Building Portfolios When Value is Hard to Find | American Funds

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Vanessa Wieliczko Director of Investments and Portfolio Management at HoyleCohen
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Building Portfolios When Value is Hard to Find

Building portfolios to generate income in a world of low interest rates is a challenge many advisors face. Vanessa Wieliczko, director of investments and portfolio management at HoyleCohen, LLC, has found unique ways to adapt to this low-rate environment. She also talks about the rising demands on advisors and what HoyleCohen looks for in the firms it partners with.


Video

 

Transcript
 

Vanessa Wieliczko:

 

On the challenges low interest rates present to advisors.

I think the problem is that we’ve had a period of sustained low interest rates, and so investors are now faced with an income conundrum where they have to look outside of the traditional fixed income world. Some managers have tried to make an effort to potentially risk up ... go down in the, in credit quality. Other managers have actually made an effort to potentially trim their fixed income allocations, go into dividend-paying equities. 

 

On using alternative asset classes for income.

Both of those, you know, solve the income problem, but they don’t necessarily really deliver the fixed income qualities of diversification and protection in down markets. So what we've decided to do is really look outside of the traditional core and go into alternative assets and private funds that explore kind of the specialty finance, private lending world, and we’ve found that that’s an interesting and unique way to deliver the portfolio diversification benefits and income that we're looking for. 

 

On the investment due diligence process.

So what we find is that certainly the bar for diligence and these types of funds is more significant and it’s really a unique skill set, so you can’t just have any individual focusing on all parts of the portfolio, but certainly you're gonna have certain people who can focus on the traditional, others that can focus more on the private world, but really, we’re looking to diversify the exposure. 

 

On the investment due diligence process.

We start with a pretty detailed process where we seek to identify opportunities. We’ll conduct a pretty thorough initial due diligence that could be anywhere from four to six months, sometimes 250 to 500 hours of diligence across the firm, and then we’ll bring it ... we’ll bring a proposal to the investment committee that will eventually review and vote to approve it, and then finally, we’ll wrap up, you know, by continuing our diligence efforts on an ongoing basis and making sure that the communication effort with clients continues on an ongoing basis as well. 

 

On how mutual funds and ETFs fit into a portfolio.

Our preference is to use active mutual fund managers. We believe that they can add value over the long term, but if we think that we’ve identified a pocket of opportunity, something that has a short-term window, and we don’t necessarily feel like we can do the due diligence on a fund manager at that time, we'll tactically allocate to an ETF, spend the time to identify a manager that we believe has a good investment process and could outperform over the long run, and then we’ll actually trade out of that ETF and into the active mutual fund for the long run. 

 

On evaluating mutual fund managers.

In the diligence effort, we really focus a lot of time on the structural, strategic and administrative view. Structural being how is the fund organized? What are the detailed parameters of the fund? Strategic being what is the manager’s style, how did they execute it, and do we believe that it’s something that is repeatable? And then finally on the administrative review function, we're really looking to find out how the actual firm is organized, how it's structured and whether there are any risks or potential conflicts of interest.

 

On the challenge of finding growth.

Once an RIA reaches a certain size, it becomes increasingly difficult to grow through organic growth alone. To put it into perspective, in order to reach a 5 to 7% net annual growth rate, without the impact of market you might even need to hit a 10% gross target.

 

On the challenge of finding growth.

So, depending on the age and life stage of your clientele, you may need to offset 1% to 2% in net distributions, and you may have 2% to 4% in lost assets due to death and terminated clients. So for a billion-dollar RIA, that means that your advisors are going to need to bring in $100 million in new assets every year, which isn’t an easy task. So knowing that it’s really hard to move the needle just through organic growth alone, many RIAs are considering growth by acquisition. 

 

On the increased demands facing advisors.

Overall, the business is getting tougher to manage. Competition is getting more robust. We have a large population of advisors that are aging, many of whom just want to be liberated from the day-to-day management of the firm so they can get back to what attracted them to the business in the first place, which is really advising and serving clients. 

 

On the types of firms HoyleCohen looks to partner with.

We’re looking for advisors and firms that are like-minded philosophically in what we’re trying to accomplish and why, not necessarily the how. Very importantly, you need to identify firms with a cultural fit, firms that are willing to change and evolve, and as long as you can agree on that what and why, we can work together to reach an optimized solution for the integration and expansion of the investment and financial planning functions. 

 

I’m Vanessa Wieliczko. I’m the director of investments at HoyleCohen in San Diego, California.


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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.