WisdomTree Launches New Model Portfolios to Challenge 60/40 Approach

The Siegel-WisdomTree Global Equity Model Portfolio and the Siegel-WisdomTree Longevity Model Portfolio, which launched last week, are available first to advisors through the Model Market Center on the TD Ameritrade Institutional platform.

ETF Trends spoke with Jeremy Schwartz, Global Head of Research at WisdomTree, to discuss the new model portfolios. When asked why this is an essential new way of thinking, he explained how one of the things increasingly coming to the world view is how interest rates are going to stay much lower than anticipated, adding that stocks have also been in a 10-year bull market.

Based on Siegel’s long-term research, stocks had 6.8% long term, after inflation, returns, while bonds are at 3.5%. Today, there are stocks with around 5% return, and bonds being negative. So, it’s bonds that are well below their average from this perspective.

Compounding that with longevity trends, and considering the trade-offs people are making, there’s more equity risk that goes along with the rate of living for these investors. Still, lowering a bond allocation can be uncomfortable, as people take fewer risks as they age.

“That’s the sort of market dynamic that causes us to look at this solution,” Schwartz adds.

When speaking with their advisors, investors tend to care about a few key issues, such as maintaining or improving their lifestyle throughout retirement without running out of money, ensuring their legacy with family and philanthropy, and managing taxes. With an individual’s general life expectancy increasing, investors face two potential challenges: lower interest rates and lower U.S. equity returns.

Tom Skrobe, WisdomTree Head of Product Solutions, said: “Investors have been subscribing to Professor Siegel’s tried-and-tested approach to investing for decades. WisdomTree’s deepened relationship with Prof. Siegel and involvement in our Asset Allocation Team led to a set of globally diversified model portfolios allowing advisors to easily access Prof.’s Siegel and WisdomTree’s vision designed to address the current challenges of lower interest rates and lower U.S. equity returns against the backdrop of longer lifespans and retirement needs.”

When speaking to what makes these models unique, Schwartz explained, “The idea relies on using open architecture factor diversification, emphasizing income, lowering valuation multiples that we think leads to better-looking forward returns. It also means being aware of the equity risks being taken as investors increase equities in the portfolio. There’s also the carving out of the equity-only piece of that option, where people can allocate whatever they want on the fixed income side to combine with that equity model.”

• More heavily allocated to equities (“stocks for the long run”) is seeking to mitigate the longevity short-fall risk;

• Equity allocation to more dividend/income/yield-oriented equities, which seeks to accomplish two simultaneous goals: income and outperformance potential;

• An all-ETF portfolio structure helping to optimize the tax-efficiency of the portfolio; and

• Siegel-WisdomTree Global Equity Model Portfolio: 0.29% composite model portfolio net expense ratio; Siegel-WisdomTree Longevity Model Portfolio: 0.25% composite model portfolio net expense ratio.

The collaboration with Professor Siegel brings a unique solution to advisors who are trying to balance the current income needs with the longevity risk of their clients. The Siegel-WisdomTree Model Portfolios were designed to outperform a traditional 60% Equity/40% Fixed Income portfolio in a risk-conscious manner by structurally allocating more toward equities over fixed income and tilting toward factors such as dividend yield and low P/E ratios in seeking higher income generation and outperformance potential. The models are strategic in nature but also reflect tactical tilts based on market conditions.

Professor Jeremy Siegel’s most widely read work, “Stocks for the Long Run,” provided investors with a new paradigm for investing and building wealth in the 21st century. His long-standing relationship with WisdomTree dates back over ten years as the firm’s Senior Investment Strategy Advisor, where he continues to advocate that stocks may be volatile in the short-term, but over full market cycles and through time, equities have outperformed all other major asset classes. Today, WisdomTree and Professor Siegel have come together to apply these principles to these Siegel-WisdomTree Model Portfolios that advisors can offer to clients.

Professor Siegel said, “The investment implications of a lower for longer interest rate environment are profound. Specifically, it means that moderate risk investors – the typical “60/40” investors – will frequently not be able to generate sufficient yield out of their income portfolios to maintain their desired lifestyle. To put it more bluntly, for many investors, a “60/40” portfolio is not going to get the job done, especially as many will have longer life expectancies. My collaboration with WisdomTree brings a unique solution to advisors who are trying to balance current income needs with the longevity risk of their clients.”

To add to this, when questioned about these models being used for different age ranges, Schwartz states, “A 75/25 portfolio split could certainly fit multiple objectives and goals. Our old world view is that the 60/40 won’t get it done, you’ll need more than that to achieve long-term planning goals. It’s figuring out who would map to the old 60/40 and who does that appeal to. So, the 75/25 could have an appeal to multiple peer groups.”

“As clients work towards retirement and work with their advisors on a portfolio that’s appropriate for them, the idea here is how, as investors get older, the traditional method is to de-risk a bit, as you want to potentially protect capital. We’re saying that’s going to be harder to do as one gets older and entering retirement. This rate environment is not going to help you generate the income needed in retirement. Most importantly, it will help you manage that longevity risk. You don’t want to outlive your money. So, the idea is to approach clients in or approaching retirement, providing the advisors with a turnkey solution to deal with both dynamics.”

For more information, visit www.wisdomtree.com.