Procyon Partners was founded in 2017 by financial advisor Phil Fiore with support from Dynasty Financial Partners. Fiore built one of the most prominent institutional advisory groups at Merrill Lynch and UBS before going independent. Although much of the RIA’s $7 billion business now consists of private wealth, institutional DNA still runs through it.
This includes the RIA’s portfolio management process. The firm’s agency model portfolio (described below) includes a 20% allocation to alternatives, which some may consider high for a retail wealth management firm. And this allocation is not made through alternative platforms such as iCapital or CAIS, but through Procyon’s proprietary funds.
Antonio Rodriguez, Partner and Chief Investment Officer, Procyon, Provides an inside overview of RIA’s 50/30/20 model portfolio.
The following content has been edited for length and clarity.
WealthManagement.com: What is included in your model portfolio?
Antonio Rodriguez: If you were to compare what we do to a normal 60/40 portfolio, we would say it would be 50% equity, 30% fixed assets and 20% alternative investments.
We mostly use passive strategies on the equity side, mostly on the equity side, whether it’s large-cap, small-cap, mid-cap, international markets or emerging markets, individual ETFs. And then we’re also going to use some thematic ETFs, like cybersecurity oil. We purchased some specific energy-related ETFs in late 2020 and held them for a few years.
On the fixed income side, we use active managers and try to keep our duration close to the benchmark.
For alternatives, if the client qualifies, we primarily use our two funds. If they don’t qualify, then we will only use one of the private funds they qualify for and look for an alternative (possibly a 40 Act fund) to act as an agent for our fund.
WM.com: What are stocks and bonds? What drives these configurations?
Augmented reality: The primary factor driving allocations is the voting membership of our Macro Investment Committee. Every quarter, we survey all members of the committee. We weigh the answers and act accordingly. We essentially asked them, “If you were 60/40 or whatever the goal was, what would be your tactical weight? Here’s the weight last time and here’s how you answer today.”
We use benchmarks to measure our success. On the equity side, our benchmark is 75% Russell 3000 and 25% ACWI (ex-U.S.)
On the fixed side, there is only the Bloomberg Aggregate Bond Index.On the private side, there is no real Benchmark there. It’s more of a manager-to-manager relationship.
We often replace or augment our equity or fixed income targets with individual securities or SMAs. We do have a range of equity portfolios that are managed internally and have multiple SMA managers within the firm covering both equities and fixed income.
WM.com: Have you made any allocation changes in the past six months to a year?
Augmented reality: We were overweight China about a year ago, but we exited it because we saw they were not reopening. We currently hold a market weight or neutral stance on emerging markets. We also added some small-cap and developed international stocks simply because the expected returns from the mean are so large.In public stocks, typically, this will revert to the average compared to the U.S. stock market
For the holdings themselves, we use the Vanguard and Schwab ETFs. Our growth rate is 23%. We have 20% in the large-cap mix. We’re using the Capital Group Dividend Value ETF, which has an interest rate of 7%. We hold a 5% position in the Nasdaq Cybersecurity ETF. We also added the Pacer US Cash Cows 100 ETF. We’ve moved away from small-cap value in the last year. We also added back to small-cap growth with the Pacer US Small Cap Cash Cows ETF.
Our mentality is that there will always be three rate cuts this year because we tend to believe in the Fed. We believe that if these cuts occur, we will have greater beta on the growth side than the value side. This situation is not priced in as of yet, but we are watching closely as some leadership is changing in the market.
On the fixed income side, we’ve moved closer to duration. We have essentially exited most of the cash positions we held over the past two years. We’re overweight cash; now, on the fixed income side, we’re back to market weight. In terms of duration, we’ve been short for a long time. We are approaching neutral duration. But in general, we have active managers, so we don’t want to overmanage managers either. We play tactics where we need macro fundamentals, but we give managers a lot of leeway.
WM.com: How is your private equity fund structured? What do they invest in?
Augmented reality: We launched two flavors: one is a vintage pullback series, which is Procyon Vintage I. It’s all private equity and venture capital. We have funded three managers so far and plan to fund a fourth manager launched last July. We do not charge any management fees and do not invest in current Procyon clients. Whether you own Apple stock or Treasury bonds, or own Procyon funds, we get the same income. We want to be a true fiduciary, and we want to make sure we don’t just have a single-source solution. Therefore, we formed several independent parties to create and deliver these funds.
Evergreen Structure was launched in the fourth quarter of last year. This is a 307C fund, and all investments within the evergreen structure will be hedged and financed through private credit and a small amount of GP. We have identified six managers there and we hope to have all the funding available to them by the end of April. The target minimum financing amount is $25 million. So once we raise $25 million, we’ll be able to deploy all of that capital to accredited investors. Although the basic investment is only QP, its minimum investment amounts are very high, with minimum investment amounts of US$5 and US$10 million. Again, we do not charge any interest or administrative fees to Procyon customers. We are developing a share class that will allow other RIAs to invest for a small management fee.
