The Power of Two

When it comes to investing, D.B. Root takes a tactical approach to asset allocation that gives its mMillionaire clients (with assets of between $1 million and $120 million) options often only available to much wealthier individuals.

"We believe in diversifying broadly between seven different asset classes–asset classes that are probably more familiar to institutions," explains Root. The asset classes include private equity, absolute return, managed futures "through real assets using natural resources," as well as more traditional items like domestic and foreign equities and fixed income.

"Our objective is to structure a client's portfolio so that we have specified weightings in asset classes that don't correlate to each other," he continues, noting that they've tried very hard to make sure there's not a lot of overlap between asset classes. "We want to own things that don't correlate with each other. The end result is that we want to produce a rate of return consistently over and above inflation each and every year so that we can meet our clients' needs–both income and capital accumulation–in the most consistent way possible. It has to be measured as a return over and above inflation. Our target rate of return is 4% to 6% above the rate of inflation; that way we can cover income needs as well as incorporate a hedge against inflation."

Kuntz stresses that the concept isn't unique–institutions have long employed this approach to diversification, but that most individual investors think their options are strictly limited to stocks and bonds. As a result, when the firm takes on a new client, there's often a certain amount of education that has to be done because most are totally unfamiliar with the institutional approach.

Investment vehicles used are primarily professionally managed funds run by individual fund managers with established track records, "methodologies that we understand," and low cost structures. The firm also uses some private funds and ETFs.

"Where we probably add the most value is with relationships that we have with independent managers that we've worked with for years and years that have demonstrated the ability to add value within their disciplines," he says.

While Root believes that asset managers can't afford to remain passive, he's not a day trader by any means. "It's active in that, and this is going to sound trite, it's not passive," he says of his investment style with a slight laugh. "It's active in the sense that every day we're managing our allocations."

He says rebalancing is probably done two or three times a year and that the turnover ratio works out to between 30% and 35%.

"Our decision-making is not systematic," chimes in Kuntz. "It's not as though we are targeting certain allocations and automatically rebalancing. We take a much more macro view to what's going on with the markets and with investments."

That macro view and its approach to diversification have allowed D.B. Root & Co. to remain calm in an unsettling environment for many investors. "For the last year we've had a 12% weighting in U.S. stocks, we've had a 15% weighting to foreign equities, so our exposure to the equity markets has been fairly minimal, riding through this very difficult and challenging period," says Root by way of example. "By contrast we have an overweighting in what we call the real asset category, the natural resource category–that would include real estate and managed futures. A 28% allocation there has assured that not only have we done a good job of diversifying the portfolio over the last 12 months it's assured that our clients have earned positive returns–and fairly healthy positive returns, returns that are consistent with our goal of 4% to 6% above inflation."

Removing the Burden

That calmness in the face of market turmoil should not be confused with a lack of concern. There are always concerns over factors that are outside an advisor's control, ranging from terrorism to natural disaster to recession. In the face of all these potentialities, Root says he want to make sure that their clients have the right asset allocation to preserve capital. "Our clients are this middle-class millionaire group," he says. "They're successful professionally, they've achieved a certain level of wealth, but by no means are they done accumulating wealth, nor, more importantly, are they secure that they have enough money. Most of our clients in this segment would be described as insecure."

"And sometimes rightfully so," adds Kuntz. "We're looking at mMillionaires and they're generally people that have made a lot of money, saved a lot of money, and have not worried about spending a lot of money because they're making, on average, a half a million dollars per year. So there is definitely a transition when they hit retirement, where they're used to spending whatever they want and now they have to live within a budget. That's one of the challenges we have. If they want to maintain, or think they can maintain that same level of spending, even though they've created a lot of wealth, typically they haven't created so much wealth that they can have a half a million dollars of income for 25 or 30 years."

Root's biggest worry for these clients is inflation. "In our opinion inflation has been understated for years and now is really once again stepping to the forefront in terms of not only becoming an issue but, potentially a real problem, not the least of which is rising gas prices, rising food prices, and the cost of travel," he says. "All of these things impact the lifestyles of our mMillionaire clients."

The partnership that Dave Root and Carrie Kuntz share was forged when they worked together as a team at their previous employer, Bill Few & Associates, and in conversation it's obvious how well they mesh. Kuntz describes Root as the firm's visionary and credits his entrepreneurial energy with continually pushing things forward. She says her own role it to take those ideas, help cultivate them, and ultimately put them into action.

"It's a great balance of core competencies," she says, "because my background and my expertise really lies in the organizational structure of the firm, the positioning of the talent within the firm, and making things happen.

"It makes for an interesting partnership because we're coming at each other with different views," Kuntz continues. "He's stretching my thinking and I'm grounding his thinking. It makes for a great partnership. It allows us to be successful because we're always playing devil's advocate with each other."

"But we absolutely share the same vision with respect to our clients, how we serve them–it's the same goal always," Root says in conclusion. "Long statement short: We want to unburden the mMillionaire of all their financial concerns."

Managing Editor Robert F. Keane can be reached at [email protected].