How a disciplined process helped an RIA re-imagine portfolios

For a family-owned registered investment advisor like Bakersfield, California-based Entruity Wealth, portfolio construction can be a daunting and time-consuming task. Researching stock and bond markets, mutual funds and global economic trends, while staying focused on tax impacts and clients’ objectives — it’s a heavy lift.

But by sticking to a consistent, disciplined process, Entruity was able to remake its portfolio strategy, focus more on client financial objectives and free up time to spend with clients.

In its monthly investment committee meetings, Entruity has focused on three key issues: gaining a deeper understanding of manager selection, using vehicle selection to minimize tax implications and ensuring that portfolios stay aligned with customer objectives. Importantly, the team has also shifted away from time-consuming in-house portfolio construction, relying on Capital Group to build portfolios to meet its needs.

“Entruity is only four people in Bakersfield, California,” says Andrew Barnes, the firm’s president and chief investment officer. “But we’ve got the entire foundation and research capability of Capital Group behind us. When we look at our portfolios, there’s a reason why everything is in there, and it’s not just us wanting to match the market.”

Barnes co-founded Entuity Wealth with his father, Bradley, in 2017.  The elder Barnes had spent 43 years in financial services, beginning as a stockbroker at EF Hutton in 1981. The name “Entruity” is a combination of values important to the Barnes family: trust, truth and integrity. 

Drawing from local wealth in the agriculture and oil industries, the two have built their practice into a $125 million RIA (as of 10/31/2024).

In the beginning, a two-person investment committee — Bradley and Andrew Barnes — did it all, running the firm alongside Brad’s wife, Julie, and daughter Laurie. The Barneses did their own research, picked individual stocks, selected bond funds, built their own portfolios. Monthly investment committee meetings went deep into the weeds and lasted four hours or longer. Then came the punishing bond market selloff of 2022. 

Manager selection: A bear market in bonds raises tough questions

“The fixed income market was struggling,” Andrew says. “Clients who think of bonds as safe money were seeing their bond values drop by 20%. We compared Capital Group’s bond funds to what we were using and saw that Capital was doing better. That led us to think, there’s got to be a better way to construct portfolios.”

Entruity viewed fixed income as a way to mitigate risk in the equities market. What they learned, however, is that some bond investors have a different strategy. “Some of the funds we were using were focused on outperforming the aggregate (the Bloomberg Aggregate Bond Index), often by taking credit risk,” Andrew says, referring to the possibility of a financial loss resulting from a borrower's failure to repay a loan. “As a result, during the bear market in bonds, our portfolios were hit particularly hard.”

Seeking a deeper understanding of investment philosophy, Entruity initially worked with Casey Dregits and Capital Group’s Portfolio Consulting and Analytics team to revisit the role of fixed income in its portfolios.

“We were looking for a foundation in a choppy market, where we can rely on fixed income not to pull the rug out from under us,” Bradley says. “Our first conversation with Capital Group was around fixed income: How do you think about it? Do you view it as trying to get as much income as possible, or as a balance to equity?”

“We have a very consistent answer to this question,” Dregits says. “Fixed income should play four key roles in a portfolio: diversification from equities, capital preservation, income and inflation protection. In volatile markets, diversification is critical. Your bond portfolio shouldn’t behave like stocks when volatility hits.”

Managing tax “surprises”: Leaning into active ETFs

A second area of portfolio focus for Entruity was avoiding what Bradley calls “capital gains surprises,” which can drag down after-tax investment returns for clients. They found a solution in actively managed equity exchange traded funds (ETFs), which can combine the tax efficiency offered by ETFs (ETFs are structured to minimize capital gains distributions) with the selection and flexibility advantages of actively managed funds. This also freed the Barneses from time-consuming analysis of the tax implications of buying and selling individual stocks.

Working closely with Capital Group on active fixed income and equity ETF products impressed upon Entruity the depth of experience and research that goes into successful portfolio construction. “Anyone can build a portfolio — the pieces need to add up to 100%,” Andrew says. “But understanding how the pieces work together to achieve a specific goal, that’s entirely different. It’s part science, it’s part art.”

Entruity then worked with Capital Group to look even deeper at Entruity’s overall portfolio construction strategy and whether it could improve Entruity's ability to tailor portfolios to individual investor goals. 

“We asked ourselves, can we research these markets and come up with better ideas than the Capital Group portfolio managers and analysts? And we concluded no, we probably can’t do that,” Bradley says.

Instead of using existing Capital Group model portfolios, Entruity worked with Dregits to build its own suites of portfolios.

Casey came back with an accumulation suite, income/distribution suites and a tax aware suite as options to consider," Andrew says. “And we’ve just recently built out a cash management service, which is essentially a portfolio geared toward receiving income of cash and cash equivalents.”

The 60% equity/40% fixed income ETF accumulation portfolio Capital Group presented demonstrates how the portfolios can be customized by Entruity. Recognizing that many Entruity clients want exposure to precious metals, 8% of the portfolio is in gold and silver investments. Overall, 63% of the investments are in Capital Group active ETFs and 37% in funds managed by other firms.

Inside a portfolio: One size doesn’t fit all

Eye on the ball: Making sure portfolios stay aligned to clients’ objectives

Freed from the burden of constant market monitoring, trading and research, Entruity now views portfolio review through a simpler lens: Is the portfolio still aligned with the investors’ goals?

“We’re not so much trying to make investment decisions, we’re trying to make sure all the portfolios are in alignment with client objectives,” Andrew says. “Every quarter we meet with Casey to ask, are the investments performing as we expect them to?”

“We have an ongoing discussion on a consistent basis, analyzing their portfolios,” Dregits says. “It’s not a one and done. Has anything changed in the market? Has anything changed with your clients? Has anything changed with your view of the markets? Has Capital Group updated our views on how to best achieve investor objectives? It’s a consistent, ongoing conversation to make sure the portfolios align with what Entruity wants for their client base,” Dregits explains.

“We work with literally thousands of advisors on portfolio construction and we find that the best teams have recurring processes in place to review portfolio construction, both internally and directly with their asset manager partners,” Dregits says. “It takes discipline and consistency from the advisor, but we believe it pays off in making sure portfolios remain closely aligned with client objectives.”

For Entruity, working with an asset manager on portfolio construction has multiple benefits. It allows the RIA to rely on Capital Group’s deep research capabilities and decades of experience in investing. That in turn allows Entruity to spend more time with their clients.

Bradley sums it up: “It gives us more time to talk to people, which is what we should be doing.”

Want to take a more flexible, active approach in your client portfolios?

Get an unbiased point of view on portfolios and talk through solutions with trusted partners. Connect to your Capital Group representative or sign up for an in-depth portfolio analysis and review today.