WM.com: What is the structure of the first fund you mentioned, Procyon Vintage I?
Augmented reality: This is a feeder fund and will likely close by the end of the year. Once we fund the fund, we close the fund and investors will have a 10-year lock-up period and these are QP-only investments.
WM.com: How did you get access to these private equity managers?
Augmented reality: We have a large network within the company of consultants and people who have been in the industry for a while, so we have a lot of input there. We have a lot of people knocking on our door wanting to get funding and be part of our platform. We don’t want to use iCapital or CAIS for funding because if we could put them on the platform, then we wouldn’t be creating our own feeder. We basically just buy them on the platform. Therefore, we hired Atrato Consulting, a company owned by FL Putnam. Atrato’s sole focus is on conducting due diligence and finding new management. They found most of their managers there. We gave them the management standards we were looking for, which were demanding, off-platform and inaccessible, and that’s how they came to us.
We are looking for diverse managers. So what will happen is that in an old-style fund, investors will put money in and if there is enough money to fund another manager, then we will fund that manager. Then there is the retracement structure. Every fund manager will have his or her own capital needs. So each commitment will be funded bit by bit over one to two years. And then what’s going to happen is, there’s going to start to be some allocations that may be a way to self-fund.
WM.com: What makes your portfolio unique?
Augmented reality: In public equity, we are providing low-cost, tax-efficient, tactical and thematic services. We have a top-down understanding of the economy. We have a bottom-up understanding of the portfolio and operate that way. But it’s hard to tell the difference now. You want to ensure that people have efficient access to public markets. So what we really want to do is find hard-to-reach managers.
We are looking for funds that may be closing but are willing to take on some interesting new deposits or new clients. We do a lot of work on the other side because that’s where most of the work belongs. It’s hard to find good managers on the other side, so we provide a lot of value there. Then we can access it. So we’re getting calls from people who are investing in alternatives with us right now and they might be offering co-investing opportunities to some unique clients. We are working hard to provide unique opportunities to all our clients.
WM.com: What is your due diligence process when selecting asset managers and funds?
Augmented reality: We have a group internally called the Manager Research Group. This is a committee whose job is to do all due diligence on all managers, and it was born a few years ago. We use Procyon’s institutional due diligence process because we have billions of dollars in institutional funds, 401(k)s and pensions. We took a due diligence process and overlaid it with a private wealth prism. In institutional due diligence, it’s all about meeting metrics—looking back. In private wealth, it’s all about expected returns. So we brought those two things together and created our Manager Study Group. They meet once a month.
We looked at about 11 different pillars. Many of these have to do with manager tenure, fees, who owns the fund, how much is in the fund’s allocation, potential allocations, and peer rankings, among other things. They must all be within the top two quartiles of all data to be considered a good fund.
For private individuals, the situation is quite different. This data is not readily available and does not allow for an easy understanding of the market as a whole. We ended up having to go manager by manager. We have a voting panel made up of key members of the main committee, we line up the managers, they are proposed, we study it, and then we vote them in or out.
WM.com: What opportunities do you see for investing in alternative investments?
Augmented reality: You should be fully diversified in your portfolio. Now, if you’re not an accredited investor or higher, number one, it’s hard to get these things. So the barriers are there for a reason and so we stick to them. But what ends up happening is once you’re accredited and qualified, all new doors open up to you, and that’s just the way it’s built. What ends up happening is that there’s so much demand in the private markets because the public markets have become so much less diversified.
Best of all, today you can invest in alternatives with much better liquidity structures than 10 years ago. Evergreen structures will be more difficult. We do believe that when your liquidity is low, you can earn a premium, so we want to capture that for our clients. To clients and even some professionals, public markets look increasingly “rigged” and people no longer trust them as much.
WM.com: Are you interested in a Bitcoin ETF or getting into the cryptocurrency market?
Augmented reality: Over the past few years, we have entered the cryptocurrency market on a non-discretionary basis. As needs arise within us, we want to provide the right solution rather than recommending everyone. So we worked with a company called Eaglebrook Advisors and we basically refrigerated everything. Now, with the advent of ETFs and their size and scope, it’s more of a tactical decision.
We have approved a Bitcoin ETF to our recommended list. Essentially, for us, the current structure of Bitcoin ETFs is fees because they are all supposed to have very low tracking error and so on. But we have not made an active decision to allocate to Bitcoin, and if we did it would be in the alternatives portion of the portfolio.
