A lot of business owners are certainly disappointed with the performance of their portfolio, and many are disappointed with the performance of their business, as well. It has become clear to some that they haven’t been as thoughtful as they had hoped to be in managing their portfolio to hedge their business risk.
On the business side, account receivables and payroll are currently the major concerns among business owners, said Robert Tholl Jr., an investment adviser with J.P. Morgan’s Private Wealth Management group. On the personal side, they’re looking for predictability in their portfolios: They want to maximize their return with as little risk as possible.
According to Jerry Pearson, J.P. Morgan managing director of Private Wealth Management, the business owners that J.P. Morgan serves are very confident in the businesses they’re running or managing because they know their businesses very well.
Some of the “traditional advice” a business owner might get from a financial service provider is that he should have a 60/40 portfolio. The classic balanced portfolio is 60 percent stocks and 40 percent bonds. The 60 percent of equities should be diversified among big, small and emerging market companies, as well as national and international companies, Pearson said. But at this time when businesses are extremely sensitive to the economy, as are the stock markets, people who stick with the 60/40 ratio aren’t diversifying the way they think they are, he said.
In the risky asset category there are such things as equities, real estate, private equity, hedge funds and similar strategies. Non-risky assets, which do bear a little bit of interest rate risk, include high-quality municipal bonds and short-term treasuries and U.S. agency securities. If a person simply divides their portfolio up by risky and non-risky assets, that portfolio is very lopsided, Pearson said. While not very exciting, high-quality, short-term and intermediate-term fixed income is the bedrock of a portfolio.
“You need to have something in your portfolio because when the economy turns south, interest rates are going to go lower and bond prices that have certainty of payoff are going to go even higher, so they do exactly what you expect. You’ve got to make sure your portfolio has a proper balance.”
Pearson said J.P. Morgan has been very successful in opening business owners’ eyes to the type of portfolio that would be complementary to their business and the risk their business takes, as opposed to being “additive” to their portfolio.
“We’ve had some real good conversations with folks about how to structure their portfolios with their liquid assets in a way that’s going to be complementary to their businesses,” he said.
Stocks are economically sensitive, and when the economy isn’t doing well, the stock market doesn’t do well. Government bonds, derivations, municipal securities, gold and Treasury inflation-protected securities are all doing well currently, Pearson pointed out. In his experience, high-quality municipal bonds are the foundation for most high-net-worth individuals’ portfolios, but he believes high-quality municipal bonds are sometimes underutilized.
Pearson said J.P. Morgan has a lot of strategies and global resources it can take advantage of to assist clients in strengthening their portfolios. He said his company takes a more global view of a business owner’s balance sheet. Instead of offering what he calls the “typical” advice, J.P. Morgan delves deeper to come up with a strategy that will truly complement the risks a client is taking, he said. As always, the goal is to achieve efficiency and get the most possible return for the minimal amount of risk.
Pearson thinks a lot of financial service providers neglect to take a close look at their client’s total risk profile. Someone might have an 80 percent interest in a privately held company in a specific industry that might have real estate exposures or international exposures, he said.
“You want to build a portfolio that will complement that,” he said. “We want to make sure that we account for inflation, so we really want to focus on real return. To get a consistent real return that can exceed the rate of inflation with minimal volatility is something that should be very attractive to folks, and high-quality municipal bonds can very well be a bedrock component of that.”
It’s not just about what age a person is at and in what point in life he or she hopes to have accumulated X amount of money, Tholl said. That’s not necessarily the best way to go about building a portfolio, he said, and that’s why J.P. Morgan investment advisers prefer to have very thoughtful, deliberate conversations with their business clients.
People who have amassed wealth are typically good at doing something, and many times they’re business owners with specialized expertise, Pearson said. Most often they want to make sure they maintain their wealth and grow it at a reasonable rate.
“I think when they really sit down and think about it, that’s a job they should be doing themselves; they shouldn’t necessarily hand that responsibility to a manager that is going to invest in stocks in American manufacturing companies when that’s the risk they’re already taking with their business.”
J.P. Morgan Private Wealth Management has a footprint that spans 22 states.