CLS Investments uses exchange traded funds—and some individual bonds—to manage the income stream for clients. Asset manager JJ Schenkelberg tells how various types of investments fit into this strategy.
Kate Stalter: Today’s guest is JJ Schenkelberg, Senior Portfolio Manager at CLS. JJ, a few weeks ago I spoke with your colleague Scott Kubie, and we talked about risk budgeting, but I wanted to talk with you today about the firm’s managed income strategy, which you launched earlier this year. Maybe you could just start out today by giving us the bird’s eye view of what that is.
JJ Schenkelberg: Sure, thank you, Kate. We are very excited about the managed income product.
There are several key features to the product. One is that we want to create a product that could have a diversified set of income-oriented investments in it, so it’s a diversified portfolio of ETF separate account.
It’s an ETF separate account. This is diversified across different income-producing ETFs. For example, in our portfolios right at the moment, you are going to see a lot of iShares US Preferred Stock (PFF) as well as iShares High Yield Growth (HYG), because we feel like there is a lot of value in that space right now, and really that is where the income is being generated. So within our portfolio, about 20% to 40% of the allocation may be in there.
But what we really wanted to do was be able to be flexible with our income-oriented allocation. So if we start to see the market environment for these types of investments start to sour, we can move the portfolio investments, maybe to a different income-oriented space, such as income-oriented equities, or other bonds, or possibly real estate.
And so we really started as a foundation of income-producing assets, and then we combine that with a bucket approach. A lot of clients that are looking for distribution, their advisors will create a bucket approach where they can segment out their funds into cash and short-term investments, and then more long-term-oriented investments.
What we wanted to provide was for the clients to be able to do that in one account. So we are able to create a cash bucket, which is designed for those immediate distributions, and then we have a reserve bucket that is designed to reserve that cash so that the client knows that it is safe for those future distributions.
And then we have the third bucket that is the income-producing assets, which is designed to refill those buckets and replenish them over time, so that we are generating cash for those distributions from income, and not necessarily having to sell securities to generate that distribution cash.
Kate Stalter: One of the things I was curious about: How did it come about that this particular strategy got launched this year? What was the goal, or the target customer you had in mind?
JJ Schenkelberg: Well, we definitely have found that our clients are really looking for a greater amount of stability. Reliability and consistency were two buzzwords that came up consistently when we were speaking with our advisors and clients. They were looking for a reliable income stream and then they wanted consistency to know that that income is coming in the future.
So when we use those two buzzwords and we are really looking for an investment solution for them, that’s where it just really led us to a combination of that bucket approach, which provides that reliability to know that your cash is available for you. And then the consistency which comes from the income being generated off the income-oriented investments, especially in this volatile time period we’ve been in the last ten or 15 years.
We just have a lot of clients that know they want to be in the market, but they just really are looking for that reliability and consistency in their investments. So we felt this type of product could really meet those needs for these clients.
Kate Stalter: It sounds like from what you are saying, that you also included the ability to adapt as market conditions change. Can you say a little bit about how you’ve done that?
JJ Schenkelberg: Yes absolutely. You know, right now, we do have a little bit more concentration in the preferred stock and high-yield growth.
We do have some exposure to real estate. Real estate, as we know, the last ten years, the risk characteristics have been rather high. But we have recently started to see the risk characteristics fall in that space, and it is starting to look like a little bit more attractive area to be. So we have started to move some investments towards that space, and so that gives us some flexibility when we see those changes.
Another important feature of the allocation, following up from Scott Kubie’s discussion, is that we do have risk-budgeted sets of portfolios. So, if the client is conservative, and doesn’t want a lot of volatility in their portfolio, we can manage the allocation at a lower risk budget, which will give it a little bit different mix of income-oriented assets than somebody who is willing to have a little bit more volatility in their portfolio.
And maybe it means more growth. So the more growth-oriented client may be invested more heavily in dividend-oriented equities, whereas our more conservative clients may have a mix of bonds in their portfolio, including possibly emerging market bonds, corporate bonds and a variety of different bond instruments where we see value.
Kate Stalter: I wanted to follow up on a couple of things you said here in the past couple of minutes, JJ. I want to come back to the idea of real estate for a moment. How do you get exposure to that? Is this through REITs, or through some other instrument?
JJ Schenkelberg: We do primarily use exchange traded funds in our allocation. Right now we are using iShares Global Real Estate (IFGL), as well as the iShares Dow Jones US Real Estate Index (IYR), so that gives us the opportunity to not only gain exposure to the US real estate market, but ETFs have really evolved to give us exposure to many areas of the market that we are looking for. We primarily do use exchange traded funds in our allocations.
Kate Stalter: And I have the same question for you, then, about getting exposure to bonds. How do you go about that?
JJ Schenkelberg: We use exchange traded funds there, as well. And we do use a variety of instruments.
For our larger clients, we do have a special program for our clients that have an account of $500,000 or higher. We will incorporate individual bonds into the portfolio. Being able to have a combination of equity ETFs with individual bonds is actually a very nice portfolio that can have a more stable income stream from the individual bonds, and provide a bit more consistency to that income.
We can do that in a variety of ways. For our larger clients, we can do it with individual bonds, and then for our average clients we do use ETFs. And really, as I said, the ETFs, these have expanded so much that our ability to tailor that bond side with ETFs, we can really drill down to own specifically US Agency bonds, for example, or mortgage-backed-security bonds in one ETF.
Kate Stalter: I’m curious: Are these strategies that you make available to your individual clients, or all they also available to other advisors who would like to use these?
JJ Schenkelberg: We do business primarily through advisors. So typically, our products are offered through individual advisors. We work with many, many different independent advisors, as well as through different broker-dealers, so if you are interested, and can check with your advisor, they should be access this product through our platform.
