Naviter Wealth
Policy Statement
The Purpose of This Document
The Naviter Wealth Policy Statement is designed to succinctly describe our foundational beliefs, how we construct portfolios, the rationale behind those decisions, and our fee structure.Click below to jump to a section.
Our Core Investment Tenets
Portfolio Construction
Ongoing Portfolio Changes
Fee Structure
Definitions
Click below to jump to a section.
Our Core Investment Tenants
Portfolio Construction
Ongoing Portfolio Changes
Fee Structure
Definitions
Our Core Investment Tenets
Own what we recommend to our clients.
In line with our view that the families for whom we work are partners, we want our financial interests to be aligned; we are in it together. This belief is foundational to the remaining tenets.Apply our best thoughts, strategies, and resources to all relationships.
We have well-formed views on how to optimally manage wealth. These views are expressed consistently across all client relationships—customized to their individual objectives, risk tolerances, and time horizons.Diversify intelligently.
The “diversity” that comes from owning the traditional style boxes (large-cap growth, large-cap value, mid-cap growth, etc.) is almost nonexistent due to their high correlation to one another. Simply owning more strategies should not be confused with diversifying away risk. The only way to mitigate volatility is to own strategies that are truly lowly correlated to one another—which requires effort.Concentrate portfolios into our highest conviction strategies.
We believe portfolios should own fewer, but higher quality strategies. Overdiversifying can dilute the results of your best-performing assets.Drive investment costs lower.
While fees and expenses are necessary, care must be given to ensure proper value is received in return for those costs. We continually fight for lower costs, especially within traditional assets where differentiation and outperformance are difficult to obtain.Taxes matter.
We understand that it is not what you make that counts, but what you keep. While we are careful not to let the “tax tail wag the investment dog,” we aggressively seek to minimize the impact of taxes. We rarely use mutual funds which are typically tax-insensitive. We systematically tax-loss harvest across our portfolios—typically monthly, generating meaningful “tax alpha.”Our Core Investment Tenets
Own what we recommend to our clients.
In line with our view that the families for whom we work are partners, we want our financial interests to be aligned; we are in it together. This belief is foundational to the remaining tenets.
Apply our best thoughts, strategies, and resources to all relationships.
We have well-formed views on how to optimally manage wealth. These views are expressed consistently across all client relationships, customized to their individual objectives, risk tolerances, and time horizons.Diversify intelligently.
The “diversity” that comes from owning the traditional style boxes (large-cap growth, large-cap value, mid-cap growth, etc.) is almost nonexistent due to their high correlation to one another. Simply owning more strategies should not be confused with diversifying away risk. The only way to mitigate volatility is to own strategies that are truly lowly correlated to one another—which requires effort.Concentrate portfolios into our highest conviction strategies.
We believe portfolios should own fewer, but higher quality strategies. Overdiversifying can dilute the results of your best-performing assets.Drive investment costs lower.
While fees and expenses are necessary, care must be given to ensure proper value is received in return for those costs. We continually fight for lower costs, especially within traditional assets where differentiation and outperformance are difficult to obtain.Taxes matter.
We understand that it is not what you make that counts, but what you keep. While we are careful not to let the “tax tail wag the investment dog,” we aggressively seek to minimize the impact of taxes. We rarely use mutual funds which are typically tax-insensitive. We systematically tax-loss harvest across our portfolios—typically monthly, generating meaningful “tax alpha.”
Portfolio Construction
Liquid Assets vs. Low-Liquidity Assets
Broadly we view investment assets in two categories: liquid assets and low-liquidity assets. Liquid assets are those that have daily liquidity while low-liquidity assets include assets with monthly and quarterly liquidity or assets with lock-ups.When low-liquidity assets are properly selected—having low correlations to liquid assets—their inclusion has two long-term positive effects on a diversified portfolio:
An increase in return
A decrease in
volatility (risk)
Given these benefits, the decision to include low-liquidity assets in a portfolio has less to do with risk preference and more to do with tolerance for illiquidity. Cash flow needs from the portfolio and investment time horizon are the primary factors in determining
the proper balance between liquid and low-liquidity assets.
Decisions
- Allocation between liquid and low-liquidity markets.
Customizations
Liquid Assets
We view liquid assets in three categories:
Equity
Fixed income
Liquid alternatives
The common characteristic is that each of these has at least daily, if not intraday liquidity, i.e., the ability to be sold quickly for cash. The allocation between each varies based on a client’s risk tolerance, objectives, and other factors. We have created portfolio allocations for three preset risk profiles—conservative, moderate, and aggressive. Note that due to the expected returns and low correlation to equities and fixed income, the liquid alternatives are a static 30% regardless of the risk profile. Equity allocations increase and fixed income allocations decrease as risk tolerance increases.Risk Tilts
Decisions
- Selection from pre-designed, liquid asset allocations for conservative, moderate, and aggressive pro les.
