Cerity Companions, an impartial RIA agency with a 15-year historical past, has been on a progress streak.
Simply this week, the agency introduced plans to accumulate Fishman Block + Diamond, an accounting, tax and enterprise advisory agency in Encino, Calif. Earlier this 12 months, it struck a deal to purchase Agility, the OCIO division of Perella Weinberg Companions Capital Administration. In more moderen months, it has additionally picked up Janiczek Wealth Administration, a Denver-based agency that focuses on serving high-net-worth and ultra-high-net-worth purchasers, and SBC Wealth Administration, an Indianapolis-based agency catering to prosperous people and companies. Altogether, Cerity now has roughly $103 billion in AUM and serves purchasers starting from particular person buyers to non-profits and firms. Â
WealthManagement.com spoke with Tom Cohn, deputy chief funding officer and accomplice with the agency, to debate how Cerity builds its mannequin portfolios for several types of purchasers, the place it sees probably the most alternative for outsized returns in coming years and the way it picks the asset managers it really works with.
This Q&A has been edited for size, model and readability.
WealthManagement.com: What’s in Cerity Companions’ mannequin portfolio? Are you able to give us a breakdown by asset class?
Tom Cohn: At Cerity Companions, we have now a lot of mannequin portfolios, primarily based on the purchasers’ urge for food for danger and measurement. Usually, for all of the mannequin portfolios we construct, there are basically 5 danger portfolios, starting from a conservative portfolio to a balanced portfolio to an aggressive portfolio. We try to steadiness the return wants of our purchasers vs. their capability and willingness to take dangers. An aggressive portfolio can be extra closely weighted to equities and fewer so to mounted earnings. Conversely, a conservative portfolio can be extra closely weighted towards mounted earnings and fewer so to equities.
Inside all these portfolios, we may have fairly constant publicity within the fairness portfolios to worldwide and rising markets equities, in order that the weights inside them can be fixed though the fairness allocation will fluctuate and go up as you’re taking extra danger. They may also have publicity to REITs, and we embody that now as a part of our total fairness publicity. On the mounted earnings facet, we’ll have allocations to core mounted earnings, which supplies a ballast in opposition to equities for taxable purchasers. In most cases, that can be municipal or tax-exempt bonds. And we’ll complement that with publicity to riskier mounted earnings. That might be high-yield bonds, publicly-traded leveraged loans or rising market debt. Right this moment, that’s largely within the type of high-yield bonds.
WM: Who’re your typical purchasers?
TC: Our typical consumer—and so they can span a spread—is mostly an energetic wealth creator. They’re both an govt at an organization, a small enterprise proprietor or a non-public fairness principal. They are usually high-net-worth or ultra-high-net-worth, have complicated monetary conditions that require not solely funding administration however monetary planning, property planning and tax prep. And our differentiator is the power to supply complete monetary planning throughout all of these domains with one workforce.
WM: Do purchasers gravitate towards one in every of these portfolios greater than others, or is it evenly dispersed throughout the 5?
TC: I wouldn’t say it’s evenly dispersed. It would actually rely on a lot of elements as we construct a monetary plan. In the event you have a look at the proportion, most of our purchasers fall someplace between a balanced and a progress portfolio. To present you some numbers on that, these will usually have someplace between 50% to 65% in fairness publicity. We discover these are the 2 hottest portfolios total.
WM: What differentiates your agency’s funding philosophy and your portfolios out of your rivals?
TC: I consider, more and more, the differentiation is inside personal markets. We take into consideration the power to doubtlessly generate extra returns above what you will get from the general public markets; we consider it’s within the personal markets. Our allocations to non-public markets replicate that. We’ve been rising these over time. It’s additionally the place we’ve constructed out a really sturdy workforce. We have now now 35 colleagues in our funding workplace. Roughly half of these colleagues are dedicated to actions inside alternate options. These colleagues are accountable for constructing the mannequin portfolios, growing the capital markets outlooks, working with our advisors to give you the strategic allocations, but in addition doing the analysis. And that analysis is increasingly targeted on personal markets.
