What is Investment Portfolio Management?

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Investment Portfolio Management is the first service addressed in John Sleeting’s Thought Leadership article titled, “What are Multi-Family Offices Services?” As a fiduciary, our responsibilities include being prudent stewards of client assets in achieving their long-term objectives. Objectives vary from client to client requiring differentiated solutions and services; thus, a client-centric approach toward investment management is required to tailor solutions for each family.

Determining an appropriate investment strategy requires a rigorous framework for prudent decision-making. Our framework is called Clearwater C3, and though this framework is broader than just our portfolio management processes, its application is necessary. Clearwater C3 is a disciplined process that CCP uses to guide families through the prioritization of long-term objectives, the evaluation of high-impact tactics, and the implementation of comprehensive strategies.

The C3 process starts with achieving clarity through data discovery such as having a firm understanding of the client’s financial and human capital. Once we have clarity on the data set, we conduct a detailed analysis and interpret findings to build conviction in the broader investment strategy. Finally, we must stay committed to the meticulously crafted strategy through monitoring and maintaining the plan developed.

Creating this investment strategy requires a solid understanding of the total balance sheet, as we believe broad asset allocation is the most important component. According to a study done by Brinson, Beebower, and Associates, asset allocation is the primary determinant of the variability of returns. In 2020, UBS published their Family Office Report detailing the investing profiles of +$1Billion families. One of the key takeaways from the report, is the importance placed on the asset allocation strategy as “the cornerstone of overall wealth preservation and accumulation.”

A proper asset allocation strategy is not only critical for the long-term success of client objectives but can also help provide stability in moments of crisis. Interestingly enough, the +$1Billion families had roughly 59% (i.e. ~$590mil) of their wealth invested in traditional asset classes (equities/bonds/cash) which stresses the importance that these asset classes have for wealth preservation. The remaining 41% is invested in Alternative and Physical asset classes (i.e. real estate, private equity, real estate, gold, etc.) for their roles as return enhancers or diversifiers.

These percentages are certainly not appropriate for every client, but they do provide a guidepost for broader strategic investment allocations. Insights like these combined with our rigorous data-driven investment philosophy have resulted in our Investment Management Pyramid as illustrated below. Every component contained in the pyramid may not be appropriate for each client’s asset allocation strategy, but we must address each one as we establish the framework for future Portfolio Insights in the months and years to come.

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Strategic Asset Management refers to the investing principles that we believe are foundational to every client. As we discussed the importance of asset allocation above, a well-crafted asset allocation strategy is woven with the client’s risk profile as well as their long-term objectives. In carrying out the client’s asset allocation, CCP has been long-time investors and proponents of Exchange Traded Funds (ETF’s) as the investment vehicle of choice for our factor investment methodologies. These methodologies are foundational to our investment disciplines, but we believe Strategic Asset Management covers so much more that we will discuss in future writings, including:

  • Diversification

  • Systematic & Tactical Rebalancing

  • Tax Loss Harvesting

  • Tax Efficient Strategies

  • Factor Investing

  • Investment Methodologies

  • Dollar-Cost Averaging

Disruptive Innovation. We believe we are in the midst of the largest technological transformation in history. The pace of innovation in previous decades has been modest with most improvements being incremental. Automobiles, for example, look very much like they did a generation ago, and only a few technologies like the internet made a dramatic impact on our lives. This is changing before our very eyes as we see breakthroughs in genomics, quantum computing, data management, artificial intelligence, energy storage, robotics, blockchain technology, etc.

While Strategic Asset Management is typically focused on historical/academic processes, investments in Disruptive Innovation are focused on forward looking themes we believe will continue to take shape over the years and decades to come. Investments in these themes do take on higher risk as these investments are typically made in smaller companies or industries that are in the early stages of their cycle, but with it comes the potential to generate higher returns. We believe investments into diversified strategies with strong exposures to specific disruptive themes are a necessary complement to our Strategic Asset Management beliefs.

Risk Capital Management. Families with considerable wealth and complexity may wish to allocate a small percentage of their wealth towards individual equities. While the core of a client's portfolio is geared towards growing and preserving wealth, the Risk Capital "bucket" is about investing in significant risk with aspirations of higher returns within the public markets. These individual equity strategies include but are not limited to:

  • Individual Equity Holdings (i.e. Concentrated Positions with Low-Cost Basis)

  • 10x10 Disruptive Innovation Strategy

  • Transformational Wealth 2030 Strategy

  • Options Strategies (i.e. Protective Puts, Covered Calls, etc.)

Options are simply financial instruments that derive their price based on the performance of the underlying asset (aka. Derivatives). It gives the contract holder the right to buy or sell the underlying stock at a predetermined price. Options are very volatile by nature, but they can provide a tax-efficient way of managing risks without the need of liquidating individual positions.

Alternative Investments can play a large role in the broader wealth strategies for families that have greater capacity for higher risk and illiquid investments. It’s critical to look at each client’s balance sheet as many clients may already have large real estate exposures or business owners can have a large percentage of their wealth already invested in their business (i.e. Private Equity - Direct), and thus may reduce the need for additional investments in this category. Alternative Investments can have several roles within an investment strategy and typically offer at least one of the following benefits:

1) Potential for Higher Returns (i.e. Private Equity, Opportunistic Real Estate)

2) Diversify Portfolio Risk from Traditional Market Risks (i.e. Hedge Funds, Real Estate, Private Credit)

3) Generate Income (i.e. Real Estate, Private/Direct Lending)

4) Tax Benefits (i.e. Qualified Opportunity Zone Investing, 1031 Exchanges)

Alternative Investments have significant complexity and various risks which stresses the importance of detailed sourcing and due diligence processes. CCP sources these investments in 3 ways. 1) Access to 3rd party tech platforms (i.e. CAIS & iCapital) that provide approved alternative investments/funds. 2) Access to direct fund offerings through strategic partnerships (i.e. Blackstone, Carlyle, Goldman Sachs). 3) Access to public markets as large private equity firms have publicly traded stock. Once a potential investment is sourced, it goes through rigorous screening and due diligence before any dollars are invested in the strategy.

Direct Investing. Direct Investing refers to private assets directly owned by the client or prospective private investment deals. The clearest example is private business ownership as briefly mentioned above. This ownership can be viewed similarly to any other venture capital or private equity investment. While these assets are typically owned and operated outside of Clearwater’s management, we do maintain a balance sheet approach to wholistic advice. Thus, we have partnered with clients by consulting on their businesses, business liquidations, 3rd party investment reviews, due diligence, etc.

Aside from business ownership or direct lending, direct investing also includes Passion Assets. As the name suggests, this category refers to physical assets that clients have a deep interest or passion for. Examples of Passion Assets include: Wine, Art, Antiquities, Exotic Cars, etc. Some of these assets may have a solid investment thesis, while other investments can be purely for personal enjoyment. As such, this category typically makes up a small percent of the broader wealth strategy but can add significant satisfaction as well as diversify from the rest of the broader wealth strategy.

Clearwater serves a wide array of wealth levels, and we must ensure that we deliver the right solutions to achieve proper outcomes for each family. Not every component on the Investment Pyramid applies to every client, but we do utilize these tools and strategies when appropriate. We will continue to articulate our philosophy in depth, exploring each of these Investment Pyramid components. If you have any questions, please be sure to reach out to your Clearwater Capital Team.