In this latest column, Eric Branson, director of investments, at St. Petersburg, Fla.-based Cyndeo Wealth Partners, gives WealthManagement.com a peek inside the $1.85 billion RIA’s core model portfolio.
WealthManagement.com: What’s in your model portfolio?
Eric Branson: Our core model is currently three different styles of equity management, and they're all individual equities. It's your typical style box management. We have the value side covered; we have the core and we have the growth. They're managed in-house, not with SMAs.
It's equally weighted with a third in each of those strategies, even though performance-wise we, in the short term, should focus on growth. But we just like to pace ourselves to run a marathon and not chase returns.
Then back in 2020, we added a commodity sleeve, which we have now called the real-asset sleeve. And it is to give us that exposure to the non-traditional individual equities and fixed income. But if we want a gold and silver or a basket commodity investment or uranium, that provided us the opportunity to insert that.
Right now in the balanced model, it is 18% growth, 18% value, 19% core equities. And then we’ve got 7% in that real asset sleeve; it's got about 3% in cash and the rest is in fixed income.
In fixed income, we have your typical Aggregate Bond Index as a barometer for core fixed income that we use.
WM: Have you made any big investment allocation changes in the last six months to a year? If so, what changes?
EB: We had historically been for the last year and a half to two years, shorter duration than the aggregate bond index, and now we're agg neutral with about a 6% duration. We had gone down to about 4% and change duration. Looking down the road, I would see us extending duration, but probably the average duration on that core fixed income will maybe go to 8%. That's as high as I think we'll make it. And then we have a relative strength, fixed income that kind of rotates in different sectors of fixed income depending on where the markets are going. It's had a lot of floating rate recently because of what's going on.
Back in June, we pivoted with our equities allocation to go equally weighted. Instead of having an ETF relative strength portfolio, we removed that and added in a pure portfolio of dividend stocks, which is our core portfolio, and then a growth portfolio. So we removed about 14 ETFs, and then replaced it with those two, which have on average between 30 and 35 equities total in each of those strategies.
WM: Besides direct equities, what other vehicles are you using for the other allocations?
EB: For fixed income, we are currently using just ETFs, and very rarely do we insert a mutual fund because we have a tax-free version and a taxable version. For some high yield, you obviously want either an ETF, and especially in Muni, we've been adding some high yield Muni in there, but that's the only place where we use ETFs or Munis. In the real asset category, we're using ETFs.
WM: How often do you make portfolio changes?
EB: We have an investment committee that meets every month. That’s not to say we change things monthly. It just depends on the environment. We don't make changes to the asset allocation every quarter or every six months. It's just market dependent. If we made two changes in a year, that'd be big. But we do tweaking of the models inside each strategy, but we don't do big asset allocation changes very often.
WM: What are some of the asset managers that you use, if any?
EB: We've got anything from iShares to First Trust for the principal and the satellite fixed income allocations, and then we've got your Vanguard, Lord Abbett, Transamerica, iShares on the core fixed income too.
WM: What differentiates your portfolio?
EB: One thing is, we're not indexers for the equity allocation. In the world of equity management, having around 30 positions in a style is determined to be concentrated, but that's how we run all of our equity styles. The maximum we have is like 35, but our value strategy is 20. I would say our monitoring process for changes separates us. Every position that we insert into a model is mapped at the execution of the trade to the benchmark. So we can track all of our positions on that basis and look for any deterioration that would cause us to further investigate and look for changes.
WM: What’s your top contrarian pick at the moment?
EB: One of the things that we identified a couple years ago was the need—and being independent allowed us the creativity—to create our own private credit fund of funds. And we've been putting money into it, and we're almost completed with our final raise of it. And it's worked out really well. It's got all kinds of investments. There are five different vehicles anywhere from maritime assets to equipment leases to private company lending that needs to happen for privately held businesses and they need complex capital solutions.
We designed it a couple of years ago, not anticipating the spike in interest rate that we were going to get, but we had the charter and building it to make sure it wouldn't apologize for its net asset value fluctuations and it would give off a nice reliable income stream. And building the chassis, it had a floating rate feature to it. At the time we thought a 6% distribution yield would be really cool and be really attractive to people. And that's almost money markets now. Thankfully, it looks like it's going to be in the 8%-9% range on a consistent basis. And we're very happy with that. And it was not a long deployment of capital. It turned out to be perfect for this environment, and what we're seeing down the road, it will continue to be the right vehicle for certain clients.
WM: What type of clients are you putting into those fund of funds?
EB: The entity itself is a QP, a qualified purchaser, but when the people invest in it, they can be accredited investors. The minimum right now, we've lowered it, is $100,000, and it's obviously taxable assets. The restriction of capital from the banks plays right into private credit, and they're going to be able to get some favorable terms for their investors. And I think the person that appreciates that but can stomach the illiquidity for seven years or whatever, but getting an income stream off of it at the time that you can use, that's the person that's best suited for.
WM: Is this strategy baked into the model portfolio?
EB: No, this is outside the model. It is very difficult at scale to do true private credit investments in a model that you're deploying over a thousand different accounts.
WM: How are you addressing the inflationary environment in the portfolio?
EB: The real asset sleeve—that’s one. Also, the value model that we had did very well, relatively speaking to the markets, and that's what it's there for. When inflation really starts screaming, that's what it did. The question then is, what does inflation look like going forward? And that's why we like our a third/a third/a third allocation between value, core and growth. Inflation's there, but there are more pockets of it versus widespread like it was over the last 18 months.
WM: You said the model holds about 3% in cash. Why do you hold that cash?
EB: I've been doing this since the mid-‘90s. And over the last 10 to 15 years, cash was not a viable asset class to deploy money to. But when you have cash yielding 5%, it is a viable asset class that needs to give strong consideration relative to other investments. But the journey to get here was obviously a rough one.
WM: Are you holding it in particular money market funds?
EB: Our go-to is, right now, is a pure government money market because you're not getting enough premium from some of the more higher yielding funds.
WM: Does the firm do any direct indexing?
EB: Yes, but not a lot of it. Currently, we use Canvas and 55ip.
WM: How are you using these tools?
EB: Time will tell. I mean, they all sound good in theory. To get further deployment, I need to see the alpha generation that they say they can through tax loss harvesting. It’s a very good concept and the mapping of transactions and diversification. I just want to watch how it plays out.
WM: Are you incorporating ESG into the portfolio at all?
EB: We are not ESG investors. To me and to us, ESG has at its foundation some emotion to it. There's some emotional motivation to deciding to go that route. Having done this a long time, lost a lot of hair through the process, you understand that emotion has no role in investing. If it is appropriate for the client and to meet their objectives, to help them have impact on those around them and for their life, then we will make investments there.
WM: Is there anything else you’d like to add about your investment process?
EB: One thing that I think is very important right now is chasing the benchmark. The impact the magnificent seven (Amazon, Apple, Alphabet, Nvidia, Meta, Microsoft and Tesla) has on the S&P 500 and market-cap weighted benchmarks is significant, but it is not indicative of the broader market performance unless you're willing to put 35% of your equity exposure in the seven stocks, which I don't think anybody would do prudently because that's gambling money and I just don't think you should do it.
The focus needs to be on what the equal-weighted benchmarks are doing because they are more reflective of the actual market participants’ experience with their portfolios. There is a massive difference between equal weight and the S&P, and I think that that's the one thing that we see a lot is, not understanding how much is weighted in those seven stocks and how to watch out for that. You do need exposure there in those seven stocks, but I don't think you need that 35% of your equity exposure in those seven stocks. And if that's the case, then the equal weight benchmark is more appropriate.