Savant Wealth Management, a national RIA with almost $28 billion in AUM, has been in the financial planning business for over 30 years. Recently, the firm has been on an acquisition spree, buying smaller RIAs and entering new markets with the stated goal of tripling its assets by 2027.
However, the firm’s reliance on evidence-based investing in its allocations has remained the same throughout this growth period. According to Gina M. Beall, director of investment research with the firm, before investing in a new fund, asset manager or asset type, Savant wants to see historical data to support its choice.
WealthManagement.com spoke to Beall about how Savant constructs its model portfolios and what objectives it aims to achieve.
This Q&A has been edited for length, style and clarity.
WealthManagement.com: What’s in your model portfolio right now?
Gina M. Beall: We have different models available for our client base. I’ll go off one of our main models, where at a broad asset class level, we use stocks, bonds and alternatives. We call it our 70 model. In that model, we’ve got 65% stock allocation, which is global stocks. We’ve got 15% fixed income and 20% alternative asset classes. Within the stock allocation, we have 60% allocated to U.S. stocks, 40% to international stocks, and also, in that global stock allocation, 5% is allocated to global REITs.
In the stock allocation, both U.S. and internationally, we do tilt toward factor funds. We’ve got, for example, size and value factors, as well as quality. Those are three of the bigger factors we tilt to in our global stock allocation.
In the fixed-income space, we break the portfolio down into five key areas. We have the majority of it is intermediate fixed-income, which is high-quality U.S. fixed income. We also have another allocation to short-term bonds, which is again high-quality U.S.-focused. Then, we have about 10% in TIPS (Treasury-Inflation Protected Securities). We’ve got another 10% in multi-sector fixed income and the balance in international bonds. And that’s broken down between developed and emerging market bonds.
In the alternative space, we break that down across several asset classes. We’ve got some diversifying strategies, some real assets, and some private credit exposure.
WM: How often do you make changes to your allocations?
GB: We don’t use a specific calendar or timeline to make changes. We review asset allocation on a regular basis. And some of that is driven by the forward-looking expected returns that we calculate for each of the asset classes. Those are also referred to as capital markets assumptions. We generate those every quarter for the asset classes that we invest in and sometimes those provide information directionally on how we want to shift the portfolio.
But I would say we really make changes based on a long-term strategic framework. We are not making a lot of changes. We are not trying to do market timing. It’s based on the long-term strategic outlook of those capital market assumptions. So, we might make changes one to two times a year on average in the portfolio. Then, the same goes for if we were going to change out one of the actual funds that we use. That is driven more by our quarterly due diligence process, which looks at our funds and our annual fund review. Basically, once a year, we look at every asset class we invest in and screen the universe to see if there is anything better we should be using that might be more attractive from a fee perspective or maybe other features that score higher in our methodology.
WM: Have you made any big changes in allocations in recent months?
GB: Earlier this year, we shifted the portfolio more toward that quality factor on the stock side. We did in both U.S. and international stocks, but the exposure we had internationally was very minimal, so that’s where we did a shift there. We are in the middle of our annual fund review right now, so we’ll potentially have at least one fund swap there in the alternative space, but that is yet to be approved by our investment committee.
WM: What external asset managers do you use, if any?
GB: We use external managers for our portfolio, which are either mutual funds or ETFs. In the alternative space, we do use some interval funds. We have AQR [Capital], another one is Stone Ridge, Abbey Capital, Cliffwater and Variant. On ETFs, we are using Dimensional Fund Advisors. We’ve got JP Morgan, Vanguard, and iShares. Those are primarily the providers that we have.
WM: What’s your due diligence process for choosing asset managers or funds?
GB: Some of the key features we would look at is wanting to make sure there’s broad market exposure in whatever the asset class is. We typically don’t invest in highly concentrated strategies.
We spend a lot of time focused on fees, minimizing the expense ratios that our clients have to pay. Tax efficiency is always a big factor, and it has gotten better and better over time just due to the use of ETFs and other ways that mutual funds can minimize taxes or capital gains distributions for investors.
I would say we also look for strategies that are consistent and do not have a lot of movement in terms of style. We want it to be a very strong, consistent approach. We really want that broad market exposure to be there and for the manager to stay consistent with what they are doing. So, if we select a manager for small-cap exposure or small-cap value, we want them to stay in that space and be consistent over time. We have capital market assumptions for each of those pieces of the pie when we are building the portfolio, so we want to be able to get that consistent exposure from that manager that we know we are going to get that small-cap premium over time and they are not going to be moving the portfolio to mid-cap or having it drift over time.
And then another thing, too, being a large RIA firm, we are very cognizant of the size of the fund that we are going to be putting assets into, just because we have such a large client base now.
WM: Do you have a cut-off for what fund size might be too small for you to work with?
GB: We have a general $200 million number that we look for the fund to have in terms of assets under management. However, depending on the asset class, that may be even too small. It just depends on the asset class. For example, we put more into U.S. core, so that would need to be a larger fund to be able to handle our flows.
