Broker Check
Is The Great Asset Shift For Real?

Is The Great Asset Shift For Real?

June 13, 2023

A World where uncertainty is high and convictions are fragile suddenly is presenting advisors with a host of new questions—and
challenges. How should they invest in the current market? Should they price in a recession? Are private assets or foreign
markets more attractive alternatives today? Most importantly, should advisors reposition client portfolios for a new interest rate

With so many moving parts to this puzzle, chief investment officers at RIA firms are trying to address problems that others might
trust to crystal balls: Will the job market stay strong? If so, will the Federal Reserve continue to raise interest rates or has its
work been done, and will it now pause?

Do asset allocation strategies need to be permanently reimagined now that a 40-year bull market in bonds has ended? Should
the 60/40 stock-bond playbook be torn up? If firms are moving their clients into bonds, how long should the durations be? What
is the role of alternatives in the new investment garden? What if clients don’t want to be in the markets at all? A 5% money
market yield is finally paying you enough to, as one investment specialist puts it, sit and be patient.

Financial Advisor tried to mine the investment wisdom of investment officers at some of the country’s biggest firms and get a
sense of how portfolios are being rearranged for the future for maximum benefit on clients. How big a role will bonds and income
play in the picture, especially now that so many people are hitting retirement, and capital appreciation may not be as big a factor
as their ability to keep unwinding assets, perhaps for a longer life?

Dave Grecsek, the managing director of investment strategy and research at Los Angeles-based Aspiriant, says that even
though markets fluctuate, fundamentals don’t. “One needs to recognize that markets usually work fairly well in terms of rapidly
discounting all available information,” Grecsek says. “So larger efforts to move tactically have generally proven to be ineffective
strategies for maximizing wealth, especially for taxable investors.”

However, he says that tilting clients’ asset allocation still helps return. “We are tactical in the sense that we’re always searching
for value, i.e., the notion of adding more of an asset as its price becomes more attractive and vice versa. … The stronger the
value signal, the more we’ll lean into a particular area while being mindful of adhering to the important principles of staying fully
invested, having a globally diversified portfolio and using an appropriate asset allocation for each client.”

Grecsek points to a conundrum with bonds: If interest rates go higher but asset prices remain constant and inflation is normal,
he says he could see a case for adding bonds. But sharper interest rates compress equity multiples. And that means better long-term opportunities in stocks.

His long-term views aren’t really changing, he says, but the firm thinks there’s a high likelihood of recession. His team is also
watching the banking crisis.

Autumn K. Campbell, a Tulsa, Okla.-based senior lead planner at RIA Facet Wealth, says her firm has reacted to rising interest
rates by reducing credit-spread risk and interest rate risk, lowering the average maturity of corporate bond holdings and
increasing exposure to intermediate-term, three-to-seven-year bonds, all while lowering overall bond market exposure.
“This will make our portfolios more protected from potentially higher interest rates, and conversely able to benefit from potential
Fed rate cuts with our adjusted maturity risk,” she says. Facet also offers short-term investment strategies using high-quality
bond funds, which are intended to be held for one to three years to offer clients more yield than cash in savings accounts with
less risk than moderate investment portfolios.

Parameters And Guardrails

Jack Ablin, the chief investment officer for Cresset Capital, says his firm uses investing categories roughly mirroring traditional
bucketing strategies. The first bucket focuses on meeting clients’ liquidity needs for up to three years, another on their income
and cash flow requirements for three to seven years, and a third bucket is targeted at growth seven to 15 years into the future.
The final “aspirational” bucket is designed to meet clients’ long-term cash flows 15 years into the future and beyond. Around
these buckets, the firm has created strict risk parameters.

“If risk rises in the market,” Ablin says, “we dramatically reduce risk in the portfolios. What we really want is to have a
predetermined outcome. So in our diversified income portfolio, we want a 95% chance of delivering a positive return over the
three-year holding period, and if interest rates are low and volatility is high, we’re reducing risk to make sure that happens.”

Meanwhile, in its growth portfolios, Cresset targets a 90% chance of positive returns over a seven-year period, Ablin says. “It’s
the same thing across the categories; if our capital market assumptions are lower, or volatility is higher, we have to reduce risk.