WM: We’re clearly in a altering financial local weather proper now. We’ve seen some rate of interest cuts in latest months, we’re going to have a brand new administration coming into the White Home. Have you ever made any large funding allocation adjustments prior to now six months to any of these portfolios to reply to what’s taking place?
TC: We’ve been fairly constant throughout the final 12 months and a half to have publicity to equities and away from mounted earnings on a relative foundation. The way in which we construct our portfolios is we have now a strategic asset allocation to all these portfolios. On the whole phrases, we’ll make what we name tactical tilts across the strategic asset allocation. We by no means wish to considerably deviate away from these strategic weights. We wish to have these fairly constant, in order that they match our purchasers’ danger profiles and the monetary plan.
However we’ll make slight adjustments, together with overweighting equities over the previous 15 months. We’ve moved from having pure market publicity to shifting into small-cap and equal-weight publicity. We’ve additionally taken on publicity inside high-yield bonds.
WM: When it comes to the strategic allocations, how usually do you modify these?
TC: Our strategic adjustments is an annual assessment course of. We simply began this course of the place we give you our personal capital markets assumptions, we assessment each asset class on an annual foundation after which our funding committee critiques these danger/return assumptions. These will in the end drive adjustments to strategic asset allocations for our portfolios.
WM: Throughout the present annual assessment course of, what are the most important issues you might be discussing?
TC: Our predominant issues are across the persistence of inflation. We attempt to consider additional methods during which we will shield portfolios total from all market environments. A part of that traditionally has been by having a low weight to mounted earnings. We consider that fairness markets over the long term shield you in opposition to sustained inflation due to the money movement nature of equities. Whereas mounted earnings, being usually mounted to the coupon charge over the long run by way of your return profile, is not going to do as effectively in an inflationary surroundings.
The second means is inside the actual asset bucket or actual property. Personal actual property, we consider, could be a excellent safety automobile in opposition to an inflationary surroundings.
WM: Do you have got some publicity to alternate options and personal markets inside every of the 5 mannequin portfolios you talked about? Is it tilted extra towards purchasers with a better urge for food for danger?
TC: We construct portfolios each with and with out personal markets, relying on the consumer measurement and the urge for food to take illiquidity danger. More and more, increasingly purchasers due to the elevated entry factors into personal markets by sure automobiles, may have personal market allocations.
We take into consideration personal markets in 4 methods. We have now conventional personal fairness methods, which can embody buyout and progress fairness. We have now enterprise capital. We have now actual belongings or personal actual property. And, lastly, personal credit score, which has been a giant allocation for us. That may embody direct lending, asset-based loans, in addition to distressed debt. The first means during which we have now invested over the past a number of years has been inside direct lending, which can also be, for my part, a very good safety in opposition to inflation and rising rates of interest as a result of floating nature of these securities.
WM: Are you able to give an concept of how a lot of a consumer’s portfolio might be devoted to non-public markets?
TC: It relies on consumer measurement, however on the whole it would vary anyplace from 10% to 30% throughout these asset courses for bigger purchasers. For purchasers who don’t have as a lot expertise inside personal markets or whose portfolio isn’t capable of entry each asset class out there, it is going to be nearer to that 10% to 12% vary. For the bigger purchasers, we’ll unfold it relying on the chance profile anyplace from 25% to 30%.
WM: Do you have got any allocations to Bitcoin ETFs or the crypto market on the whole?
TC: We have now checked out each the general public market publicity to cryptocurrency and personal markets, and truly made a few investments on the enterprise capital entrance which have publicity there. We shouldn’t have any mannequin allocation to cryptocurrency. It’s been an ongoing dialogue with our funding committee. We in the end discovered that the volatility of that asset class is troublesome to place inside a mannequin portfolio.
