Category: Business Building Basics


The Third P: Process

Cropped shot of four designers in a business meetinghttp://

Content provided by Rusty Vanneman CFA, CMT, CLS Chief Investment Officer

In previous commentary, I wrote about the “Five Ps” of the money manager’s due diligence process: People, Philosophy, Process, Positioning, and Performance — in that order.

Each of the Five Ps should be addressed by the person selecting an investment advisor. Ultimately, it’s about understanding and being comfortable with how a portfolio or strategy should behave over time (recognizing, of course, that no strategy works all the time). The key is to never be surprised.

Before I came to CLS in 2012, I spent my career in Boston either on or managing high-performing teams building global, multi-asset portfolios of mutual funds (and ETFs). To do my job, I interviewed portfolio managers (PMs) from across the country. So far, I have conducted well over 2,000 interviews during my career.

My task was to identify managers and funds that could be confidently used for clients and shareholders. After doing the due diligence, did I trust the managers? Respect them? Like them? In that order. As a side note, liking them was the least important, although we did need to have a decent working relationship. Ultimately, the question I asked myself was: Did I understand how the portfolios they managed should behave?

As the Chief Investment Officer of CLS, I recognize the importance of each P and the consistent messaging to our clients and shareholders about what we do and how we do it. Like me, and the managers I selected, my clients shouldn’t be surprised by what we’re doing.

In past articles on this blog, I discussed People and Philosophy. Here I will address the next P: Process, and how CLS conducts its investment process.

The investment process is essentially about these elements:

  1. What is the investment universe?
  2. How are portfolios built?
  3. How are securities selected?
  4. How is risk managed?
  5. How are our thinking and actions communicated?
  6. What’s the edge to perform and help investors succeed?

Let’s briefly review each of these questions as they pertain to CLS.

What is Our Investment Universe?

At CLS Investments, we build a variety of portfolios using all kinds of securities. Our preference is to use exchange traded funds (ETFs) due to their low costs and dependable market exposures. ETF analysis and management is our core analytical competency. We are indeed one of the largest ETF strategists (a money manager that builds portfolios with at least 50% ETFs) in the country.

That said, we have also managed mutual fund portfolios for nearly three decades, including American Funds’ portfolios for the last nearly 20 years. Lastly, we construct portfolios using individual stocks and bonds. As a global, multi-asset money manager with 13 people on staff, half with Chartered Financial Analyst ® credentials, we have the capabilities to cover every investment universe.

How are Portfolios Built?

At CLS, we put tremendous effort into portfolio construction. At the heart of our portfolio management process is Risk Budgeting, which means that we build all portfolios to a risk target. This qualifies CLS as a strategic manager since we manage to a target. The way we differ from other strategic managers, however, is that we manage to a target risk level instead of a target asset allocation (how much should be invested in stocks, bonds, or cash).

Though we are strategic, we are not a buy-and-hold manager. We are an active manager, meaning our portfolios will differ from the overall market as we adjust for changes in risk and return expectations.

Many strategies at CLS are managed by checklists, i.e., some portfolio management teams manage funds using a checklist to ensure the portfolios are achieving certain attributes versus various benchmarks and peer groups. It also means portfolios are being monitored and managed by factor-based analysis, which is another overlay of risk management on top of Risk Budgeting.

How are Securities Selected?

Securities are selected by examining various risk and return characteristics. Risk statistics we monitor include beta, relative risk, drawdown risks, and correlations. These are important inputs in the Risk Budget scores, but we also look at additional risk characteristics.

As for return expectations, we look at a variety of statistics that fall under five categories: economics, fundamentals, valuations, technicals, and quantitative. Each plays a role in the formation of the CLS Score, which is our proprietary expected return methodology.

Lastly, in an effort to improve overall investment team efficiency, and yet provide deeper research, we have split the entire investment team into four analytical teams called BACE (Broad Asset Class ETFs), which cover: domestic equities, international equities, fixed income, and alternatives. The PMs therefore no longer have to be responsible for deep research on each and every ETF selection in their respective portfolios. Instead, they can now lean on the BACE team to pick the most appropriate ETFs. Each BACE team creates a buy list to help facilitate ETF selections.

How is Risk Managed?

Risk management is crucial in managing today’s investment portfolios. We implemented Risk Budgeting more than 15 years ago, but we conduct much more risk management these days, including the aforementioned factor-based analysis and various stress tests. We also constantly monitor the portfolios on a variety of risk measures to make sure we’re seeing them from every angle.

How Do We Communicate?

Helping investors succeed requires more than manufacturing a rate of return. It also requires communication. At CLS, we create commentary on a daily basis. We write commentary not only for our internal audiences to make sure everybody is confident and consistent in our messaging, but also in various external outlets, including, of course, and various industry publications. Our social media efforts are also strong, ranking tops among ETF strategists. We create podcasts, videos, and webinars, and we often go on the road to talk to advisors and investors. All of this is done to explain the markets and our thinking. We also need to explain the whys and hows of our portfolio behavior. Investors need to understand how their investment portfolios are going to behave. Again, surprises aren’t good.

What’s the Edge?