That discipline helped us going into 2020. We didn’t anticipate the pandemic, but the market was expensive in late 2021, and
that had us reducing risk in the growth and equity strategy. With rates still low, we could reduce risk in the diversified growth and
income categories in 2021.”

Ablin says today the firm is a bit concerned about the S&P 500 and isn’t in a rush to add large-cap stocks. “Another theme is
that we’re in an environment where capital is going to become increasingly scarce,” he says. “Across our equity and bond
spectrum, we’re focused on quality. We believe that we’re entering a K-shaped market recovery—with the quality companies
moving higher and lower-quality companies struggling.”

Tonny Navarro, a CFA with the Erdmann Group, a Merrill Private Wealth Management team in Greenwich, Conn., says that
whatever the Fed does will drive what he recommends for his clients’ portfolios. “Asset allocation, portfolio construction and
diversification are designed to remove emotion from investment,” Navarro says. “We’re never all in or all out. We certainly need
to look at asset allocation to adjust to whatever the current environment is, and to choose what levers we’re pulling. “When you
get the weather report and hear there’s a 50% chance of rain, it’s up to you whether you pack an umbrella.”

But he does see lending getting tighter, putting more pressure on large-cap growth, which has outperformed. “From a defensive
perspective, we’re carrying more cash,” he says.

The firm is typically 2% to 5% cash, but “now we’re at 5% to 10%,” he says. “This gives us opportunities to buy the dips. And
right now, with money market funds at 5%, we’re being paid to be patient.”

Looking To Private Markets

From an offensive perspective, Navarro says he’s torn up the 60/40 playbook and looks more at private credit investment, which
he feels allows him to “paint with a broader brush” since it offers a different risk-return profile than Treasurys do.

Because banks are continuing to retract from the market, private credit investors are able to get call protection and other
covenants that make the asset class less risky, he says. And within private credit, Navarro says he’s partial to infrastructure

“Infrastructure hits all three buckets,” he says. “It hedges against inflation, has very predictable cash flows and offers
diversification. In addition, there’s a modest correlation with equities and negative correlation with public debt.”

The private equity secondary market is another place Navarro sees new opportunity. Now that interest rates have risen and the
cost of capital is so high, just being a liquidity provider is an attractive position to be in.

Limited partnerships, he says, “need to take out money to deploy elsewhere. If you look back in history to ’01, ’08, the
endowments and pension funds learned that this isn’t a time you want to hide under the mattress. These are vintage years, and
secondaries are allowing them to go to the market.”

Only commercial, office and retail real estate is off-limits, Navarro says, even though there are opportunities for distressed
investing. “We’re not touching that,” he says. “We’ll let someone else do it.”

Ablin says Cresset is also a big believer in private investments. “Our diversified income portfolio is 30% in private investments—
20% in private credit, 10% in equities. Currently, we have 10% of our growth allocation in private equity secondaries, but I think
we’ll expand that allocation to include other private equity and broaden that out to 20%. Our aspirational strategy is heavily
weighted to privates: We’re big believers in public market beta and private market alpha.”

However, he adds, “We prefer not to get involved in public market investments in private wrappers, like hedge funds and LPs.”
He says that in the last year Cresset has decreased its allocation to private credit now that interest rates seem to have
stabilized. “Floating-rate debt is earning a pretty generous yield. We like new-issue, underwritten middle-market private-credit

Different Levers With Fixed Income

On the fixed-income side, Navarro says he’s happy with his “bulletproof” municipal bond ladder that now extends out 12 years.
“With free cash flow producing income, municipal bonds and core real estate, we think we have lots of different levers in the
portfolio that should provide opportunities for appreciation down the road.”

Kevin Grogan, the chief investment officer for Buckingham Strategic Wealth in St. Louis, says his firm works mostly with clients
who have $1 million to $10 million in investable assets. Most are either in retirement or in the years approaching retirement. For
these individuals in particular, higher rates have changed the firm’s view of fixed income.