WM: Which asset managers do you’re employed with, significantly inside personal markets? How do you select them?
TC: Talking in broad phrases, we work with a lot of managers. The way in which we take into consideration that, relying on the asset class, we attempt to consider the place the aggressive benefit is. In some markets, there’s an rising profit to scale, and I might put that with direct lending, the place constructing out a very devoted workforce of underwriters and people who’ve deep expertise inside the capital markets is vastly useful. And scale additionally helps with the sourcing of actually high-quality investments inside these markets as a result of you’re a constant supplier of capital.
In different markets, like enterprise capital, the return distribution is far totally different than in direct lending. We may match with extra area of interest or more durable to entry managers inside enterprise capital or different markets which can be related in nature. It actually relies upon. All that’s pushed by our analysis workforce, these roughly 17 market colleagues I discussed whose major duty is sourcing and vetting personal market alternatives.
WM: What varieties of constructions do you utilize on the subject of funding automobiles?
TC: Throughout the public markets, we’ll usually use a mix of ETFs, mutual funds and SMAs. For bigger purchasers, that tends to be weighted extra towards SMAs. We have now the power to barter charges and constructions primarily based on our measurement and scale, which I feel is a differentiator.
Throughout the personal markets, we’ll spend money on typical drawdown constructions, so restricted partnerships in addition to evergreen constructions, comparable to non-traded REITs and non-traded BDCs. That can be decided by our purchasers’ capability to entry these. The entry level for personal markets will look totally different for an accredited investor than a professional purchaser and we wish to be certain that we have now out there choices for all purchasers.
WM: Do you maintain any money?
TC: We’ll use money as a strategic and tactical allocation. We discovered over the long term that we usually wish to reduce the amount of money we maintain strategically as a result of over the long term, proudly owning asset courses that take part within the progress of the financial system each right here within the U.S. and globally is helpful. Subsequently, we wish publicity, the place applicable and primarily based on the chance to the consumer. We acknowledge although that money is a vital element of our purchasers’ monetary lives. So we’ll mannequin that into our monetary plan by way of how a lot money we maintain and the place we maintain it, however we attempt to reduce the quantity the place doable.
WM: Do you utilize any direct indexing?
TC: We do. We discovered that to be useful for transitioning consumer portfolios, getting broad publicity into the markets, primarily the fairness market, and in addition as a instrument to offset positive factors elsewhere within the portfolio.
WM: The place do you see probably the most and the least danger out there proper now?
TC: The place we like danger in the present day is especially on the personal market facet. We have now broad-based publicity within the normal equities market. Whereas on the margin, we alter a few of our positioning, we proceed to be ok with the U.S. financial system and the fairness market.
We proceed to seek out alternatives in personal credit score. Our viewpoint is, we’re within the early innings of the enlargement of personal credit score. We consider it’s important to the functioning of the U.S. financial system, and we proceed to allocate there.
We’ve additionally allotted into extra rising areas of the personal markets; that would come with GP stakes and GP secondaries. These are two areas that we expect play to a big theme, which is personal markets will more and more play an necessary position in personal wealth portfolios, very similar to they’ve finished on the pension and endowment facet. These are two areas of the market the place you will get diversified broad-based publicity within the case of GP stakes, and within the case of GP secondaries, the way in which these are structured permits firms to remain personal for longer. We predict that can be an accelerating development. These are two areas that we proceed to love.
WM: Do you incorporate ESG preferences into your mannequin portfolios in any means or cater to purchasers who’ve these preferences?
TC: We do. Our portfolios aren’t particularly constructed with the ESG overlays, however we have now the power. We have now a lot of methods that enable us to tailor the portfolio to the preferences of our purchasers. I do know there’s a lot of SMA methods the place we will create and take away or obese sure varieties of investments. After which we have now devoted methods on the fairness and fixed-income facet to play the bigger development of ESG.
