Nine top investment ideas for wealthy investors

One US adviser outlines his strategy to minimise risk.

Summary: One US wealth manager aims to minimise fees and reduce taxes, saying even very wealthy clients should hold cheap exchange-traded funds. Harold Evensky’s model portfolio also includes liquid alternatives and bond funds to get exposure to uncorrelated assets.

Key take-out: The current portfolio would have performed roughly in line with benchmarks over the last year before fees. Evensky says his goal isn’t to maximise returns but to minimise risk, meaning he’s looking forward rather than backward.

Key beneficiaries: General investors. Category: Investment portfolio construction.

Need ideas for the choppy waters ahead? Harold Evensky, chairman of wealth-management shop Evensky & Katz in Coral Gables, Florida, says the answer is minimising fees and reducing costly taxes. Evensky manages $US1.6 billion in assets, with the ­median client holding $US2.5 million, and insists that even very wealthy clients should load up on cheap exchange-traded funds. “We would love to market-time, but we conclude nobody has done that well,” says the 30-year veteran of the financial planning business. “So we figured if we could save half a percentage point on taxes and expenses, we could improve performance, net of fees, taxes, and inflation, by maybe 15 per cent to 20 per cent” a year.

Evensky, a co-founder of the Alpha Group, an industry collective that gathers periodically to debate investment ideas, gave Penta a peek at his firm’s model port­folio, a simplified starting point for well-to-do clients. Evensky strikes a balance between passive and active strategies; two-thirds of assets are invested in benchmark-hugging ETFs and low-cost mutual funds. Evensky then rounds out the portfolio by buying liquid alternatives and go-anywhere bond funds to get exposure to uncorrelated assets and a hedge against the expected interest-rate rise.

Clients pay about 0.45 per cent in underlying investment management fees, but Evensky & Katz then charges an additional 0.25 per cent to 1.25 per cent fee to manage the assets. A ­client with $US5 million will in effect pay a 1.33 per cent fee, all in. That’s still not cheap, but investors won’t mind paying if they are getting reasonable risk-adjusted returns.

Before we get to that, let’s look at what clients own. Eight ETFs and low-cost mutual funds make up the 21 per cent allocation to traditional fixed income. Among them are the iShares 1-3 Year Credit Bond fund (ticker: CSJ) and the Vanguard Limited-Term Tax-Exempt fund (VMLUX) for munis. Thirteen funds make up the portfolio’s US and international equity exposure, which totals 52 per cent. That includes the Schwab US Broad Market fund (SCHB), and ­DFA International Core Equity Portfolio (DFIEX).

Liquid alternatives sit at the other end of the portfolio. While these funds cost more, they are significantly cheaper than paying the hedge fund industry’s usual 2 per cent management fee and 20 per cent of profits. As the name suggests, these funds also offer daily cash-out opportunities, so investors aren’t locked in, and they make up 9 per cent of Evensky’s overall portfolio. Stone ­Ridge Reinsurance Risk Premium (SREIX) invests in “catastrophe bonds,” reinsurance for natural disasters like hurricanes and earthquakes. The fund is up 3.5 per cent, net of fees, in the past year. Meanwhile, Natixis ASG Global Alternatives­ ­(GAFYX) uses futures to replicate the performance of the hedge fund industry, but at a fee of 1.29 per cent. It’s up 7.8 per cent this year, besting even the Standard & Poor’s 500.

These are “diversifying alts,” Evensky claims, because their returns aren’t so closely correlated to stock and bond performance. They are also unleveraged, reducing potential volatility. Such investments usually pay off in bear markets when everything else is getting hammered, and Evensky expects from them, long term, 2 per cent to 4 per cent returns net of fees and ­inflation.

He also pays up for go-anywhere bond funds, which in essence allow portfolio managers to buy fixed-income instruments in any shape or form they like—a necessity of the times, Evensky says. “We wouldn’t normally do this, because we like cheap plain-vanilla strategies, but they should be able to help weather the uncertainty of future interest rates,” he says.

Evensky owns three unconstrained funds, because “we don’t implicitly trust any of them,” and they make up 13.5 per cent of the portfolio: JPMorgan Strategic Income Opportunity Select (JSOSX), BlackRock Strategic Income Opportunity (BSIIX), and Goldman Sachs Strategic Income (GSZIX). These investments hedge his other positions, but two of the three funds have underperformed the Barclays US Aggregate Bond index, up 2.7 per cent over the past 12 months. In contrast, the ­JPMorgan fund is up 0.8 per cent, BlackRock’s is up 2.8 per cent, while Goldman’s lost 1.2 per cent. The rest of the portfolio is in cash and real assets such as commodities and real estate.

The current Evensky portfolio overall would have performed roughly in line with benchmarks over the last year, but that’s before his fees. “Our goal isn’t to maximise returns; it’s to minimise risk,” Evensky claims. In other words, he’s betting his port­folio should do better than average when markets tank, which means he’s trying to fight tomorrow’s battle, rather than looking backward.


This piece has been reproduced with permission from Barron’s.