As interest in actively managed products grows, asset managers and financial advisors are working harder to tailor and customize products to improve various investment attributes: fees, tax-efficiencies, individual risk-tolerances and liquidity needs.
"We continue to see an aggressive push toward how bespoke and personalized managed products can become, all so that the positions can be closely tailored to individual needs, while still giving investors access to professional money managers," said Matthew Gastall, head of municipal research and strategy at Bloomberg Intelligence.
And with customization, asset managers and advisors can better align portfolios with their clients' needs.
For example, a client's tax situation and geographic location shape their portfolio. So each client will have a somewhat different asset allocation and a different trajectory over the life of the portfolio, said Ed Paulinski, portfolio manager and head of municipal SMAs at Goldman Sachs.
And the level of customization from a tax-efficiency and tax-sensitivity perspective drives a lot of these model portfolio decisions, said Ben Barber, director of municipal bonds at Franklin Templeton.
Clients have more capacity to demand specific exposures, access and outcomes. With investors putting more pressure on managers, there is a need to innovate, grow and expand offerings, said Russell Feldman, IMTC CEO.
It's an "evolution" to try and find the optimal intermediary between managed solutions that allow investors to, concurrently, "potentially enjoy the benefits of personally tailored approaches, particularly when calculating for risk- and tax-adjustments, as well as liquidity and performance objectives," Gastall said.
There are numerous strategies and investment vehicles to achieve this, as there are more ways to access the market than before.
"Ten years ago, mutual funds were the dominant. SMAs were there [but] ETFs didn't really have much of a market presence, and now all three areas are growing," said Dan Solender, partner and director of tax-free fixed income at Lord Abbett.
SMAs have seen explosive growth with an estimated $1.3 trillion in AUM across around 180 managers, J.P. Morgan said in a report earlier this year.
And as demand booms for SMAs, "people are going in that direction, they're looking for different things, whether it's more customization of their accounts, or ways to add on a completion fund to get more yield. Just different ways to make the separately managed accounts … meet their objectives," Solender said.
Meanwhile, active ETFs — which have only emerged in the muni market over the last five years — are seeing increasing demand. Active ETFs have the flexibility to access parts of the market that some passive ETFs can't, providing more return over time, said Matt Norton, CIO for municipal bonds at AllianceBernstein.
"It's a pretty ripe market for pretty significant flows into all the different types of wrappers that are offered right now in munis: open-end funds, ETFs, SMAs, and so we're seeing it across our entire business," Franklin Templeton's Barber said.
However, as the market has evolved, strategies that span asset classes are becoming a larger part of client portfolios, Goldman's Paulinski said.
Munis play a large role in fixed-income client portfolios — sometimes 75% to 80% for high-tax-rate clients, he said.
However, if asset managers decide to include investment-grade corporates, taxable munis and Treasuries, even for clients in the highest tax bracket, "there are some times where you can pick up 78 basis points after tax by going into high-quality corporates and taxable munis," Paulinski said, noting the average pickup has been about 20 to 30 basis points.
Having the flexibility to go into corporates and Treasuries does a number of things: it enhances investors' after-tax return, reduces their risk and makes their risk-adjusted returns better over time, AllianceBernstein's Norton said.
"If you're avoiding things when they're expensive, like municipals when they get expensive, that gives you the ability to avoid when municipals underperform, then sell your taxable bonds and move back into tax-exempt bonds when they get cheaper. So over time, you not only get better absolute returns, you get better after-tax returns, and … potentially lower volatility as well," he said.
In the long term, there will be more customization requests, more unique client requirements, and more requests for a combination of solutions in the easiest possible format, leading to technology playing a bigger role in portfolio construction, said Eddie Bernhardt, head of Invesco managed accounts.
This is a departure from 10 to 15 years ago, when systems like IMTC and others did not exist in the market in ways that would facilitate optimization of retail SMAs at scale, Feldman said.
For portfolio managers looking across thousands of accounts, it's a "daunting consideration" to determine optimal outcomes for each portfolio in fixed income, he noted.
Now, having more automation tools, along with quantitative research, data aggregation, and portfolio optimization tools, in the fixed income space rivals what's possible in equities. This is especially true given the complexity of the fixed-income markets, Feldman said.
"It's going to be all about bringing technology to the client, solving middle and back-office problems with technology, it's going to be heavy on the tech side, and that's just the nature of what we do more and more," Bernhardt said.
Overall, as clients' needs evolve and they want a bevy of offerings, managers are doing their best to meet the clients where they are.
"Investors and market participants are evolving with the times. Clients want more customization. They want more real-time information. So that is a demand, so investors are meeting client demands there," Paulinski said.
