Morningstar Investment Services LLC
Active Passive Blended Mutual Fund/ETF Portfolios
Active or passive management? We tap into the strengths of both approaches in five model portfolios that span the risk spectrum.
Integrated strategies designed to offer you the best of both approaches Each portfolio uses active investments to help increase the potential for returns, and passive investments to help remain diversified, low-cost, and tax-efficient. Asset Allocation In investing, the essentials matter. We start with proprietary research first developed by Ibbotson Associates, Inc. showing that the mix of assets in a portfolio can have a greater impact on investment returns than timing markets or picking stocks. We use risk and return forecasts as a guide to develop a diversified strategic allocation for each portfolio, including up to 19 asset classes.
Combining Active and Passive We use actively managed funds to invest in asset classes in which we think a manager can add value. Because active managers may take on greater risk in pursuit of greater return, the more aggressive the portfolio, the larger proportion of actively managed funds it’s likely to hold.
Portfolios Active/Passive Aggressive Growth
More Active
Less Passive
Active/Passive Growth Active/Passive Moderate Growth Active/Passive Income & Growth Active/Passive Conservative
Less Active
3 Conservative Portfolios: Greater amounts of passive index funds 3 Aggressive Portfolios: Greater amount of active funds For illustrative purposes only.
More Passive
Active Management “Active” mutual fund managers seek to outperform a benchmark. To select securities, they use both research and their own experience as a guide. To build each portfolio, we examine each fund’s holdings and returns to determine how effective a mutual fund manager may be. We also consider a manager’s investment philosophy, process, and the strength of their management team. Finally, we review costs, ensuring that each fund’s fee appears reasonable for the return potential it offers. Passive Management “Passive” investments seek to replicate the performance of an index for a low fee, using exchange-traded funds (ETFs) and/or indexed mutual funds. Because they demand less research and analysis than actively managed funds, they’re typically cost-effective, with lower portfolio turnover and more favorable tax consequences. To build each portfolio, we select passive investments that closely track their asset class or benchmark index. Getting the Most From Each Approach We carefully monitor the overall risk level of a portfolio when combining active and passive strategies. We select actively managed funds in areas where we think a skilled manager’s research and knowledge has the potential to boost performance, such as emerging markets or small-cap stocks. In areas in which manager skill is less likely to affect performance— such as government bonds—we tend to favor lowercost passive investments.
Active/Passive Portfolios
Each model portfolio is carefully designed to put your needs front and center—where they belong. We think your portfolio should be working for you no matter what investment approach or style is in favor at any given time. That’s why they’re broadly diversified
across asset classes, managers, and investment styles. To select a portfolio, talk to your financial advisor, who can help you build a wealth strategy focused on your long-term goals.
Portfolios
%
Goal
Active/Passive Aggressive Growth
54 35 19 U.S. Stocks 29 24 5 International Stocks 6 6 – Real Estate REITS 2 2 – Taxable Bonds 7 5 2 Alternatives 2 – 2 Short Term Reserves
Long-term capital appreciation. Designed to help investors to participate fully in the growth the stock market can offer, the portfolio invests primarily in domestic and foreign equities.
Active/Passive Growth
46 24 5 15 8 2
29 17 19 5 5 – 12 3 5 3 – 2
U.S. Stocks International Stocks Real Estate REITS Taxable Bonds Alternatives Short Term Reserves
Long-term capital appreciation. Designed to help investors to take advantage of the potential for stock market growth by investing primarily in domestic and foreign equities.
Active/Passive 36 Moderate Active/Passive 17 Growth 3 95 / 5 36 6 2
21 15 14 3 3 – 20 16 4 2 – 2
U.S. Stocks International Stocks Real Estate REITS Taxable Bonds Alternatives Short Term Reserves
Long-term growth with moderate volatility. Built with a focus on providing balanced and varied exposure by investing in both equity and fixed-income securities.
Active/Passive 27 Income & Active/Passive 10 Growth 2 80 / 20 57 2 2
15 12 U.S. Stocks 8 2Active/Passive International Stocks 2 –95 Real / 5 Estate REITS 26 31 Taxable Bonds – 2 Alternatives – 2 Short Term Reserves
Moderate capital appreciation combined with current income. Combines the growth potential of equities with the balance that fixed-income securities can provide.
