Carson Group, an Omaha, Neb.-based RIA with a total AUM of $37 billion, has been around for almost 40 years. Today, it includes Carson Partners, a non-custodial RIA support network; Carson Coaching, which provides coaching for financial advisors; and Carson Wealth, its wealth management practice that also offers retirement planning.
The firm’s model portfolio, launched in late October 2022, has approximately $2 billion in AUM today.
We spoke with Barry Gilbert, the firm's portfolio manager and vice president, about Carson’s investment philosophy and the options included in its model portfolio.
This Q&A has been edited for length, style and clarity.
WealthManagement.com: What’s in your firm’s model portfolio?
Barry Gilbert: I’ll start very general. We are overweight equities, a little bit over 5% overweight equities. And when I speak to this, I am just going to speak to our 60/40 because that’s where most of the assets are. So, we have 65.5% equities, 28.5% bonds, and then the final 6.5% is in non-bond diversifiers. We have a little bit of gold in the model and also a little bit of managed futures exposure.
The biggest impact on our portfolio right now when it comes to how much we are deviating from our benchmark is going to be the equity overweight. The next biggest impact is being overweight to the U.S. relative to international. That’s mostly coming out of an underweight to emerging markets and a little bit of an underweight to developed markets.
We are roughly balanced on style. We are a little bit overweight on small and mid caps, probably about 2% underweight on large caps. We have some dedicated sector exposure in there as well. The main overweights are industrials, financials, healthcare on the overall portfolio basis.
On the fixed-income side, we are underweight on fixed income, so we are a little bit overweight on interest rate sensitivity or duration. Our benchmark duration is probably about 5.25%, and we are probably about a year ahead of that. But if you look at that compared to the benchmark, the overall impact of interest rates is probably sitting right around where the benchmark is. There are no big sector bets in there because we are underweight on fixed income. We do have some exposure to long-term Treasuries, that’s something that we added back in November. And then we are probably about balanced between mortgage-backed and Treasuries and corporates. There are no spread sectors, no high yield, or anything like that in the portfolio and just a nominal amount of cash to meet liquidity needs.
If I were going to characterize the overall portfolio right now, it’s clearly aggressive just because of the equity overweight. But we are always looking for an effective combination of diversifiers, so we do have that gold position in there—we’ve had that position for well over a year—and those managed futures in there. If you look at our equity exposure, we recently added a lower volatility position, which we consider another kind of diversifier.
We always try to think about the model portfolio as a whole, and even when we are aggressive, if we are relatively confident about the economy (relative to the street, which we have been for quite some time), it doesn’t mean we try to take risks everywhere. We are still trying to build a robust diversified portfolio.
WM: How often do you tend to make changes to your allocations?
BG: Our model that I was highlighting—that traded eight times in 2023, trailing year, it’s traded six times. I think that the six-to-eight times range is pretty fair. We also have the strategic version of our model portfolio—that’s probably going to trade about two times a year.
WM: What asset managers do you work with, if any?
BG: We do. The base model portfolio is ETF construction. One of the things that Carson does when we are thinking about our model portfolio is our advisors are very focused on long-term wealth planning and we try to make it easy for them to outsource the portfolio management. But we also try to make it easy for them, if they want to, to co-source, work with us, and choose the leverage that they want to choose. So, while the main portfolio is ETF, it’s very easy for them to build a model portfolio that uses slightly different ETFs. We are moving up towards having 500 on our platform.
They can also use other models that provide similar exposure and other asset managers who have models that are actually on the platform. Some for the large cap exposure like to use SMAs to get individual stock exposure. That’s very easy to do on our platform.
We also have non-traded alternatives, private alts and we help them find the right places to slot that in as well. So, we are using quite a few different asset managers for a lot of different angles. It’s all about building out a very flexible platform where advisors can take our model portfolio as is, but it’s also very easy for them to make alterations. With that, we are talking to different ETF shops, we are talking to different SMA managers, we are talking to and doing due diligence on the different alternatives managers.
WM: For your base model portfolios, what’s your due diligence process for choosing asset managers or funds?
BG: Part of it is the exposures that they actually provide and observing, in this case, the ETFs and seeing if they are actually providing the proper exposure, seeing what the risk profile is, especially understanding downside risk profiles. We talk to the managers themselves to make sure that they actually have a sound process for what they are doing. And we try to make sure that anything that we put on our platform is very competitive on cost for what it’s doing as well. That’s also a key factor.
So the key questions are: What is it doing? Is it doing what it’s supposed to? Is it doing it for a reasonable price? Do the people who construct and manage the portfolio have the resources to do it effectively? We also look at liquidity all-in—what kind of trading costs, in addition to the fees, are associated with those particular ETFs?
WM: You mentioned that you do have some alternative investment options. What investment vehicles do you use for those?