Customizations
- Clients are not limited to pre-designed allocations and may design their own blend of liquid markets, i.e., equities, fixed income, and liquid alternatives.
Customizations
- Clients are not limited to pre-designed allocations and may design their own blend of liquid markets, i.e., equities, fixed income, and liquid alternatives.
Equities
We have three broad views on owning equities:
Global equities are one asset class
Passive management wins over active management
(after trading costs/fees)
True value exists in tax-loss harvesting
Equities are often segmented into dozens of categories based on market cap, growth vs. value, geographic region, and many other factors. Investors commonly try to “diversify” into these various asset classes to lower risk, but due to the high level of correlation across these asset classes, this approach does little to mitigate volatility. Allocating to numerous asset classes that behave so similarly not only is ineffectual, but it serves to create a false sense of security for investors. Rather than idly attempting to invest across each of these “style boxes,” we view global equities as one asset class. Global equities (U.S., Developed, and Emerging Markets) have largely been commoditized. Large, highly-liquid, and well-known markets are very efficient (What does one manager know about Apple that every other manager doesn’t know?). This makes it highly unlikely that active management will consistently outperform passive management (the index/benchmark). Additionally, the fees of active managers further reduce the likelihood of outperforming the respective benchmark. In fact, according to the SPIVA® U.S. Year-End 2022 Scorecard, large-cap funds underperformed the S&P 500 for the 13th consecutive calendar year. Even more condemning, in the categories of All Domestic and International, 92% and 94% underperformed their respective benchmarks over the last 20 years by an annual average of 1.50% and 1.05%. Given this data, it is improbable that we—or any other firm—bring value by selecting active managers in the broader markets. While active management may work in smaller, less-traded, niche pockets of the market, by utilizing passive management for broad global equities, we significantly reduce fees and the tracking error to the benchmark (the difference between the portfolio performance and the benchmark performance). Rather than implement our passive approach to global equities through ETFs or mutual funds that track an index, we utilize Direct Indexing which provides a greater after-tax benefit. Direct Indexing seeks to replicate index performance by owning the index constituents (or a subset of them) directly—not through a fund structure. This approach allows for tax-loss harvesting across the entire portfolio, even in up markets. We systematically (typically monthly) tax-loss harvest across the entire portfolio. Studies show that historically this has annually generated 75-100 basis points of “tax alpha” or after-tax economic benefit. For more, see our piece on Direct Indexing.In summary, our global equity portfolio is passively managed through Direct Indexing. The benefits are:
- Reduced costs (no manager fees)
- Increased likelihood of matching index/benchmark returns and thereby outperforming the majority of equity managers
- Significant after-tax economic benefit via “tax alpha”
Customizations
- Non-taxable accounts will not need to be tax-loss harvested
- Allocation between U.S. & International can be altered (standard allocation is 60/40) to better address tax, risk, and liquidity profiles
- Overlay portfolio screens for ESG, SRI, “smart beta” factors, and other personal preferences are available (additional overlay fee of 10 basis points)
- Run process to identify other independent managers (1700+ options, additional manager fee)
Fixed Income
We believe active management produces the best risk-adjusted returns in fixed income. Fixed income managers should have the flexibility to invest across different credit types, durations, and sectors. Quality managers can quickly move to capitalize on undervalued assets due to market dislocations or adjust for changes in interest rate forecasts. Our fixed income allocation is managed by a single institutional manager through a “Core-Plus” portfolio. The manager has outperformed their benchmark over 1, 3, 5, 10, and 25-year periods. Our relationship with this manager has led to favorable pricing. We access this strategy through a separately managed account (SMA) structure whereby clients own the individual fixed income securities directly, rather than through a mutual fund structure.There are two key advantages of an SMA:
Owning the individual securities allows for tax-loss harvesting that creates “tax alpha”
Fees are less than typical actively managed mutual funds
Customizations
- Run process to identify other independent managers (1700+ options, additional manager fee)
Liquid Alternatives
This allocation represents lowly-correlated liquid alternative investments designed to complement the equity and fixed income allocations. These investments have either daily or intraday liquidity. These often include asset classes not represented in other parts of the portfolio, including gold, commodities, business development companies (BDCs), master limited partnerships (MLPs), and real estate investment trusts (REITs). They may also include countries, sectors, industries, or “tactical cash” to which we want to gain exposure. These investments are implemented primarily through exchange-traded funds (ETFs) but may include individual securities, SMAs, or other liquid vehicles. While we have no preset holding periods, these positions are more temporary relative to other portfolio investments. Having the option to quickly and thoughtfully add lowly correlated assets and express timely market themes drives both returns and lowers portfolio volatility.Customizations
- Allocation to these strategies can be customized
- Any of these strategies may be removed from the portfolio
Low-Liquidity Assets
We define this set of strategies as “low-liquidity” assets rather than illiquid assets, as they each have varying degrees of liquidity, but are all less liquid than traditional investments.