Active/Passive 14 6 8 U.S. Stocks Momentum Conservative International Stocks 95/5Active/Passive 5 5 –Active/Passive – – – 60 / 40 80 Real / 20Estate REITS
Protection from capital loss and a safeguard against inflation. Invested in fixed-income and equity securities, it’s Active/Passive designed to be best-suited for investors who value current 95 / 5 income and stability
A Active P Passive Equity / Fixed Income
Passive 20
Active/Passive 95 / 5
A
P Asset Allocation
/Passive 40
Active/Passive 80 / 20
m /Passive 60
Momentum 95/5Active/Passive 60 / 40
m /Passive 80
Momentum Active/Passive 80/20 40 / 60
m
U.S. Stocks International Stocks Taxable Bonds Momentum Momentum Real Estate REITS Momentum Active/Passive Active/Passive 60/40 80/20 95/5Active/Passive 20 / 80 40 / 60 60 / 40
m
74 2 5
31 43 Taxable Bonds – 2 Alternatives – 5 Short Term Reserves
Alternatives
Active/Passive 80 / 20
Short Term Reserves
Active/Passive 95 / 5
Note that the passive portion of a portfolio may be invested in a combination of indexed mutual funds and ETFs, or simply indexed mutual funds, depending on custodial arrangement. Weightings are subject to change. Figures are based on a recent allocation, and are subject to change. Asset classes shown are Morningstar, Inc. category groups. Allocations of portfolios at the individual account level my vary.
&
Momentum Growth 40/60
Momentum 60/40
Momentum 80/20
Momentum 95/5
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+1 877 626–3227 global.morningstar.com/mis
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About Morningstar Investment Services LLC We’re committed to helping financial advisors create better outcomes for investors like you.
Together, we offer the professional guidance and access to strategies that can help you achieve your goals. Our model portfolios are designed to be part of a long-term investing plan that helps meet your needs at each stage of your lifetime.
Important Information It is important to note that investments in securities (e.g., mutual funds, exchange-traded funds, common stocks) involve risk and will not always be profitable. ETFs, like all investments, carry certain risks that may adversely affect their net asset value, market price, and/or performance. An ETF’s net asset value (NAV) will fluctuate in response to market activity. Because ETFs are traded throughout the day and the price is determined by market forces, the market price you pay for an ETF may be more or less than the net asset value. Because ETFs are not actively managed, their value may be affected by a general decline in the U.S. market segments relating to their underlying indexes. Similarly, an imperfect match between an ETF’s holdings and those of its underlying index may cause its performance to not match the performance of its underlying index. Like other concentrated investments, an ETF with concentrated holdings may be more vulnerable to specific economic, political, or regulatory events than an ETF that mirrors the general U.S. market.
The Morningstar® Managed Portfolios Program is offered by Morningstar Investment Services LLC, a registered investment adviser and subsidiary of Morningstar Investment Management LLC.
Neither diversification nor asset allocation ensure a profit or guarantee against a loss.
In addition to the Program, Morningstar Investment Services also offers model portfolios to thirdparty advisory programs (“Advisory Program”) on a non-discretionary basis as a strategist and a discretionary basis as an investment manager. Under a strategist arrangement, the Advisory Program has full discretion to invest the Advisory Program client accounts in accordance with the model or deviate from the model provided by Morningstar Investment Services.
Morningstar Investment Services does not guarantee that the results of its advice, recommendations, or the objectives of your portfolio will be achieved. Morningstar Investment Services does not guarantee that negative returns can or will be avoided in any of its portfolios. An investment made in a security may differ substantially from its historical performance and as a result, you may incur a loss. Past performance is no guarantee of future results.
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The Program is intended for citizens or legal residents of the United States or its territories, and can only be offered by a registered investment adviser or investment adviser representative. Portfolio construction and ongoing monitoring and maintenance of the portfolios within the Program is provided on Morningstar Investment Services’ behalf by Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc. The Program includes various strategies available to individuals and institutions primarily through arrangements Morningstar Investment Services has with various unaffiliated registered investment advisers. Within the Program, Morningstar Investment Services provides discretionary investment advisory services.
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