Timely, relevant, and actionable investment perspective, best practices, and planning insights for institutional and wealth management clients from CAPTRUST's Consulting Research Group.

Advanced Filter

No Easy Button

A Field Management Guide to Portfolio Management

Mark Paccione, CFA, CFP® 
Director | CAPTRUST Wealth Practice Leader

Recently, a friend came to me seeking advice. This friend, a lawyer by trade, has somewhat limited investing knowledge, and despite the rise in the stock market, her investment returns were less than she had expected. In an attempt to invest her portfolio more wisely, she inquired about CAPTRUST’s portfolio management strategies and investment process. The following is a synopsis of our ensuing discussion and CAPTRUST’s philosophy surrounding discretionary portfolio management.

Begin With the End in Mind1

Determine whether the portfolio goal is capital preservation, income, growth, or some combination of the three. One approach is to split the portfolio into three distinct buckets: a liquidity or capital preservation bucket, an income bucket, and a growth bucket. The three-bucket approach breaks the portfolio down into more manageable pieces and clarifies each investment’s purpose. In addition, it provides confidence that immediate needs are planned for while decreasing anxiety over a portfolio’s more volatile growth components.

Decide How Much Loss is Tolerable

Investors must be prepared to lose money — at least temporarily. Unless investments are limited to cash, U.S. Treasurys, or FDIC-insured certificates of deposit, portfolio volatility and capital loss potential are unavoidable investing byproducts. While all investors desire the highest return possible, it is important to strike a balance between desired high returns and tolerable risk of loss. 

Identify Key Investment Constraints

Liquidity and time horizon are two key investment constraints. For liquidity, consider immediate spending needs. Funds needed in the next 12 months should be set aside in a capital preservation bucket with only cash and cash-like investments allowed. Liquidity needs also affect the investment vehicle decision. For instance, private equity is an attractive opportunity but has a long lockup period and, thus, should not be seeded with funds needed in the next few years. Time horizon dictates how aggressive a portfolio should be. 

Portfolios with longer time horizons can be more aggressive since they have more time to recover from the inevitable market declines. Retirement presents a unique time horizon challenge as retirees must balance two opposing risks: longevity risk (the risk of outliving your money) and market risk (potential portfolio loss due to adverse market movements).

Implement the Investment Strategy 

CAPTRUST begins with top-down asset allocation — which drives the majority of a portfolio’s returns2 — and utilizes investment vehicles and managers that provide broad exposure to an asset class or sub-asset class, such as U.S. equities or mortgage bonds. In cases where we have discretionary authority, CAPTRUST adds value to client portfolios at three distinct levels:

The first, strategic asset allocation, is the apportionment of funds among six major asset classes, including U.S. equities, international equities, fixed income, real estate, commodities, and hedge funds and private equity. 

The second value-add is tactical asset allocation, tilting the portfolio toward asset classes and sub-asset classes that are more attractive and away from those with less opportunity in a given market environment. CAPTRUST utilizes multiple primary and secondary data sources and proprietary research insights to determine strategic and tactical asset allocations. 

The third value-add is investment selection. CAPTRUST has a dedicated investment manager due diligence team that focuses on selecting the best managers for discretionary portfolios. With access to world-class asset managers, our due diligence team provides a distinct edge in understanding a manager’s unique value proposition and investment opportunity set. 

Risk Management is Critical

CAPTRUST spends significant time, energy, and resources on risk management to avoid permanent capital loss and achieve the desired return with the least amount of risk. At the portfolio level, CAPTRUST focuses on numerous investment risks, including interest rate, credit, market, manager, sector, and country risks. Almost all bonds have interest rate risk, which represents the possibility for price decline due to rising rates. To manage interest rate risk, CAPTRUST generates duration reports that quantify the interest rate sensitivity of a particular bond holding and the overall portfolio. To manage market risk, CAPTRUST runs beta reports, which measure the tendency of a security’s returns to respond to swings in the market.3 Sector reports detail the U.S. and international equity exposures by sector, such as health care and information technology. Finally, the country risk report decomposes international equity holdings by country of domicile. These risk management reports allow CAPTRUST to anticipate how individual investments — and the complete portfolio — will act in various market environments. More importantly, the reports enable proactive and deliberate portfolio positioning to take advantage of the current market environment.

At a microscopic level, CAPTRUST monitors the daily performance of discretionary models, accounts, and investment managers. We produce daily model performance reports, which record model and manager returns over several trailing time periods. Performance attribution is derived from the daily model performance report, detailing which investments or factors are contributing to and which are detracting from overall performance. Daily account monitoring ensures detection of potential problems quickly and decisively. CAPTRUST also utilizes deviation reports that measure the difference between current positioning and desired positioning. Using account-level reports, we can quickly detect discretionary accounts not performing as expected, identify the issue, and resolve it.

The Wisdom of the Crowd is Invaluable

CAPTRUST has an investment committee made up of senior investment professionals who talk daily and meet formally on a biweekly basis to collaborate on investment theses, glean insights from others, and generally expand the team’s knowledge base. The committee construct also helps us avoid common behavioral biases. Lively, data-driven discussions based on primary and secondary research minimize the risk of confirmation bias (the tendency to accept data that confirms existing beliefs while rejecting data that contradicts them).4 Our belief is that investment decisions should be based on all available data and not just data that confirms initial views. Further, we hope to avoid falling prey to herding behavior (the tendency for individuals to follow the group’s actions) and eliminate emotions from playing a role in decision making.5

In the end, while my friend was grateful for the insight, I’m not sure it was the simple answer she had hoped for. The key to success as an investor—as in any endeavor—is to become an expert or hire one to work on your behalf. No shortcut, FastPass, or EZ button for instant success exists when it comes to investment portfolio management. The best practices outlined above require a team of experts working in unison toward a common goal: the successful execution of a client’s investment objectives.



CAPTRUST’s Wes Collins on Financial Wellness at Work

PLANSPONSOR recently published an article written by Wes Collins, senior manager of participant advice services at CAPTRUST. Collins explains that plan sponsors should consider educational programs that help their workers understand what financial wellness looks like at different ages and career stages.

Read More