Practice Management
Dynasty CIO: RIAs should rethink 3 things
Eric Grey
Senior Vice President, Head of Financial Conglomerate and RIA Distribution
Scott Welch
Chief Investment Officer, Dynasty Financial Partners
  • Market volatility and the wind down of central bank moves will test client portfolios.
  • RIAs should challenge assumptions they’ve held during the bull market.
  • Active management, correlation and rising interest rates should be reconsidered to prepare for changes in the market.


In the audio broadcast of this interview, Scott Welch mentions “CTAs.” In this context, CTAs are commodity trading advisors, which are people or firms who offer guidance and strategies on the buying and selling of futures and options.

Market volatility reappeared earlier in the year and has since calmed down. But advisors should use the moment to challenge their portfolio construction approach in light of important changes in the economy, said Scott Welch, chief investment officer at Dynasty Financial Partners, at the Investments and Wealth Institute conference in Nashville. He sat down with Capital Group’s RIA Distribution Director Eric Grey in May. Dynasty provides various services — be it technology, investment, operations, marketing or compliance — to independent advisory firms and teams.

There’s a push-pull situation in the economy that makes it increasingly important for advisors to test whether or not their portfolios are positioned for uncertainty, Welch says. “On one side we’ve got the administration attempting to sort of pile on fiscal stimulus … in the form of tax-law changes,” he says. “At the same time, the [Federal Reserve] is clearly trying to tighten; trying to pull liquidity out of the system.“

This macro-economic tug-of-war underscores the importance for advisors to position portfolios for volatility now. With U.S. corporate earnings and global economies strong in the first half of the year, it seems counterintuitive to brace for a slowdown. But with rates rising, stock markets trading sideways, U.S. stocks bumping up on the higher historical levels of valuation and inflation expectations moving higher, advisors must at least entertain the thought that a shift could be coming, Welch says. At the very least it’s a time to remind clients the halcyon days of low volatility are likely ending. There’s a certain sense of “investor complacency where volatility was at all-time lows for months, and months, and months,” he says.

While rethinking portfolios for a potentially different market than we’ve seen, Welch says advisors need to revisit three areas that they might have put out of their minds the past few years, including the:

  • Role of active management. Simply being invested in the market — or pursuing index-based “smart beta” approaches — may have captured much of the upside in the low volatility market the past few years. But, “I think that’s changing,” Welch says. The push-and-pull in the economy — and increased volatility — could create more disparity between companies and investments going forward. Selectivity and active managers “should at least have the opportunity to do better than they have in the past several years,” he says.
    A strategy to consider: Don’t assume smart beta strategies will continue to be the best place to be. Evaluate active managers with solid track records amid market volatility.

  • Pursuit of non-correlated assets. When everything is going up around the globe, there’s naturally less interest in assets that move in the opposite direction. Being diversified didn’t necessarily help portfolio results the past few years. But if volatility picks up, as Welch expects, the separation between different types of investments may widen, making it important for some portfolios to add assets with a different risk profile than stocks and bonds.
    A strategy to consider: Take a look at your portfolio for excessive exposure to one asset class. Overexposure to U.S. stocks is something that could be a risk at this point in the cycle, and something Capital Group has seen, too, in portfolios it has reviewed.
    Half of Dynasty’s equity portfolio weighting is outside the U.S.: 35% developed and 15% emerging markets. Look beyond, too, a company’s physical headquarters when building global diversification. Look for investments that diversify global exposure based on where companies generate revenue, instead. It’s also important for some portfolios to own assets that could gain if volatility rises, as well. “You have to have things in your portfolio that will respond to whatever the market throws you,” he says.

  • Build a viable strategy amid rising rates. 
    Many portfolios have been built on the idea that interest rates would bounce along the lows for a considerably longer time. With the yield on the 10-year Treasury jumping above 3% in 2018 for the first time in more than four years, it’s time for portfolios to take higher rates into consideration.
    A strategy to consider: For one, cash is no longer something to be automatically avoided. “Cash generates a real yield right now,” Welch says. Fixed income portfolios should also be shortening durations to reduce exposure to rising rates.

