After we consider a typical wealth administration shopper, there’s typically an assumption that the shopper, whereas savvy, nonetheless is aware of much less about funding methods than the monetary advisor serving them. Nonetheless, within the case of Citi International Wealth at Work, a division of Citi Wealth established in 2021, that’s typically not the case.
Among the many individuals Citi International Wealth at Work serves are legal professionals, accountants, non-public fairness professionals, enterprise capital executives and asset managers. These purchasers are fairly savvy about funding administration, however might not have the time or inclination to do it for their very own portfolios. Or they could be held again by skilled conflicts of curiosity, based on Mike Remak, head of investments for the agency. WealthManagement.com not too long ago spoke to Remak about its strategy to wealth administration for people who find themselves already well-versed in investments.
This Q&A has been edited for size, type and readability.
WealthManagement.com: Are you able to give me a way of who your typical shopper is?
Mike Remak: The purchasers that we’re sometimes serving are professionals in industries similar to legislation and administration consulting and asset administration. We additionally work with senior professionals at fast-growing corporations in industries like tech and healthcare. The folks that we serve are inclined to have a wealth profile that may be outlined as high-net-worth to ultra-high-net-worth. In addition they are usually extremely educated and really savvy, however have restricted time and bandwidth to focus day-to-day on their investments.
WM: What’s in your mannequin portfolio proper now?
RM: If we have been to phase danger on a scale of 1 to five, 1 being very conservative and 5 being very aggressive, we might consider a average, danger stage 3 portfolio is ideally having round 36% publicity to bonds, 36% publicity to shares, 27% publicity to different investments and 1% publicity to money.
WM: Are you able to speak about what sorts of equities you might be gravitating towards proper now?
RM: As a result of the purchasers that we serve are largely trying to outsource their wealth administration, versus being self-directed, a lot of them are topic to independence restrictions or conflicts of curiosity from what they do for a residing. Most of them are searching for discretionary managed options. So the way in which we’re constructing fairness portfolios is with a U.S. residence bias and with a big cap bias. [That’s] primarily as a result of given financial situations right now, we consider that with a whole lot of commerce coverage uncertainty lingering, for instance, large-cap tech ought to proceed to be one space of the market that’s extra resilient. Whereas small-cap corporations could be extra prone to disruption that might happen from a commerce perspective.
Inside U.S. giant caps, we are usually comparatively detached because it pertains to lively vs. passive. We actually have a broad menu of options out there in each classes, however one factor I’ll say is pervasive is there’s growing investor urge for food for tax effectivity. Whether or not we’re managing an lively inventory picker technique that’s supposed to outperform its benchmark or actually simply index replication and returns that match the benchmark on a pre-tax foundation, our purchasers are more and more wanting or demanding lively tax loss harvesting inside their fairness portfolios.
Inside worldwide, which is actually necessary inside an total portfolio, we’re robust advocates of getting international diversification. That’s actually been useful by way of portfolio returns this 12 months. There, we predict there’s a stronger case for lively administration and a stronger case for managers who’ve a confirmed monitor report for selecting particular person corporations. That’s for quite a lot of causes. One, rising markets are usually a bit bit extra opaque; subsequently, having a research-driven strategy and being extra selective is necessary. However even areas similar to Europe, that are rising extra slowly, you could not essentially need to personal the entire market. You could need to be extra selective and decide particular person corporations which are rising and buying and selling at a wholesome valuation low cost relative to comparable U.S. corporations.
WM: What varieties of investments are you making on the fixed-income facet?
RM: If we take into consideration that 36% allocation to fastened earnings, that largely ought to be allotted to protected sleep-at-night belongings. For many U.S.-based tax-paying people, that might be investment-grade municipal bonds, the place default charges are extraordinarily low. That is a gorgeous house by way of one’s capacity to generate a gorgeous, tax-advantaged yield. The taxable equal yield right now on investment-grade intermediate period municipals is true round 6%. If you happen to occur to reside in a kind of very high-tax states, like California or New York, the taxable equal yield is as excessive as about 7.5%. That actually goes to comprise nearly all of the portfolio.
Inside that portfolio, in the meanwhile, given the form of the yield curve, we’re going to hold the period comparatively quick. Once more, the key phrase right here for that portion of the portfolio is “security.” However we might advocate complementing that with extra versatile, actively managed fixed-income methods that may be extra opportunistic, that may pivot between private and non-private markets, and even go to money if the portfolio supervisor feels that it’s the correct transfer. And we’re seeing in a few of these versatile, extra diversified credit score methods that the yields are usually within the low double digits. We predict that’s a pleasant complement to what ought to be largely a protected bond portfolio.
WM: What’s the first goal for the 1% money allocation?
