Here is how three top registered investment advisers achieved triple-digit growth in assets under management in the past decade:
* Portfolios diversified widely by investment class and geography, including real estate, commodities and leveraged funds.
* A large portion of investments are in "non-correlating" assets, meaning their returns differ from each other and are not driven by the same economic factors
* Each investment is managed tactically, based on shifts in macroeconomic conditions.
The investment advisors, speaking at a recent web seminar titled "Top RIAs' Advice on Gaining a Competitive Edge," are convinced that this diversified, comprehensive approach is more salient than ever, given wobbly economies and expected weak market returns.
As Steve Blumenthal, president and CEO of Capital Management Group, put it, "I believe 60/40, where 60% of a portfolio is in equities and 40% is in bonds, is at a disadvantage for the long-term secular bear cycle we are in. Secular bears tend to last a long time. The shortest secular bear in the last 113 years lasted 17 years."
Thus, Blumenthal is convinced a better balance today is 30% equity, 30% fixed income and 40% alternatives, such as commodities and precious metals.
For those clients who are more bullish on a general economic recovery, around the world, Blumenthal recommends a 60-20-20 split, with 60% in equities, 20% in fixed income and 20% in alternatives. For those more bearish, he asks clients to consider a 20-20-60 allocation, with 20% in equities, 20% in fixed income and 60% in alternatives.
Since its founding in 1992, CMG has achieved overall growth in assets under management of 186%. Today, the advisor has $500 million under management and a target of $5 billion by 2016.
How does Blumenthal expect to achieve this imposing target?
Through continued use of CMG's systematic, tactical strategies, run in complex separately managed accounts, he said.
CMG's tactical approach grew out of the early days of the company, when it first specialized in high-yield investing, again specifically looking for non-correlation between investments.
In 2004, Blumenthal opened a hedge fund-of-funds that expanded into other investment tactics, such as convertible securities arbitrage, merger arbitrage and long/short equity investments. In 2007, Blumenthal decided to run these hedging strategies in separately managed accounts since they do not have the illiquidity, style drift and high fees of hedge funds.
Operationally, CMG relies on Trust Company of America to run all of its strategies in a single account, with separate tracking "sleeve" sub-accounts for each underlying asset manager.
Gordy Wegwart, president of Verity Asset Management, believes the key to success is innovating in very specific markets, combined with a technology platform that can grow as the fund grows.
In Verity's case, the firm specializes in running separately managed accounts that include alternatives and investment advice for 403(b)s at colleges, universities and other institutions of higher education.
Since Verity's founding in 1996, the company has experienced 180% overall growth. Today, Verity manages $300 million in assets, with a target of $1 billion by 2016.
What was the inspiration for a specialty in managing assets for educational institutions?
"When we started, we stumbled into the opportunity to meet with some college professors whose investments were in 403(b)s," Wegwart explained. "We saw that their products had very high expense ratios with advice that was very poor, or, conversely, low-expense products with no advice at all. We began to work in that market with detailed asset allocation strategies in the mid 1990s. Later in that decade, even as valuations began to climb, we began to shift to a more tactical and very broadly diversified approach to allocation."
The key to this approach for 403(b), 401(k) or other retirement accounts is "better predictability over results," Wegwart said.
Certainly, launching such an approach in the middle of a bull market made Verity a contrarian. Today, of course, with 77 million Baby Boomers beginning to enter retirement, there is growing appreciation and respect for predictability and retirement income-especially after the market crashes of 2001 and 2008.
"There isn't a lot of room for failure when you are dealing with the retirement assets of individuals, especially for a lot of participants in the 403(b) market," Wegwart said. "So, we wanted to find a way to maximize the probability of very sound, reliable results and set to work to build a model that could provide that. There is no magic bullet, but we found that employing a broad, tactical asset allocation strategy-meaning diversifying more broadly"-boosts returns and lowers risk, Wegwart said.
Verity's separately managed accounts then began investing in commodities, metals, and 30-year Treasury-things that for the middle-income market in the 1990s "looked very exotic" and even today are still considered the fringe.
Like Blumenthal, Wegwart believes that "monitoring correlations, the risk/reward of different asset classes and maintaining better diversification real time" is key.
For example. Verity's Moderate Composite portfolio holds 22.5% in equities, 20.0% in merger arbitrage, 19.0% in bonds, 11.5% in cash, 10.5% in commodities, 10.0% in bonds-short, 3.5% in equities-short and 3.0% in real estate investment trusts.
Wegwart also pointed out that the ability to offer SMAs with account balances as low as $1,000 within retirement plans would not be possible without Trust Company of America's scalable, turnkey platform.
This platform has enabled Verity "to be one of the pioneers of discretionary management within retirement plans," Wegwart said.
Flexible Plan Investments has experienced overall growth of 125% since January 2010, and currently has $1.05 billion in AUM, with a goal to top $3 billion by 2014. This RIA offers more than 100 quantitative strategies that span a wide range of tactical approaches, said EVP Renee Toth.
Flexible Plan Investments' specialty is offering these portfolios to other independent RIAs and financial planners that want to outsource their investment management.
"This works because 100% of our systems are quantitatively driven," Toth said. "The platform allows us the flexibility to blend or customize all of these portfolios to meet the needs of any given market, client or rep. And we found a way to accept accounts as small as $5,000. Using Trust Company of America's platform," she said, "we found a way to make it scalable."
