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Folio Investing, Motif, and Tailored Portfolios

Chris DeMuth, a money manager and well-followed contributor at Seeking Alpha, recently published an overview of Motif Investing. Motif is a young firm that has gotten a lot of media coverage for enabling investors to build, track, invest in, and manage portfolios of individual stocks.

Much of the functionality that Motif provides to individual investors has been available at Folio Investing for more than 15 years. To make sure that Mr. DeMuth was aware of Folio Investing, Geoff Considine reached out to the author to make a few observations about how the model-based portfolio management process can be used to help investors to meet their goals.

After he sent a note to Mr. DeMuth (to which he responded graciously), we thought the points covered in Geoff’s email would be of interest to Folio Investing Blog readers. It is reproduced below:

 

Hi Chris:

I enjoyed your article on Motif. It’s a very interesting company and business model, and I think that you have hit on a key theme that does not necessarily get a lot of attention. How can investors create their own portfolios of stocks and ETFs and manage such portfolios without getting eaten alive by costs or having to spend a lot of time managing the allocations? Motif has done a lot of work on telling this story.

I consult to Folio Investing, a broker-dealer based in Virginia that has been providing individual investors with the ability to create and easily manage totally customized portfolios of stocks, ETFs, and mutual funds for more than 15 years. I assume that you have not encountered Folio Investing because your article, if I am not misinterpreting, seems to suggest that the type of capability provided by Motif is new.

Folio Investing calls its portfolio structure a 'folio' as compared to a 'motif' at Motif Investing.

You raise interesting points in your piece for the advantages of this type of approach. There are a number of other ways that individual investors can use folios. One is for socially responsible investing (SRI). People might want to buy an index but exclude certain types of companies that are not consistent with their values. Folio enables screens for SRI themes. Folio Investing's approach has seen strong adoption by Registered Investment Advisors because this type of model-driven portfolio management is highly efficient for managing multiple client accounts using a given strategy or multiple strategies.

Another benefit of owning a basket of securities rather than an index fund is tax loss harvesting. If you own the securities in an index (as opposed to owning an index fund), you can sell individual losing stocks in order to recognize a tax loss when you choose. Even when the index as a whole has positive returns, there are likely to be individual stocks in the index that could be harvested for losses. Wealthfront has been getting quite a bit of press with a product that does exactly this (they call it direct indexing), but Folio has provided this technology for many years and holds a patent on a tool that enables investors to tailor their tax loss harvesting to their needs.

Another advantage of holding a folio of individual stocks is that you can tailor the weighting scheme assigned to individual stocks. There is a range of research on the advantages of equal-weighted vs. fundamentally-weighted vs. market-cap weighted portfolios. If an investor wishes to implement one of these, or simply wishes to create a slight tilt towards value or small cap stocks, it is straightforward when you set the weights of the underlying securities.

There is an additional issue that is potentially important in discussing the creation and tracking of model portfolios (folios, motifs, etc.) of any kind: performance. When you look at the historical performance of an ETF or mutual fund, you see realized returns. Motif shows something different for its historical return charts. As they say on the site (www.motifinvesting.com/view/returns-disc...), the published historical returns for motifs are not actual returns--they are, according to text in Motif's disclosure--"hypothetical results" and "not intended to represent actual results." More than five years ago, Folio Investing decided to invest money in all of the folios listed on its site in order to avoid the potential that the returns reported on the website might be unrealistic due to differences between paper trading results and realized returns. In either case, past returns may have no resemblance to future returns but, philosophically, Folio believes that it is important to show actual funded return performance rather than hypothetical returns.

Individual investors will (hopefully) increasingly grasp the potential value of owning a portfolio of individual stocks (as opposed to owning a fund of those securities) for the reasons above. Both Motif and Folio Investing provide platforms to enable investors to do this in a cost-effective way. Technology makes this much easier than ever before. The question of how best to explain and present portfolio returns using a common standard has not yet been addressed, however.

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