Behind the Scenes: Investment Management

August 14, 2019. By Mark Barry:

At Centerpoint Advisors, investment management is a core component of our business, and is the primary focus for myself and my colleague JD Wolfsberg. While it encompasses a wide variety of roles and responsibilities, there are four main functions that I have outlined in further detail below to help you get to understand our roles at Centerpoint Advisors a bit better. Broadly, these four functions are:

• Investment Research
• Portfolio Construction
• Client Portfolio Management
• Client / Firm Communication

Investment Research

As you might expect, selecting the investments utilized in our client portfolios is a major function for the investment management department. We research and evaluate a variety of equity, fixed income, and managed investments using several industry-leading analysis and screening tools, and then make buy/sell/hold recommendations to the investment committee.

For example, we recently conducted a search for a core bond fund for our taxable client portfolios. This involved screening the entire universe of US fixed income funds to create a subset of funds that met our desired criteria (ex. duration exposure, credit quality, etc) then creating a shortlist after an initial review of the funds. We then followed this with more in-depth quantitative and qualitative analysis, with particular focus on the strategy and process employed by the funds portfolio managers and research analysts which we discern in part through discussions with them. After narrowing our list to the three finalists, we modeled these funds into our existing portfolios to see how they interact with the existing investments by examining asset exposure and correlation statistics, among others.

Once an investment is approved for use in client portfolios, we conduct ongoing analysis to ensure the investment’s performance, risk characteristics, and strategy execution continue to meet our criteria and expectations. For managed funds this also involves quarterly meetings and/or calls with the portfolio managers.

Portfolio Construction

Another major function of the investment management department is the construction of portfolio models that serve as the starting point for client portfolios before being tailored to the specific client. We employ extensive quantitative modeling and analysis in the research, design, and testing of these portfolio models in an effort to create optimal allocations within our equity, fixed income, and multi-asset portfolios. As with the underlying investments, these portfolio models undergo continuous monitoring, and a variety of performance, risk monitoring, and allocation reports are run on a daily/weekly/monthly basis.

Client Portfolio Management

While investment selection and portfolio construction are the building blocks for the overall investment strategy, we then need to ensure that this investment strategy is customized for each client portfolio based on their specific goals (ex. liquidity needs) and risk tolerance, and then implemented appropriately across all of their accounts. To this end, we supervise client portfolio management activities across firm’s multi-asset, fixed income, and equity portfolios, which includes:

• Investing new accounts and/or cash balances on a predetermined schedule over a number of months (dollar-cost-averaging into the market) or opportunistically on market weakness
• Monitoring client asset allocations and rebalancing periodically or as needed
• Raising funds for client distributions in the most prudent and tax-efficient manner possible
• Analyzing total aggregate client portfolios (including 401k plans and other accounts outside of Centerpoint) and recommending allocation shifts based on our evaluation
• Implementing the portfolio construction recommendations of the Investment Committee (for example, a shift in our fixed income models towards a more conservative posture)

One tool that we utilize extensively in managing client portfolios is our rebalancing and trading technology platform, which assists us in portfolio rebalancing, risk monitoring, and trade order management. We can efficiently identify which accounts need rebalancing and then quickly generate the trade orders specified to get the client account back to its target allocation. This platform was critical to our tax-loss harvesting rebalancing in December 2018, where we were able to quickly execute tax-loss sales across a large number of accounts and then immediately re-enter the market in order to maintain the target equity exposure.

And while many of the activities included in this function are relatively routine, I would emphasize that we are always trying to improve our trading and portfolio management processes to create better outcomes for clients. For example, we identified research that indicated financial asset returns were marginally higher in the first few days of the month, ostensibly from automated buy orders for 401k plans and the like. After researching and testing this ourselves, we came to the same conclusion and then shifted our monthly excess cash schedule to the last day of each month. While any improvement in client portfolio returns will be very marginal based on the research, these incremental improvements are ones we continuously try to make.

Client / Firm Communication

The last major function of the investment management department involves communication with a) existing and prospective clients and b) other team members within the firm. Our goal is to ensure our clients understand our investment management philosophy, how their own portfolio is allocated, and the specific role of each underlying investment, and do this by participating in client meetings/calls and authoring periodic market updates and commentaries. And as to communication within the firm, because we are the firm’s “front line” so to speak in monitoring the global financial markets and economic developments, we will share updates to both the principals and other team members so everyone is aware of market events and the potential implications for our portfolios.

In Conclusion

Hopefully this piece was helpful in getting to know our roles here at Centerpoint Advisors and understand some of what the Investment Management department is responsible for at the firm. We are always available to speak with clients regarding market concerns, investment research, and strategy clarification, so please don’t hesitate to reach out!