Fidelity Investments’ Paul Ma knows a thing or two about investment portfolios. After all, he and his team have reviewed something like 30,000 of them for financial advisors.
Ma’s team helps advisors who custody with Fidelity to fine-tune their client portfolios, checking assumptions and looking for ways to improve performance and diversification. A former portfolio manager himself, Ma has worked at Fidelity for the past seven years. The lead portfolio strategist talked with Barron’s Advisor about what trends he and his team of “portfolio nerds” are seeing in portfolios, and why national birth rates are among the statistics he pays close attention to.
Illustration by Kate Copeland
Lots of advisors like to build their own portfolios. Why should an advisor seek help with portfolio construction? Advisors are busy. They’re handling their practice, their clients, and compliance. What a lot of advisors would like to do is to have more face time with their clients. Being able to engage a team like ours can help them be more efficient with their portfolios and spend more time with clients. Another case is a fiduciary one. It’s nice to have a second pair of eyes looking over a portfolio. When we engage an advisor, we’ll review their portfolios and prepare a 30-page [analysis]. This is a hands-on consultation with a team of CFAs.
If an advisor doesn’t want to see us at all and just do the analysis themselves, we have Portfolio Quick Check software. It’s very easy to use and it’ll analyze a portfolio and give you talking points [for clients]. For example, it’ll tell you the portfolio needs more diversification. Maybe the portfolio doesn’t match the client’s risk profile. It’s self-serve like TurboTax. But if a portfolio gets too complicated you can come see our team of CFAs, which is about seven people right now.
What’s a typical meeting with your team like? We start with a 30-minute discovery call. We sit there and listen to them, their world views. Then we walk through a current portfolio, hear what they like and don’t like about it. That discovery call is important. Every advisor has their own thoughts. And we want to fuse that with Fidelity’s best thinking. We’ll come back a week or two later, and help them build a better portfolio by suggesting, for example, using different funds or fund families.
For example, a May 2020 profile we looked at with an advisor showed he had way more fixed income than a 60/40 portfolio would dictate. We said he should be forward-looking—see where the puck is going—and suggested repositioning, dialing down that fixed income and taking on some equities, such as growth stocks and small- caps, and on the fixed-income side swapping out a fund for one we would consider best of breed. It worked out really well. That’s what we try to do.
If the advisor is satisfied with the experience, they come back. Our repeat customer, if you will, is like 80%.
Do some portfolios come in and need no major revision? Yes! These are portfolios advisors put together over their 20-year or 30-year careers. These are their babies. And there are times when we’ll say only minor changes are necessary. We’re here to be objective. And there are a lot of advisors who are doing a great job.
What are some other recent portfolio trends you and your team are seeing? The trend we are seeing the last year or so is that a high inflationary environment forces people to realize that we need to go beyond stocks and bonds. We added a lot of alts and commodities over the last year. Twenty-seven percent of incoming portfolios had some exposure to alternatives. But half of outgoing portfolios had alternatives. The average allocation per portfolio is around 5%. When you have high inflation, you need to go beyond stocks and bonds.
Advisors are also getting more defensive and conservative. Cash has gone higher. We’re trying to preach rebalancing. You need to get back to your strategic allocations. You may feel some uncertainty, but you kinda need to go against your behavioral biases and rebalance.
This has been a historically bad year for the traditional 60/40 model. Is it time investors and advisors rethink using it? It depends on inflation. People have been declaring it dead for years, and they have been wrong, wrong, wrong. The 60/40 portfolio has one of the best Sharpe ratios. That’s because of the diversification of stocks and bonds. But that doesn’t hold in a higher inflationary environment.
Inflation rates may have a hard time returning to the low-inflation environment of the past two decades. Some commodity demand destruction is likely with the slowing global economy, but continued volatility and uncertainty in the commodity markets broadens the range of our estimates.
So the question is, where will inflation end up? If it stays high, then you may need to find diversification wherever we can—alternative investments, commodities.
Alternatives is a big category. Some can be an inflation hedge, others are for income. Among liquid alts, you have market-neutral, and that has low correlation with stocks and bonds. You have to do manager research. Partnering up with a firm like Fidelity that has resources can help with that. That said, in every asset category there are big names in there, and if you reach out, we can help you.
When is your team’s busy season? January. Advisors are going to talk to their clients about what they expect in 2023, and they want to review the portfolios. We’ll help them get set up and have talking points ready.
Advisors have a tough job. We’ve been talking about tax-loss harvesting with advisors, which is something they can bring to clients, and say “Hey, we harvested these losses and can use them to offset gains in the future.”
There is a whole set of portfolios for retirees who care about income. That’s also something we spend a lot of time on. With yields up, it’s easier to get the 4%. It’s not a great time to retire right now, but to build a portfolio for yield, it’s a great time.
Birth rates are among the data points you keep tabs on. Why? I want to focus advisors’ attention on long-term issues. You can focus on tensions in the short term: China/Taiwan for instance. But if you look at demographics, India and Indonesia have an expanding middle class. China, by contrast, is struggling. That affects their policies. The reason I talk about babies is that demographics can be destiny. And you should be focused on the long term. Population growth can affect a country’s GDP growth because GDP equals productivity plus labor force growth. That’s economics 101.
[Of course,] there are other factors to consider. For example, while China’s average birth rate is on the decline, its middle class is actually seeing a double-digit growth rate. That’s better than countries that have neither working for them—both a declining average birth rate and a declining middle class growth rate. India, which has both working for it, has one of the highest valuations among major economies.
Money supply growth is another number we keep track of. It can be a precursor to inflation and definitely inflation expectations. The reason the Federal Reserve is comfortable is that people expect inflation to come back down. But back in the 1970s, inflation expectations became unanchored. People expected inflation to rise. It’s so hard for the Fed to put that genie back in the bottle.
You live in Boston, but you’re not from there originally. Have you gotten used to New England winters yet? I’m from Taiwan. I lived in New York. Boston is freezing. This is terrible! One day I’ll move to Florida. [laughs]. But we’re here and we’re raising our kids, and they’re happy, so we’re happy.
How does a portfolio specialist relax? I spend my spare time reading stories with my kids. I find that very relaxing.
Thanks, Paul.
This interview has been edited for length and clarity.
Write to Andrew Welsch at andrew.welsch@barrons.com
