Vanguard, American Funds double down on model portfolio partnership

Recognizing the growing popularity of model portfolios among financial advisers, Capital Group and Vanguard Group have partnered to offer 10 active-passive strategies for Morgan Stanley’s platform.

The models, which are two-thirds allocated to Capital Group’s actively managed American Funds strategies and one-third allocated to Vanguard’s index ETFs, follow a similar partnership the two asset management firms established at Merrill Lynch last year.

One major distinction between the model portfolios offered to the two wirehouses is that allocations on the Merrill platform are two-thirds weighted in Vanguard passive funds and one-third weighted in American Funds active strategies.

Capital Group already had 10 American Funds models on the Morgan Stanley platform, but the new lineup is aimed at tapping into the growing appeal of strategies that blend active and passive management, said Kris Spazafumo, vice president of model portfolio business development at Capital Group.

“Active-passive models are the fastest growing category, and we are excited to be taking part in Morgan Stanley’s model line-up expansion,” she said.

In addition to leveraging two well-established brands in asset management, Spazafumo said, “We also have increased distribution horsepower in the marketplace” by having two wholesaling teams promoting the partnership models.

Amma Boateng, head of broker-dealer business at Vanguard Financial Advisor Services, also cited the growing appeal of model portfolios as a key driver behind the partnership.

“Streamlining investment manager research, portfolio construction and portfolio monitoring through model portfolios empowers advisers to spend more time on critical relationship management with their clients,” she said. “Vanguard and Capital Group’s suite of hybrid model portfolios pairs active funds with broadly diversified index ETFs.”

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, described the partnership as “interesting indeed, as one of the heavyweights in active management is partnering with the leading provider of index mutual funds.

“This is a sign that advisers are increasingly using passive as the core and using active funds to generate potentially stronger returns,” Rosenbluth said. “For some, it is not active versus passive, but active and passive building a better portfolio.”

Daniel Wiener, chairman and co-founder of Adviser Investments, said the partnership “kind of follows the popular core-satellite model, and it will be interesting to see if they go active core and index satellite or vice versa.”

As it currently stands, it's active core at Morgan Stanley and passive core at Merrill.

“Capital Group needs to provide exposure to indexing to satisfy clients who don’t want active-only,” Wiener added. “For Vanguard, it’s no skin off their nose and in fact simply expands their reach through the broker-dealers who typically use American Funds. Plus, don’t forget that Vanguard’s having a tough time bringing expenses down further, so any partnership that can bring in more assets could, ultimately, lead to lower costs, though it’s a tough road these days given their expanding marketing and distribution expenses.”