An Inside Look: Investment Research at Truepoint Wealth Counsel
The investment team at Truepoint has a simple goal: construct the best possible portfolios and continue to refine our portfolio management process. It’s easier said than done because the investment universe is constantly changing. Over the years, there has been a proliferation of new products, a constant stream of new academic research, and two significant revisions to the tax code, to name a few. Given the dynamic nature of investing, our task is never-ending. We’ve tackled countless research topics in our quest to improve the investment experience for our clients. Each of these topics requires long hours of independent research, data analysis, consultations with outside experts, and roundtable discussions that often evolve into heated debates. And do you know where most of the topics end up? In the trash. (Not literally, they’re saved in various research folders, but they all don’t end up in your portfolio).
Though you might be thinking, “what a waste of time,” there are two main reasons why our continued research and refinement is so crucial. First, if we found a new way to improve the portfolio each month, that would indicate that we weren’t starting from a strong foundation. Over three decades of managing our clients’ life savings, we’ve researched and adopted some of the leading ideas in the industry. Second, we don’t view research topics that go unimplemented as wasted time. When something is implemented, it is exciting for all of us, and we get satisfaction from the thorough due diligence performed on the countless abandoned ideas.
We have communicated directly to clients the changes we’ve made to the portfolios over the years. Most recently, we implemented a few changes to our recommended bond portfolio. A few years ago, we eliminated our direct allocation to publicly traded real estate (REITs). At that same time, we changed the fund manager used to deliver exposure to small cap value stocks. This article will take you through our due diligence process and “research graveyard” to shine some light on a handful of ideas that were not implemented.
The Research Graveyard
To provide some background, the research agenda is set by our Investment Committee which consists of the entire Truepoint Investment Team plus our director of institutional investing and the firm’s president. The committee meets monthly to oversee our underlying managers, review performance of all holdings, and to discuss any ongoing research topics. This regular, in-depth, and comprehensive analysis is essential to our evidenced-based approach to investing. Although our focused research efforts do not always result in an immediate change to our investment strategy, they always deepen our understanding of the ever-shifting investing landscape. Here is a sample of topics from our “research graveyard” over the past several years:
- International Stock Allocation: what is the appropriate mix between U.S. and non-U.S. stocks, and do we need to adjust our current allocation?
- Actively Managed Bond Portfolios: should we use actively managed bonds funds instead of passively managed?
- Emerging Markets Exposure: how should we approach our stock strategy within international emerging markets?
- Separate Managed Accounts (SMAs): Does a SMA structure that utilizes individually held stocks have a place in specific circumstances, whether it be to accelerate tax-loss harvesting or to fulfill client preferences for ESG investing?
- Treasury Inflation-Protected Securities (TIPs): would a long-term, strategic allocation to TIPs be appropriate for our bond allocation?
- Momentum Strategies: instead of an allocation to growth stocks should we use momentum strategies to try to capture excess return?
- Currency Hedging: should we hedge the currency exposure of our international stock allocation?
- Cryptocurrency: has cryptocurrency become an established asset class that warrants an allocation in client portfolios?
- Master Limited Partnerships (MLPs): Could MLPs improve diversification and the overall risk/return characteristics of the portfolio?
Due to the evolving nature of investing, it is not out of the question for any of the above graveyard topics to come back to life and onto our research agenda again. The driving goal behind all of our research is to benefit our clients. This means we not only research whether we should make a change, but how we should make it. If we decide to alter our investment recommendations, we do not simply implement the change across all of the client portfolios immediately. We consider how to best implement the strategy for each client portfolio. For example, when we went through our research process on REITs and decided to shift away from direct real estate funds in 2021, we made the transition more slowly for certain clients because of unrealized gains in the positions and the clients’ unique tax situation.
Although something as heady as quantitative investment research might seem distant from building strong client relationships, we don’t view it that way. At Truepoint, everything we do comes back to helping each individual client. From our estate planners to our tax accountants to our investment committee members, we view our core responsibility as developing deep and meaningful connections with our clients so that we can understand what they want most in life. When we research a topic, it’s not an abstract thought experiment. It’s about helping our clients meet their goals.