“At the highest, strategic level, the increase in general interest rates changed our capital assumptions and planning for many of
our clients,” Grogan says. “Rewind a year and a half ago, and retirees couldn’t earn anything on fixed-income investments that
were very safe. Now that rates are higher, that changes the planning that we can do.”

That said, he adds that the changes are more on the planning side than on the investment side, as additional income gives
clients more options for lifestyle, estate planning and philanthropy.

“How we manage fixed income is tied not so much to the level of the rates, but to the shape of the yield curve,” he says. “It’s
inverted now, so we can earn more on the shorter maturities than on the longer durations. Flat or inverted, on the margins we’ll
reduce the durations of our portfolio, so instead of building a one- to 10-year bond ladder, we’ll build a one- to five-year bond

Buckingham is also using brokered CD investments, as they provide a yield spread over Treasurys that has widened since the
meltdown of Silicon Valley Bank, but he reminds other advisors to keep an eye on the $250,000 account maximum for FDIC
insurance coverage.

“You can get 120 basis points over what you’ll get with Treasurys,” he says. “The critical part is that you stay under the FDIC
limits. If you go over, you’ve got risk you don’t need to take on.”

Tried And True

For some advisors, shaking up the investment strategy misses the point of long-term investing in the first place, which assumes
there will always be peaks and valleys. So it’s not perhaps surprising that a robo-advisor strategist would see it that way.
Mychal Campos is the head of investing at Betterment, a robo-advisor and RIA custodian. “Our portfolios are built for the long
term, with many different macroeconomic and market environments in mind,” Campos says. “As such, we currently do not
tactically make adjustments to our portfolio allocations in response to short-term changes in market conditions.” He says the
firm’s current allocations remain appropriate for long-term investing goals.

“One thing to keep in mind is that while our portfolios are largely passive in nature, our portfolio management is still dynamic,”
Campos continues. “We do offer automated rebalancing [to stay in line with target portfolio weights] based on what becomes
under- and overweight in the portfolio. So as the macro environment changes, stock and bond allocations can perform differently
over time but portfolio rebalancing options are still an important part of our procedures.”

He says less sophisticated clients will likely adhere to long-term asset allocation advice, but that each of Betterment’s portfolio
strategies aims to provide both recommendations and flexibility. “We’re very clear in the copy for our web and mobile
experiences about the multiple dimensional risks related to each portfolio strategy. At the margins, we do have a cohort of clients
who want to trade and invest more actively. For these types of clients, we have a flexible portfolios option that they can

Looking Abroad

“I think we are anticipating a mild recession, but we’re only calling for a 10% to 15% decline in S&P profits,” Ablin says. “I think
we’re actually going to be able to navigate that pretty well, especially if we get an offsetting decline in interest rates: What we
lose on the earnings side we’ll make up in multiples, and portfolios might end up plowing through a recession unscathed from an
equity perspective. I still prefer to have a call option on the debt ceiling.”

Consequently, Cresset has extended duration. “Earlier in the year we went back to neutral duration in diversified income, and in
growth we had a 10% underweight in U.S. equities, with that allocation moved to gold. Right now we’re still 5% underweight U.S.
large caps; we took half of that gold position and bought international equities.”

He says that once the Fed is done with its hikes, Cresset anticipates that the dollar will decline, helping international stocks. “We
felt that international developed stocks are not only cheaper, but their currencies are also cheaper than the dollar. There’s two
ways of winning by holding international equities.”

“We currently favor gold over cash,” Ablin maintains. “We’ll forgo the 5% yield we can get in savings because we think the dollar
is expensive relative to gold and foreign currencies. Cash is a push for us.”

But at the end of the day, Ablin says, portfolios have to be structured around an investor’s tangible goals.

“Our job is to take the cash-flow stream that our clients present to us and provide the advisor with a frontier to guide a series of
choices they make with the client,” he says. “That way, they can sit down with the client and say, ‘Look, if you commit a ton of
capital to these goals, you have a 100% chance of making sure the cash is there and makes it to a checking account every
month if you need it. But if you’re willing to accept a 95% chance of meeting those goals, you can commit substantially less
money and do more now.’ That’s the trade-off.”