Another instalment in a series of articles detailing how to design a secure, income-producing portfolio.
Several years ago, a small experiment led to a terrifying discovery. I was helping a family investment office do some long-range planning and I was not shy about sharing with them the fundamental ideas from my earlier articles: namely, that liquidity bias is leading many investors awry and that there is important investment opportunity beyond the standard mix of stocks and bonds.
To drive these points home, I recommended that my client conduct an experiment. I suggested she visit three of the largest global private banks and ask each of them for the same thing: a proposal for how they would manage $5m of her money. I recommended that she request detailed information not only about the portfolio allocation they would suggest, but also the management philosophy and applicable fees. My client must have recognised the potential for this experiment to yield some interesting results, because she agreed to give it a shot – neither of us anticipated how stunning the results would be.
“The proposal was beautifully done, on fine stock paper, and it spelled out just how the bank would allocate her money”
When the first bank had readied its proposal, they asked her to come back to the office, where she was greeted by her prospective advisor. He walked her outside to a leafy courtyard and proffered a leather-bound folder. The proposal was beautifully done, on fine stock paper, and it spelled out just how the bank would allocate her money: what percentage to US large caps, what share to small caps, how much to emerging markets, how much to tech, how much in fixed income. Toward the back there was also a special section called ‘Proprietary Investments’.
“You won’t find this anywhere else,” the advisor told her, dropping his voice. He went on to say that his institution had access to certain unique assets. “We’re talking about multi-factor exchange-traded funds,” he said, conspiratorially, as if the two of them were in on a secret. Multi-factor ETFs are funds that include an array of securities that are supposed to demonstrate diverse characteristics.