At CLS Investments, we believe we have various edges:

  • Risk Budgeting not only helps us manage global, multi-asset portfolios more effectively, we think it’s a great way to help manage investor long-term return expectations. For example, a portfolio with a Risk Budget score of 50 not only means its risk should be 50% of a globally diversified equity portfolio but its long-term returns should approximate that too.
  • Our portfolios asset allocations are not only managed differently than most of our competition, our holdings look different as well. We are one of the industry’s leading users of smart beta ETFs.
  • We are known for accessibility to senior management and to the portfolio management teams. The Investment Team, for instance, spends about 25% of its time dedicated to communication, education, and client service. And again, as an ETF strategist, our social media efforts are usually at the top, or near the top, within our field.
  • We’ve been around since 1989. We have decades of experience.
  • Our investment team is made up of 13 people, which includes seven that hold the CFA®.

In summary, we believe the way we manage money and communicate what we’re thinking and doing gives us an edge to perform and provides the necessary confidence for our clients to succeed.

Thanks for reading. Stay balanced.


The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change.  No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report.  You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed here and should understand that statements regarding future prospects may not be realized.  You should note that security values may fluctuate and that each security’s price or value may rise or fall.  Accordingly, investors may receive back less than originally invested.  Past performance is not a guide to future performance.  Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.

A client’s Risk Budget is derived from the client’s specific answers to CLS’s Confidential Client Profile questionnaire, which establishes the client’s financial goals, ability to handle risk, and overall investment time horizon. The individual client Risk Budget is expressed as a percentage of the risk of a well-diversified equity portfolio.

An ETF is a type of investment company whose investment objective is to achieve the same return as a particular index, sector, or basket. To achieve this, an ETF will primarily invest in all of the securities, or a representative sample of the securities, that are included in the selected index, sector, or basket.  ETFs are subject to the same risks as an individual stock, as well as additional risks based on the sector the ETF invests in.



Story Telling

Open book

Content provided by Brian Towner, CLS Separate Account Product Manager

In the financial industry there are three key components or phases in the client/advisor relationship:

  1. Proposal: Define the client’s financial goals and how the advisor can help achieve them.
  2. Client Review: How has the advisor helped the client progress toward his or her goals?
  3. What Happened?: The end or the breakup.

In general, the financial industry does a great job with the proposal phase. Many advisors can lay out their detailed, unique process and show numbers to back it up.  There’s a wide variety of technology out there that really helps advisors bring home their recommendation and show why they believe it’s better than any other. These tools allow advisors to explain where they’re going to take the client and how they’re going to get there. For example, the advisor can show them why it’s believed that international equity is undervalued and primed to tick up, or why the client should stay away from commodities.

Once the client makes it to the portfolio review phase, there are a vast amount of opportunities for advisors to complete their story and really show progress. (I’d like to note that this stage of the story could certainly be broken out into multiple smaller stages, but for simplicity, I’m going to keep it rather broad.) When it’s time for the client’s annual review, there’s often a lack of simplistic, yet visually appealing tools at the advisor’s disposal to show the portfolio’s progress and help connect the dots. Advisors sell clients on how they’ll do their best to help achieve the client’s financial goals, yet often lack a sufficient way to show if the client has achieved those goals. Currently, advisors compare clients’ accounts against a variety of benchmarks; however, because advisors don’t propose the account to the client by stating they’ll beat a benchmark, why is that their best showcase during the “client review” phase?

Technology can help change the conversation. Imagine an advisor with 30% of a client’s assets, and during the “client review” phase, the advisor is able to actually prove his or her process and show the client where he or she stands?  With that technology, the advisor can compare the client’s portfolio to the 70% of assets that are being held elsewhere (hello aggregation!), make allocation suggestions, and hopefully make their life as an advisor that much easier. Ideally, clients will see that the advisor has a proven process that provides results and would be excited to bring all of their assets under the advisor’s management.

All advisors hope to avoid the last phase, “what happened? the end, or the breakup”. In this phase, the client most likely transfers his or her assets to a new advisor, who sold them on an alternate proposal. This stage could potentially be avoided if advisors were able to better communicate to clients, in plain terms, what’s going on with their portfolio. We all know that the average investor doesn’t have an extensive financial background or understand all aspects of how the markets work – at least not as well as advisors. As an industry, it’s our fiduciary responsibility to provide tools that will allow them to understand these topics in a simple way. In doing so, clients may have a better understanding of what’s happening with their money and a reprieve from financial tensions (often fueled by the media).

There are a variety of innovative firms out there, but none of them have been able to solve this simple, yet important issue. However, here at CLS, we feel that we are making progress in the client communication process. We believe that through better client education, the “what happened?” phase could be greatly minimized. One tool that has been an important factor in this process is CLS Autopilot. Within the Autopilot program, we utilize Riskalyze’s “Check-in” feature that shows clients how they’re progressing against their simplified financial plan that they completed in the beginning of the relationship. We’re hoping to help clients truly understand that one day of poor market performance should not detract them from their long-term goals, and staying invested is one of the best ways to achieve them.

Our clients deserve more, and it’s our duty as an industry to provide them with the knowledge, tools, and support to help reach their financial goals.





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