Alex says the business must take informed and educated risks.

“At Morgan Stanley, we are risk takers by nature, but what’s important for us, is that the risks we are taking pay off. These are the key drivers we focus on when we are managing our multi-asset models,” he says.

Alex Ventelon is Executive Director, Head of Research and Investment Strategy at Morgan Stanley Australia Wealth Management; and

Wayne Chatterjee CFA is Investment Strategist, Head of Alternative Asset Research at Morgan Stanley Australia Wealth Management.

They spoke at an IMAP Best Practice webinar on what best practice means as the recipient of the IMAP 2022 Licensee Managed Account Award.

The session was moderated by David McDonald CFA - Investment Specialist at IMAP.