Alternative Path
MyCIO is an investment advisor, but it is not into stock picking. Among the investment vehicles it uses are no-load, open-end mutual funds and index-based exchange-traded funds (none of them leveraged or actively managed). The team also employs separately managed accounts invested directly with asset managers, not packaged in a wrap product.
The firm uses a combination of outsourcing and in-house expertise. For the former, they subscribe to Bank Credit Analyst for economic forecasting, plug into Morningstar and Zephyr Associates for investment research, and employ Callan Associates, a consultant to pension plans, endowments and foundations.
"We take all of that data into our investment committee and make the ultimate call on asset allocation and investment products," says Lees, adding that the goal is to build portfolios based on broad-based allocation. MyCIO custodies most of its assets at Charles Schwab and JP Morgan. Fees for myCIO's high-net-worth clients start at 100 basis points for accounts up to $1 million, and drop as assets increase.
The firm is big into alternative investments--mainly hedge fund vehicles using long-short equity strategies. For clients who can afford it, the firm will invest money directly into a particular hedge fund. For those who can't pony up $10 million to $20 million minimums, the firm has created several feeder funds that pool together commingled client assets to meet the investment minimums of a particular fund.
Lees says the feeder funds have a $250,000 minimum. The largest fund has raised $200 million, and the second-largest about $140 million. The fees for the largest fund include a 60-basis-point management fee and 10% of profits. Fees on the second-largest fund are 1.25% and 10%, which Lees says is significantly below industry averages. He notes that these investments go through two levels of audits at year-end, and that the three partners and the firm's managers eat their own cooking by investing directly in each of the strategies.
"The allocation [to alternatives] can be as low as 10% and as high as 30%, depending on the client," Lees says. "But it's a meaningful percentage for all of our clients."
Jim Henry, a myCIO senior manager, says the firm works with seven core hedge fund managers. The only fixed-income strategy is with Radcliffe Capital Management, which runs an ultra-short bond portfolio. "They do a lot of research on non-rated bonds, with a lot of them being convertibles," he says. "Their goal is 7% to 9% returns, with low standard deviation."
Among its hedged strategies, myCIO plugs into a long-short equity fund and a futures fund from Renaissance Technologies LLC, the outfit founded by famed hedge fund investor James Simons. Henry says myCIO runs correlation analysis to make sure all of its hedges aren't correlated, and that these funds have shown their worth in turbulent markets.
"In this type of market environment, the hedges have proven themselves, and it's great to be able to tell clients they were flat in August when the markets were down 5% to 6%," Henry says.
Sticky Referrals
While myCIO's brochure lists family office services as one of its business lines, the company's partners stress they don't have a traditional family office per se. It's more of a mini-family office that's a value-add for their investment advisory clients.