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Asset Allocation and Understanding The Big Picture

By Kathryn Tully


Do you really have a complete view of all of your investments?

Today’s investors are becoming increasingly savvy about their market portfolios. They check the value of those portfolios regularly and think about whether the mix of securities still aligns with their risk and return objectives. But for affluent investors with significant other holdings, perhaps in business or real estate, their portfolio of liquid investments is just one part of the picture.

“People tend to look at the value of the marketable securities they own too often, but don’t think about any of their other assets enough,” says Gwynne Shackelford, managing director of global wealth portfolio management at BBVA Compass. “When people buy illiquid assets, they often mentally file that purchase away.”

That’s particularly the case where buyers have an emotional attachment to those assets. “Some clients don’t consider assets such as their home or homes to be financial investments at all,” she says. “They don’t think ‘why do I own this and is it fulfilling an investment purpose?’”

They almost certainly don’t think about building a market portfolio that complements their other holdings, but Shackelford says this is crucial if people are to realize their long-term investment goals.

“We have a lot of clients that have real estate, oil and gas properties, limited partnerships and private equity investments. They may have other liquid investments too,” she says. “When the client comes to the portfolio management team, we build a customized portfolio that takes all of this into consideration.”

That might be as simple as not adding REITs to the portfolio if the client already owns a lot of REIT securities, or it could be about understanding whether a client’s illiquid holdings act as a positive or negative constraint on their marketable portfolio.

“Maybe they own an oil and gas property that’s producing a lot of income,” says Shackelford. “If we know how much that is and how long it will last, we don’t need to replicate that income stream in their portfolio. If they own an energy company, they may not need us to include energy stocks.”

On the other hand, a client’s marketable portfolio may be required to support their other assets. “Say our client owns an apartment complex that is subject to a capital call and the client needs to raise funds. In that case, we need short-term reserves or other short-dated securities in the portfolio to support that asset.”

So how should you ensure that all of your holdings work together to meet your long-term investment goals? Here are a few tips to get it right:

Talk to a financial advisor. Shackelford says that all of her clients work with a BBVA Compass financial advisor before they meet the portfolio management team. “The financial advisor will create a plan based a client’s entire wealth picture, including all their illiquid and liquid investments. We use that plan to build their customized portfolio.”

Understand the purpose of the assets. Are you holding these assets for growth or income and how do you expect that to change? “Once we understand this, we can build a portfolio around it,” says Shackelford. “Many of our clients have multiple residences, for example, so we need to know whether they plan to sell or keep them until they retire, and whether they need their market portfolio to support ongoing costs for these properties.

Review your assets regularly. “We suggest an annual review of all of a client’s assets to check they are still fulfilling their investment goals,” says Shackelford. To achieve that, regular valuation is important. “People can look at their stock and bond portfolio every day to see what it’s worth, but often overestimate the growth of their illiquid holdings because they are not marked to market. That’s why we require an annual valuation of partnership holdings and similar assets.”

Change your marketable portfolio accordingly. Constant adjustments need to be made to reflect changes to your overall financial picture. Shackelford says that if her team knows a client plans to sell some real estate, for example, it may reduce the client’s equity exposure and add more fixed income until the real estate capital arrives in the portfolio. “Once that happens, we’ll add more stocks to replace that property with another growth asset,” she says.

Having a clear understanding of your liquid portfolio is certainly a good idea, but building and maintaining a clear picture of all your investments is even better.

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