WM: Are any of the ETFs you are using Bitcoin or Ethereum ETFs?
GB: No, we don’t use any cryptocurrency exposure in our portfolios. It goes back to our evidence-based investing philosophy. In order to invest in an asset class, we want to be able to understand the historical data surrounding that asset class and the expected return. With those cryptocurrencies, there really isn’t a way for us to come up with an expected return. A company stock would generally have earnings—it doesn’t have earnings. It’s driven more by supply and demand, and we just don’t feel like it’s a great addition to a portfolio if we don’t have a fundamental insight into expected returns that we can rely on.
WM: What is Savant’s investment thesis or investment philosophy around which you build your portfolios?
GB: I think we are pretty well-known for having an evidenced-based investing philosophy. That goes back to what I was saying about the asset classes we are selecting to invest in. We really want to make sure there is long-term data around that asset class and that we can study and rely on it going forward to include it in portfolios. I mentioned small-cap value, for example. We know there is a historical premium associated with that asset class. We do revisit the evidence over time and make sure that’s still going to be there in terms of having enough data and being a good exposure to have in portfolios over the long term. We know it may not work every year, but we are going to base our decision on whether to include an asset class based on the evidence.
That’s why we don’t do market timing or stock picking. We are really looking at broad-based market exposure in the portfolio and tilting it to capture some of those higher expected return premiums over time.
WM: Can you talk about how you use the alternatives in your portfolio and what you feel each of those products offers investors?
GB:.I think managed futures really offers the portfolio the most beneficial [diversification]. It’s basically not correlated with traditional stocks and bonds. And depending on what time period you are looking at, it could even have a negative correlation. So, it really is a great diversifier in a portfolio because it just doesn’t have that correlation with either of the traditional asset classes.
The diversified arbitrage is really accessing that corporate liquidity premium. There’s the ability to capture return premiums from things such as convertible arbitrage and there is merger arbitrage, and there could be exposure to SPACs. So, it’s kind of a unique space to capture a different source of return.
The re-insurance allocation is not again not correlated with financial markets at all. It is based on the insurance-linked industry, and the way we are getting exposure to re-insurance is through catastrophe bonds, which are one of the underlying investments in the re-insurance funds that we are using, as well as quota shares. Those are the two primary underlying instruments, and they really don’t have any correlation with financial markets. It’s really based on catastrophic industry events related to the re-insurance exposure.
Underneath the hood, in [our] real assets, there are infrastructure, farmland and timberland assets. Those are unique. There is a good portion of those assets that are private, so it’s a different exposure than what you would get in a public market fund.
In direct lending, one of the funds we use is a middle market non-band lending fund. In terms of private debt exposure, we also have another fund that has more niche lending or non-traditional alternative lending and exposure. Some of those funds are interval funds, so there are private assets under the hood, but they are balanced with liquid assets around those to provide exposure in an interval fund structure.
WM: You mentioned that it’s not really Savant’s approach to try to time the market, but in doing those regular quarterly and annual reviews, how is the current uncertain interest rate environment playing into your decisions?
GB: Last year, knowing that the interest rate environment was going to be shifting, we extended the duration of fixed income a little bit and added more to the intermediate-term allocation. But in general, in the fixed-income space, we do use some more active managers there because those active managers can actually shift with the market environment as needed in the space they are in. For example, the intermediate-term managers we are using can shift based on the term structure or the credit structure to be able to capture the best exposure in that fund for us. That is one area of the portfolio where we built in additional flexibility because the bond market if you were to buy an index fund, is limited in terms of the opportunity set that’s available. So, we do want more flexibility built into our fixed-income allocations so managers can go beyond the indices, and there is probably more of an opportunity set beyond the index-type exposure in the fixed-income market.
WM: Do you hold any cash?
GB: No. We minimize the cash in the portfolios.
WM: What’s your rationale for this?
GB: We just don’t want to have any cash drag in the portfolio.
WM: Do you incorporate any ESG considerations or what some people call impact investing considerations into your portfolios?
GB: We have separate model portfolios that factor that in for clients who choose to use those portfolios. We have two different versions—one broad ESG model portfolio and another portfolio that is essentially more focused on social values. So, it’s kind of more exclusionary-based type of portfolio. It’s typically utilized by religious clients.
WM: Is there anything else about your investing approach that you feel is important to mention?
GB: I would say we have our model portfolios, but then we also have a number of solutions for clients that go beyond our models. We do have solutions that we can put in place for clients who might have concentrated stock positions or might be selling a business. We have different solutions to meet different needs.
I can give you an example of one of them. We have a custom indexing solution in place. For clients it’s a good fit for, we can put together a custom index portfolio that can either be for a U.S. stock allocation or a global stock allocation, depending on what their account structure is. It’s similar to direct indexing. It’s just instead of using a standard index to track individual stocks at a specific provider, we refer to ours as custom indexing because we are actually designing the blended benchmark exposure that we want. So, it’s more customized than trying to track an off-the-shelf index such S&P 500.
