Portfolio management can take many different approaches, but sometimes simpler is better. A disciplined strategy can provide diversification while keeping clients invested and helping them understand why their money is invested the way it is.
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AJ, you have a unique experience in that you’ve been able to see portfolio management done from the financial planner side as well as the institutional side. What are some things that you think financial planners and other portfolio managers do differently than maybe our approach?
That’s a good question. I think the thing that I see most commonly in the institutional space when you compare it to the wealth management channel as an example. There’s some give and take here because obviously the institutional portfolios from a dollar perspective are substantially larger than the retail portfolio. But you see a—it’s just my personal view on it—I think you see a lot of unnecessary diversification, and to me it leads to dilution.
If you have a 5% or a 10% allocation to private credit, as an example, in your institutional portfolio, that might be done through 16 or 18 different managers. And I guess, just it’s my personal opinion, I’m not sure that you need that many cooks in the kitchen managing it that way.
I think coming back to our approach, sometimes simpler is better. But ultimately, the best strategy is the strategy that keeps you invested when times are tough. So, in our case, I’ll just use one of our more aggressive portfolios as an example that we have a fair amount of money in this. It’s five funds.
We have a rule internally that at any point in time, no less than 50% of the portfolio is going to deviate from just broad U.S. indexes. So right now it’s actually at 60% between the S&P 500 and the Nasdaq 100. It’s cheap, it’s low cost, tried and true, and it’s very tough to outperform on a long-term strategic basis. So that’s great because we don’t have to think about it. It’s something that keeps us disciplined and it keeps clients invested.
That other 40%, that’s where if we have a certain sector industry group that we’re excited about and right now it’s semiconductors and it has been for a while. We’ll look for a good passive access vehicle to that. So we’ve used SMH for a handful of years, and another handful of areas that we’re excited about that we don’t prefer to be passive. This is something that we’d like to delegate to a manager that has a track record of generating alpha.
Small caps and international stocks, that’s not something that we think we should take a passive approach to. But point being, it’s five funds. It’s simple. We have a rule that keeps us from crossing any lines or doing anything too exotic. But it’s still well diversified. I mean, you get really good index exposure and then you get a little flavor into some other things that you’re trying to allocate to, which I think that’s very different from how big institutional managers do it. There’s 10,000 securities in those portfolios at times, and I’m just not sure what that necessarily accomplishes, especially at that expense ratio scale.
So in short, by us choosing to manage our clients’ money at a local level versus outsourcing it to a third-party asset manager, we’re able to understand their story, keep them invested, and really help them understand why their money is invested the way it is.
I think that’s a really good way to put it. Yep.