Two of the primary reasons for owning these alternative assets are:
Increased returns
Lower volatility (risk), relative to traditional investments
Properly selected alternative investments can provide the elusive “have my cake and eat it too” investment properties sought after by so many investors. These benefits come at the cost of liquidity, but that is a price many investors are willing to pay. While all investments in our portfolio are thoroughly researched with proper due diligence, alternative assets require substantially more work. Alternative assets also require more work for clients due to expansive subscription documents, capital calls, distributions, lagged performance reporting, and K-1s that often arrive after April 15th. Even owning a single alternative asset can be difficult, but owning an entire portfolio of alternative assets is daunting; it requires a dedicated and experienced team. We work tirelessly to simplify and streamline ownership of these assets.Given the demands of ownership, we believe:
- Target returns for alternative assets must be higher than long-term equity returns (10%+)
- Alternative assets should not only have a low correlation to traditional assets but also a low correlation to the other alternative assets in the portfolio
- The strategy should not be easily replicated in a cheaper or more liquid way
- The manager must have a history of both exceptional returns and risk mitigation
- Each investment needs to be assessed not only on its own merits but additionally on how it fits within the overall portfolio
Customizations
- These strategies can be customized
- Select from 200+ other alternative strategies with due diligence prepared ($2.5MM minimum investment)
- Have qualitative and operational due diligence performed on any strategy via a third-party ($25,000 minimum fee)
Other
Client-driven trading portfolios, restricted or control stock, and large concentrated positions can easily be accommodated and may be considered in developing allocations for client portfolios. These positions may be excluded for billing and performance purposes in most cases.Ongoing Portfolio Changes
Asset Allocation Changes
Once a portfolio has been fully deployed, allocations between liquid assets and low-liquidity assets may change for two reasons:
A change in the client’s cash flow needs, objectives, etc.
Drift due to return differences between liquid assets and low-liquidity assets
Each risk profile is assigned target allocations for equities, fixed income, and liquid alternatives. To ensure the proper risk parameters are maintained, each target allocation is assigned a drift range used to trigger rebalancing. Periodically, adjustments will be made to bring allocations back in line with targets.Within the liquid assets,
allocations between equities, fixed income, and liquid alternatives may change for three reasons:
- A change in a client’s risk profile
- Drift due to return differences between equities, fixed income, and liquid alternatives
- Changes in tactical weightings that we make based on the current market and economic environment
Within the low-liquidity assets,
allocation among the core strategies may change for two reasons:
- Drift due to return differences between the various strategies
- Occasional weightings changes due to capital calls and the investments used to fund those capital calls
Strategy Additions & Removals
Our Investment Committee (IC) continually searches for new opportunities to introduce into our portfolios. Additionally, the IC regularly reviews the current portfolio for strategies that should be removed. After researching and preparing due diligence, the IC will vote on recommended changes. Occasionally replacements occur where a current strategy is appropriate for the portfolio, but we believe a different manager or vehicle would be better suited.Trading
In addition to the changes already noted, three types of trading will occur regularly across the portfolio:
- Manager-directed trades within SMAs
- Tax-loss harvesting across the liquid assets
- Trades surrounding client contributions or withdrawals
Fee Structure
Clients have the option of either a tiered or performance-based fee schedule.
It’s important to know that we are not compensated by external managers and we are not compensated differently based on the clients’ allocations:
Must be a QC to use an incentive structure
External fees
Any expense or cost reductions that can be negotiated are passed directly to our clients
Full details of both structures are available on our ADV.Fee Structure
Clients have the option of either:
or
Additional fee notes:
- We are not compensated by external managers
- We are not compensated differently based on changes in allocations, strategies, or individual securities
- Any negotiated fee reductions pass directly to our clients
- To participate in the performance-based schedule one must be a Qualified Client (see Definitions below)
Fee Structure
Clients have the option of either:
or
Additional fee notes:
- We are not compensated by external managers
- We are not compensated differently based on changes in allocations, strategies, or individual securities
- Any negotiated fee reductions pass directly to our clients
- To participate in the performance-based schedule one must be a Qualified Client (see Definitions below)