Published on August 23, 2022

There is no such thing as a one-size-fits-all approach to investing, which is why we focus on our clients’ unique needs when developing our investment strategies.

In working with clients over many decades, we have found our most productive questions are those focused on clients’ investment objectives. We want to know what our clients are trying to accomplish, how we can help them achieve it, and what problems they need us to help solve. Clients’ goals often include a healthy retirement, having enough money to leave to children and grandchildren, growing income to offset inflation, etc. We organize these in a detailed financial plan that we monitor and update. How we build client portfolios varies depending on their needs, investment horizon, risk tolerance, overall financial picture, and other considerations.

By first and foremost focusing on the “why” of portfolio construction, we are better able to devise the “how” or the “what.” Simply put, we utilize a solutions-based approach to portfolio construction, one that is tailored for each client based on their particular goals and needs, as well as their timeline, resources, and comfort level with risk. We aim to build efficient portfolios that optimize the asset mix to solve each client’s “problem” while appropriately balancing risk vs. return to achieve the highest probability of success.

We want to develop optimal solutions for our clients, regardless of convention. We frankly do not care whether our portfolios look like everyone else’s. The key is whether they can consistently deliver the results our clients want.

As a case in point, we have developed a Growth & Income Strategy that we believe can more efficiently and more effectively deliver consistent income and long-term appreciation, relative to more conventional approaches. It uses a flexible combination of shorter-duration high yield bonds and equities with growing dividends. The allocation between equities and fixed income at any given time is a function of the relative opportunity set based on earnings growth, dividend yields, valuations, and fixed income yields. We can position portfolios more aggressively during periods of economic growth and adjust to a more conservative approach during market stress. This strategic mix seeks to give our clients higher current income than many other growth & income portfolios, while still providing the opportunity for significant upside from growing dividends.

Shorter-duration high yield bonds are somewhat equity-like and, in fact, we often regard them as equity substitutes with some very favorable characteristics. First, they yield more than equities on average. Second, they can be considerably less volatile. Third, their short-term nature makes them less sensitive to interest rate and credit risks than their longer-dated brethren. Together, these factors often provide higher current income than equities alone, while dampening the overall volatility of the portfolio.

The equities we select tend to be issued by leading or dominant companies in their respective industries. Such businesses typically gain market share over time, enjoy higher margins, and can raise dividends faster than their competitors. We look for companies built for durability that can be owned for many years, in part to help make the portfolio more tax-efficient than other, more aggressive trading strategies. Furthermore, we look for companies that benefit from secular growth tailwinds. These would include the shift away from carbon-based fuels to alternative energy, the shift toward electric vehicles, the shift from brick-and-mortar retail to e-commerce, and the digitization of the economy to name a few. Companies that address these trends should be able to grow faster than the overall economy and be less sensitive to short-term business cycle fluctuations.

Although many people focus on the capital appreciation opportunities with equities, dividends can be an additional and sometimes underappreciated source of return for investors. Between 1930 and the tech boom in 2000, dividends accounted for close to 50% of S&P 500 Index returns. Technology companies, which do not typically pay dividends, made up more of the S&P 500 between 2000 and 2021. As such, dividends became less relevant to the market’s performance. We believe that going forward, dividends will once again become an important component of returns. Our focus is on companies able to grow their dividends over time. Research has shown that such companies tend to provide greater total returns than those without dividend growth.

Because everyone’s financial situation is different, we approach portfolio construction client by client. Using a basic Growth & Income strategy as a starting point, we seek to optimize the balance between the equity and fixed income components to address each client’s specific needs for current income, growing income, and capital appreciation. After we first help our clients clarify their financial objectives, we then structure their portfolios to meet those objectives. This is what we mean by “solutions-based investing.”

Opinions expressed are those of the author, are subject to change at any time, are not guaranteed and should not be considered investment advice.

Osterweis Capital Management does not provide tax, legal, or accounting advice. In considering this communication, you should discuss your individual circumstances with a professional in those areas before making any decisions.