Capital Group and Vanguard have once again joined forces with a suite of new model portfolios blending active and passive funds, which will be available exclusively to Morgan Stanley advisors.
The 10 models, to be managed by Capital Group and weighted toward its own American Funds, continue a pair of industry trends that have seen advisors seeking a mix of active and passive fund exposure, while also looking for outside help in crafting investment portfolios as they focus on delivering
"Advisors essentially have a lot of complexity in running their practice," Spazafumo said in an interview.
"What we've found is that investors are increasingly looking for their financial advisor to help them with the complex nuances of their financial plan," she added. "The implication of that is advisors seeking scale in other parts of their practice, so one of the key areas has been the investment management part of an advisor's practice."
For Morgan Stanley, the new models build out an expanding library of portfolio strategies available through its Managed Advisory Portfolio Solutions business.
"Our commitment to financial advisors is to continue to provide them with investment options and intellectual capital that will help them to build scale and efficiency into their practices in order to enhance client engagement and grow their businesses," Brian Rosevear, head of model solutions at the Consulting Group for Morgan Stanley Wealth Management, said in an emailed statement.
The Capital Group and Vanguard offering went live on Morgan Stanley's platform Aug. 26, part of a quiet rollout that has also seen the wirehouse adopt model portfolios from Franklin Templeton and one from Natixis, for which State Street serves as a strategic advisor.
The 10 new active-passive models from Capital Group and Vanguard are weighted two-thirds toward the active American Funds and one-third toward Vanguard's passive funds, according to Spazafumo. She said they range in risk from an 80/20 weight of equities over fixed income to the inverse.
It's the second time Capital Group and Vanguard have teamed up on such a project, with the two fund titans partnering on a similar offering that went live on Merrill Lynch's platform about a year ago. In that case, Vanguard was the lead and Capital Group the strategic advisor, with fund allocations tilting toward Vanguard's passive offerings.
"Our work with Vanguard has been great, and I would call it a bespoke distribution partnership," Spazafumo said.
The arrangement is not unheard of in the fund industry, and Vanguard stresses that it commonly partners with other managers, particularly with its active assets.
"Vanguard has more than 40 years of experience in partnering with some of the world’s most well-respected managers," Laura Bulman, a Vanguard spokeswoman, wrote in an email.
She said that Vanguard's 25 external partners, including firms like Wellington Management Company and PRIMECAP, manage nearly half of Vanguard's active assets.
It's easy to view the two fund giants as competitors. But within the fund space, each has found success with highly different philosophies, with Vanguard's preference for passive funds and Capital Group's specialty in actively managed holdings.
And bringing those styles together with offerings like the new active-passive models comes in response to the blended approach that many advisors are already taking in portfolio construction.
"What we're finding in the industry is the large majority of advisors are implementing their portfolios with a mixture of active and passive funds," Spazafumo said.
Models are a relatively new line of business at Capital Group. The company began rolling out its model portfolios about five years ago, finding early adopters in the independent broker-dealer channel, according to Spazafumo.
Now it's seeing increasing interest from some of the biggest firms on Wall Street. Prior to the offering with Vanguard, Capital Group already had 10 American Funds models available on Morgan Stanley's platform, and rolled out a similar offering with UBS, in addition to the models it developed with Vanguard for Merrill Lynch.
"This trend has really taken hold within the wirehouses, which we think is very exciting," Spazafumo said.
Models have gained less traction in the RIA space, where advisors tend to take a more hands-on approach to portfolio construction, she said. But RIAs are facing the same challenges of rising client demands that confront advisors in other channels, which could eventually nudge some toward the off-the-shelf portfolios that the fund companies are offering.
So, too, could the wave of consolidation in the RIA channel, where large aggregators are buying up smaller firms with the promise of offering back-office support in areas like technology and compliance. Portfolio design could join that list, and Spazafumo is hopeful that the RIA channel will be the "next chapter" in the adoption of models.
Models are a small but growing part of Capital Group's business. The firm has $2.6 trillion in assets under management, and only around $75 billion of that is in the form of models. But within the advisor business it's a different story. One third of the AUM in Capital Group's advisor business are in models, and Spazafumo expects the secular shifts propelling advisor adoption of models only to drive that number up.
"If I'm a bit optimistic and think about where the future of our model business could go, I could easily see models being two-thirds of our advisor business," she said. "I think we're in the early innings of growth here."