BG: For the private alts that we use, there are a number of different firms that we work with closely. The due diligence process there is much, much deeper. That’s a place where the management is much more idiosyncratic and makes a huge difference to what’s going on. We have products on the platform that provide exposure to private credit, private equity, real estate, and also a long/short strategy that we use pretty extensively. That can be added to an existing portfolio rather than being a place within it. It’s also tax-managed, so it helps with tax mitigation. So primarily a strategy, but it has that extra side to it as well.
With all these, we are just always looking for things that can give our end clients an advantage when investing and give our advisors best-in-class tools. We are always thinking about taxes. We think that taxes often get neglected or don’t get enough attention when it comes to a portfolio. That’s one of the reasons we emphasize ETFs rather than mutual funds. It’s not a take on active versus passive debates. It’s mostly simply tax inspiration.
WM: Can you share what are some of your top stock picks right now?
BG: We do have portfolio managers on the platform who do individual equity picks, and I am not one of them. I don’t know what their favorites are right now. They also construct some interesting systematic portfolios. They have a portfolio constructed specifically to provide exposure to artificial intelligence. They have a portfolio particularly constructed to provide exposure to companies with women as CEOs. But they also have traditional bottom-up management portfolios as well.
WM: And I believe you said when it comes to cash, you hold the minimum needed for liquidity?
BG: Yes. We will use short-term Treasuries sometimes. If you go back to the beginning of 2023, and especially in the bond portfolios, the 20/80 version of our model, our interest rate sensitivity was quite low. At the beginning of the year, it had a duration was probably something like 3, so roughly half the sensitivity of the overall index.
You can almost call it dollar-cost averaging—slowly over time, bringing that up. It’s important to be ahead. Markets are always forward-looking, so oftentimes, the real movements come earlier than people think. So, we brought duration up much, much later than I think the average on the street, probably a little bit early relative to what we should have. But if you look, for example, at what the Agg (Bloomberg U.S. Aggregate Bond Index) has done since the middle of last October when it bottomed, it’s up about 13%. Bills are up nicely over that period, too, doing what they are supposed to do, up about 5%. But you could really go back to October of last year and see an extended period where intermediate-term bonds pretty soundly outperformed short-term bonds.
So, we’ve kept our cash levels minimal, generally speaking, right now. We are also keeping our short-term bond positions pretty minimal as well. We were afraid of duration, like everybody else. But trying to be forward-looking, we are not really anymore.
WM: Do you use direct indexing?
BG: We do. We have direct indexing options on the platform. As I’ve said, we care a lot about taxes and the extra returns, extra alpha that advisors can help clients keep by really focusing on taxes. It makes a big difference. And you don’t have to compete for that alpha like you do when you are doing securities selection on stocks and bonds, so we want to make sure that we are always being as smart about that as possible and that the advisors we work with have really good options.
WM: Can you tell me which providers you use for that?
BG: Yes, we use Parametric for direct indexing and will continue to expand our offering by providing even greater choice for our advisors.
WM: You touched on this already at the beginning of our conversation, but can you talk more in-depth about which areas of the market you are taking "risk on" and "risk off" right now?
BG: We are overall aggressive right now. We actually made our last tactical trade on August 19. And even though we remained aggressively positioned overall, we still think that stocks are going to outperform bonds over the next year. We took down a little bit of our overweight to equities. We rotated some emerging market exposure into that low volatility position that I had mentioned. And we also took some of the credit risk out of our fixed-income holdings as well. Those are the main places that we’ve taken risk down. We are always trying to be risk-aware, always looking for different kinds of diversifiers. Adding the low volatility position was part of that, and it kind of fits with our overall strategy of even within our diversifiers, making sure that we diversify our diversifiers.
WM: Are you incorporating ESG into the portfolio?
BG: Not in our model portfolio. We do make sure there are robust ESG options available to advisors if they have clients who want that exposure. We also have options that are sometimes called "morally responsible investing." It’s just a different set of values. If clients want to invest based on their values, we want to make sure there is a way to support them on that. But for our primary portfolio, we keep it neutral.
WM: Do you invest in any Bitcoin ETFs among your ETF line-up?
BG: We don’t have that within our model portfolios. But we consider it important to have it in the line-up available to advisors if their clients want some exposure. We recommend that the exposure be kept relatively small because of the impact of volatility it could have, but we want it to be there. Once they were approved, we were one of the first shops out there to approve some of the ETFs that provide exposure to Bitcoin. We have some people on our team who are very strong in that area and we are already having the conversations. We actually have four Bitcoin ETFs on the platform—those from larger, more well-known providers, so there’s that opportunity to get exposure.
WM: If you could summarize, what differentiates your firm’s investment philosophy from your competitors?
BG: We are very data-oriented, but we think being overly data-oriented can be dangerous, especially with this cycle. We saw a lot of the traditional indicators of a recession flag. And I think having a team that is analytically extremely talented and data-oriented helps us with what we do. But we also realized that in the post-pandemic environment, everything going on economically was being thrown off in strange ways. And we are always looking underneath the hood, looking inside the numbers with some depth. Based on that, even when at some point 80% to 90% of the managers in the field were calling a recession, we weren’t. I think that reflects the overall process that we have.