How can advisors specifically build client portfolios? Dynasty doesn’t make short-term market calls. It offers strategic asset allocation guidance to RIAs, though, that aims to help keep portfolios diversified and positioned for various market conditions. Welch says four categories of assets can help portfolios handle whatever global markets throw them, including:

  • Capital growth. The category primarily refers to global equity.
  • Income. This includes duration and credit strategies.
  • Real assets. Designed to protect against spikes in inflation, and still generate real return.
  • Volatility management. Various strategies — some positioned to benefit from declining stock     markets — to provide additional diversification.

Whatever portfolio strategy is best for clients, just know making changes after volatility kicks in may be too late. “People get upset when the market has disruptions and everything goes down at once,” Welch says. Back in 2008, many clients asked advisors: “I thought I was diversified. I thought I was diversified.”

In the audio broadcast of this interview, Welch mentions “CTAs.” In this context, CTAs are commodity trading advisors, which are people or firms who offer guidance and strategies on the buying and selling of futures and options.


How Dynasty Builds Portfolios

Eric Grey:

The, uh, you know, you described it as a strategic approach to asset allocation. What's, kind of, your philosophy? How do you structure your portfolios and then...

Scott Welch:


Eric Grey:

Turn maybe to the, the, the, uh, investment committee function. How does that work together?

Scott Welch:

Sure. Uh, so, the Dynasty Model Portfolios are, are broken into four, uh, I'll call them, buckets. And, and one is capital growth, which is global equities and we've talked about that. One is income.

Eric Grey:


Scott Welch:

And again, we sort of, break that bucket into core and, IE duration strategies and opportunistic credit strategies. We have a real asset bucket, which is intended to, uh, protect against, uh, spikes in inflation, while potentially generating some real return.

And then, fourth is, uh, well, we refer to it as volatility management. But, y-, you know, you and I might agree it's just alternative investments.

Eric Grey:


Scott Welch:

So, each of those buckets is modular. So, a Dynasty client could hire us to run the entirety of the portfolio as an OCIO. Uh, eh, in terms of managing all four of those buckets. Um, or, uh, they could, they could, if you will, rent, uh, any one of those individual buckets to compliment what they're doing themselves internally.

Now, the idea behind the Dynasty models is, it, I, I refer to it as a economic regime based um, model, in the sense that if you think about those four buckets, and then you think about two levers, economic growth and inflation, right? At any given time, economic need, the global economy's either improving or declining and at any given them, global inflation is either increasing or decreasing.

And so, you have sort of, four quadrants. Right? Uh, between those two levers, and the idea behind the Dynasty models is that regardless of where you are in that quadrant, which quadrant you're in, uh, something in the portfolio is working for you. Right? So, you have inflation sensitive assets, you have non-correlated assets, you have beta, you know, or global economic growth, uh, assets. You have income, you know, and deflationary assets.

And so, it, it, the idea is that, um, I don't have to worry so much about whether or not the global economy is doing great, or inflation is becoming a problem, because something in my portfolio should be responding positively to that, whatever's happening.

Um, now, the, the interesting thing, and I've been with Dynasty for three years now, um, is that, uh, that hasn't helped you know, for, let's call it, the market's benchmark performance. Right? Because I'm too diversified.

Eric Grey:


Scott Welch:

Right? I have too many thumbs in too many pies, uh, and it, based on what's happened in the market in the last couple years. But I, I, I keep telling my clients and my advisors, um, you know, don't extrapolate now into forever.

Eric Grey is head of financial conglomerate and RIA distribution for the North American Client Group at Capital Group, home of American Funds. He has 29 years of investment industry experience and has been with Capital Group for 20 years.


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