RM: We keep a 1% allocation to money primarily for liquidity and rebalancing functions, it serves extra of a utilitarian operate in a portfolio. We will and would improve that 1% allocation on a tactical foundation if we felt market situations warranted it, however it’s primarily there for operational upkeep of the portfolio.
WM: How typically do you sometimes change your asset allocations? Have you ever modified them considerably previously six months?
RM: Strategic allocation ought to align with a shopper profile, however we do consider in a tactical strategy and actively over- or underweighting sure asset lessons primarily based on market situations. Our international funding committee meets on a month-to-month foundation, and we publish to our purchasers any suggestions by way of these tactical overweights or underweights, and we do replicate these views actively in our mannequin portfolios.
At our final international funding committee assembly, we maintained a impartial place, which isn’t having any tactical overweights or underweights. It’s actually a mirrored image of the excessive stage of uncertainty that also hangs over markets, each from a commerce coverage perspective, but additionally from a Fed coverage perspective. It appears more and more seemingly that the Fed should pause on any additional fee cuts in the interim.
WM: You talked about CitiWealth does have an alts allocation. Are you able to inform me which different asset lessons you might be invested in?
RM: Inside that 27% allocation, we might bucket that right into a 15% allocation to personal investments. We have a look at that as roughly 10% in non-public fairness and personal credit score, roughly 5% in actual property and infrastructure, after which 12% publicity to hedge funds.
Beginning with hedge funds, we have a tendency to consider them as both being directional, these are hedge funds which are actually supposed to boost returns, or diversifying, methods that have a tendency to supply decrease correlation to fairness and glued earnings. We do implement each of these varieties of methods. I might say that more and more our purchasers are searching for diversifying methods that may present a little bit of draw back danger safety when markets are risk-off. We noticed that it was clearly very useful earlier this 12 months, across the Liberation Day market sell-off.
The opposite factor I might say is that quantitative hedge fund methods that may ship the extra advantage of tax losses are selecting up a whole lot of steam. We’ve seen a whole lot of inflows over the course of the previous six or 12 months into hedge fund methods which are each diversifying and generate lively tax loss harvesting and internet capital losses at year-end.
Inside non-public markets, clearly, non-public fairness and personal credit score have demonstrated a powerful potential to outperform public fairness and glued earnings markets over the long term. Inside non-public fairness, we’re searching for methods throughout the vary, from enterprise capital to bigger buyout, in addition to some very specialised varieties of non-public funding methods.
Personal investments into sports activities franchises could be an instance, or non-public investments into proudly owning a GP curiosity in non-public fairness companies themselves. It’s a fairly broad vary; the one factor that has been game-changing and can proceed to be entrance and middle for wealth managers is that there are some issues in making an attempt to construct out, obtain and keep a non-public fairness allocation with conventional drawdown constructions. So, this proliferation of semi-liquid and evergreen methods is making it that a lot simpler for retail traders to construct out and keep that personal fairness allocation. We’re more and more filling our non-public fairness portfolio with a mix of conventional drawdown constructions, as nicely evergreens.
One other factor I might point out is that on the true property facet of issues, there’s an growing investor urge for food to personal some infrastructure. We take into consideration infrastructure as these important companies that we want day by day, like being able to show in your cell phone and get a sign or go to your water faucet and switch up the faucet and make a pot of espresso within the morning. All of that infrastructure that allows our day-to-day lives does provide some profit for traders by way of offering an inflation hedge, offering some diversification, in addition to doubtlessly offering some long-term development. We predict constructing a bit little bit of that into an actual property allocation is sensible.
WM: Investing in sports activities franchises appears to be a comparatively new space for wealth managers, and the present guidelines could make it powerful for particular person traders to take part in. Are you able to speak about the way you entry that market on behalf of your purchasers?
RM: There may be an analog right here to Alternative Zones—these are areas the place we predict it’s extremely necessary to select your spots. It’s going to make a cloth distinction whether or not or not you might be with main sponsors who’ve a demonstrated monitor report or stage of entry in that house. As a result of, for instance, investing in sports activities franchises is a more recent phenomenon that’s been enabled by these sports activities organizations opening up and permitting third-party capital, there’s nonetheless a slender discipline of gamers on the market. Luckily, via our non-public fairness analysis and funding administration effort, we’ve got aligned ourselves to no less than one of many main sponsors in that house. It’s nonetheless an space the place most traders usually are not going to have entry, however the place Citi purchasers are going to have unique entry to among the greatest alternatives.
WM: Are you able to dive deeper into the way you select the asset managers you’re employed with? You talked about a superb monitor report of their funding discipline. What are another elements that go into your choices?
RM: From an funding supervisor analysis standpoint, clearly, understanding individuals, course of and monitor report is de facto necessary. There may be a further physique of analysis that we help that sits independently from the funding due diligence. We name it operational due diligence. Operational due diligence is knowing the infrastructure, the controls, the governance, the transparency and having a view that these are credible, sustainable companies, along with being nice funding companies.
