We were recently hired by a client with multiple stakeholders involved the investment decision-making process. Their existing strategy used two different investment advisors running two separate parts (stocks and bonds) of their portfolio. The portfolio had a 70% stock and 30% bond mix, but the managers did not communicate or coordinate with each other, so the stakeholders were tasked with managing and coordinating the overall investment portfolio. Many on the committee had differing views on how both parts should be managed. There was little consideration of overall risk and diversification at the portfolio level. When we took over management of the portfolio, we surveyed the stakeholders and identified their differing views. We also uncovered that as a group they did not fully comprehend that projected withdrawals from the portfolio were not going to be possible given how the portfolio was being managed. It fell to us at Sunpointe to overcome the inherent behavioral biases of the stakeholders; the portfolio’s required rates vs. the returns offered by the capital markets. We created unity on how the portfolio should be managed by coordinating the stock and bond management. Additionally, we looked for ways to diversify the portfolio away from traditional equity and interest rate risk to enhance returns. Within equities, we added less correlated asset classes and within bonds we increased yield and expected return while also lowering interest rate risk.
Managing behavior while gaining agreement from stakeholders is essential to long-term investment success. This client situation highlights the benefits of Sunpointe’s expertise in managing the behavioral side in addition to the technical side of portfolio management. Let us know if you would like more color on how we work with clients using behavioral finance to enhance the portfolio management process.