Having funding supervisor analysis after which independently operational due diligence has served us nicely by way of with the ability to keep a high-quality roster of third-party managers.
The one different factor that’s distinctive to Citi, and that is extra particular to personal belongings, is that it does begin with a thematic strategy. We at all times in non-public funding alternatives begin with a view of, “Primarily based on what we’re seeing around the globe, tendencies, dislocations, alternatives, what do we predict are the funding themes that ought to drive outsized returns?” Then we’re going to use that thematic crucial to seek out sponsors or managers that basically excel in that exact house. Many occasions, we’re structuring with these sponsors’ or managers’ distinctive autos that aren’t broadly out there in different places. We’re engaged on a bespoke technique to discover a kind of themes. And for that motive, roughly 70% of the non-public funding alternatives that we deliver to market in drawdown constructions are unique to Citi.
WM: Do you will have any concentrate on investments with ESG themes or what some individuals name “accountable investing”? Are you seeing demand from purchasers for these varieties of investments?
RM: We now have a worldwide sustainable funding crew that works as a part of Citi Wealth and that crew leverages an intensive quantity of analysis—exterior analysis, proprietary analysis, together with even a big physique of securities analysis from Citi’s institutional facet to have the ability to equip purchasers with alternatives and data they’ll use to specific their views in portfolios. I believe that is an space the place Citi might be forward of the business by way of the depth and high quality of the analysis.
However I’ll say that no less than for the purchasers I serve right here within the U.S. (and we do examine our purchasers’ funding preferences for his or her values or sustainability), I might describe the investor urge for food as far as average. I might not describe this as an space the place we’re seeing a excessive diploma of investor demand. That actually can change over time. We do consider, nonetheless, that sustainability elements may be an necessary return driver in portfolios and may search to boost returns along with having the potential to positively affect society.
WM: Is there anything that you simply really feel is necessary to notice about your strategy to funding technique?
RM: I believe it’s a good suggestion for many traders, along with having that concentrate on allocation in a mannequin portfolio and guaranteeing that’s populated with a very high-quality mixture of methods and being tax environment friendly, is having a bit little bit of an opportunistic bucket.
Most traders prefer to have a bit little bit of room to play, and we prefer to have a bit little bit of room to take advantage of shorter-term market alternatives that might come up within the type of a dislocation or an irregular pricing occasion. So, for instance, having a 5% or perhaps a 10% allocation to opportunistic investments that don’t essentially match neatly into asset lessons [is beneficial]. That is one space the place structured notes can play a very necessary position. For instance, once we see a spike in volatility like we did earlier this 12 months, that improve in volatility can typically drive actually attention-grabbing economics within the structured house. You should use possibility volatility as a supply of enhanced returns to drive greater yield.
We will additionally use that opportunistic bucket to fill some exposures to commodities when these make sense. For instance, we predict having a bit little bit of publicity to gold proper now may be actually useful for quite a lot of causes, together with among the macro uncertainty that we’re seeing.
That’s been a superb self-discipline to make sure that traders keep heading in the right direction with their core portfolios, whereas nonetheless having a bit little bit of room to maneuver.
WM: You talked about that due to the uncertainty, your funding committee suggestions are holding regular proper now. Going ahead, do you foresee any huge areas of alternative?
RM: There are a few issues. I’ve been within the business for near 30 years, however early in my profession, I labored in institutional funding consulting, and I discovered that asset allocation is way and away the largest driver of portfolio returns. I additionally began my profession working in San Francisco shortly earlier than the dot.com bubble burst, after which having lived via the International Monetary Disaster. And I discovered simply how necessary it’s to have self-discipline and stick with that self-discipline. It’s not solely one thing I do know to be true, however one thing I skilled first-hand—individuals who stick with that self-discipline are the individuals who find yourself doing rather well and popping out forward by way of constructing wealth and producing actually enticing returns.
One of many largest pitfalls I see purchasers falling into is this concept of market timing, making an attempt to guess when is the correct time to be in or out. We predict that’s a shedding proposition. As a rule, that retains traders on the sidelines, it retains them in money and lacking out on returns. Who would have guessed a number of months in the past that in July the S&P 500 could be 8% up year-to-date? You by no means would have thought that! So, of us who have been sitting on the sidelines in money missed out on that.
And, then I might say that traders, by and enormous—it’s true of our traders, it’s true for the business—they’re under-invested to options. They’re under-invested to personal markets. I believe most traders have a adequate time horizon that they’ll have an affordable allocation. That’s going to drive greater returns; it’s going to make sure that traders have broader entry to financial alternatives that exist in an enormous method outdoors of public markets. So, I believe that persevering with to democratize that via semi-liquid methods to be sure that’s constructed into portfolios goes to be necessary.
