What’s in My Model Portfolio: Fifth Third Bank’s Chris Osmond
Launched in 2022 as a wholly owned subsidiary of Fifth Third Bank, Fifth Third Wealth Advisors has grown to $7.8 billion in assets under management. The RIA’s clientele tends toward the ultra-high-net-worth bracket, with average household assets of about $9 million, according to Chris Osmond, the firm’s CIO. That gives Fifth Third advisors more room to play with higher-yielding, but riskier investments in the private markets arena, provided the clients have the appetite for risk.
Wealth Management recently spoke to Osmond about the firm’s approach to investment strategy, why he’s very bullish on infrastructure investments, and trying to calibrate allocations in a market that is sending contradictory signals.
This Q&A has been edited for length, style and clarity.
Wealth Management: What is the profile of your typical client?
Chris Osmond: Generally, we are making investments on behalf of high-net-worth families. Our average household assets under management are right around $9 million per household. So, we’ve got a lot of qualified purchasers. Their demographics really range from the mid- to late-40s and on to baby boomer, pre-retired or already post-retired.
WM: What’s your overarching investment philosophy?
CO: We look to develop strategic asset allocations that really focus on that three- to five-year horizon. And then overlay a tactical asset allocation where we look at a shorter time period—six to 12 months. We’ll look to either capitalize on [current trends] or try to reduce risk, based on our [market] outlook.
Typically, our starting point is a four-quadrant system that looks to identify an economic regime based on economic growth and inflation. We would have a more risk-on posture when we see rising growth and falling inflation. When we see rising growth and rising inflation—very similar to where we are today—we look to overweight real assets, which tend to perform well in inflationary environments, as well as amid rising growth.
Next would be falling growth, rising inflation—this is where we look to avoid long duration and incorporate more market hedges. Lastly, in a regime of falling growth and falling inflation is where we would look to perhaps extend duration and still be somewhat defensive.
Then there are a number of factors that could impact how we allocate across that regime, whether it be geopolitics impacting the current environment, or the rising cost of capital like we are seeing today.
From the portfolio construction standpoint, we look to incorporate a core-satellite approach across both public and private markets. In the public markets, it’s about trying to optimize market efficiency. U.S. large cap stocks is one of the most efficient asset classes. It’s very hard for an active manager to consistently outperform the S&P 500, especially on a risk-adjusted basis. When we look at market efficiency and the ability to drive risk-adjusted returns, we may look to be primarily, if not all, passive in large caps.
We would lean more into active management where the markets are more inefficient, such as emerging markets and fixed income, where active management has historically shown the ability to produce superior risk-adjusted returns over a full market cycle.
In the private markets, we really want the bulk of someone’s allocation to be made up of core investments, like private equity or real assets. Then, depending on the client situation, we’ll look to incorporate more satellite strategies. These are going to be more alpha drivers that tend to have a little bit more risk. We found that incorporating the core-satellite approach is a great way to build an allocation to private markets in a more risk-controlled manner.
WM: Can you talk about the asset class breakdown in an example of a client portfolio?
CO: We don’t have standard models that advisors are required to use. Rather, we provide target allocations and allow the advisor to construct the portfolio that aligns with each client’s objectives. With the public market exposure, we break our allocations into two different sets—your traditional equities, fixed income and cash, where we have six different objectives, ranging from preservation all the way to aggressive growth. Our moderate growth is a 60/40 portfolio. Equities are going to be that 60%, fixed income is generally at 37% and cash or money market funds at around 3%.
The other set of our public market allocations is our broad diversifiers. We now incorporate liquid alternatives into the mix. So, this is going to range from real assets such as REITs, commodities, infrastructure and precious metals to long-short, market neutral and market arbitrage. Things of that nature that can help provide downside protection and create a diversified return source.
Then, we start looking at incorporating private markets. We make an assumption that the more net worth someone has, the more ability they have to invest in private markets and absorb that illiquidity. Our starting allocation for someone with more than $10 million in investable assets is 20%. For someone with less than $10 million, it would be a 10% starting target. From there, it’s driven by the client’s risk tolerance. Someone with high risk tolerance is going to have a higher allocation to riskier, higher-growth private market investments like private equity. Someone more conservative is going to have a higher allocation to more conservative private investments, such as “alternative income.” We don’t call it private credit. We found that when we say private credit, everyone tends to immediately translate it to direct lending, and there are so many private market income-oriented investments even within the credit space.
We look at real assets as the most consistent allocation regardless of risk tolerance because they have both growth and income attributes. And they tend to be a little more tax-advantaged, so they have a heavier allocation. We then turn it over to the advisor to work with each client to assess their willingness and suitability and create a bespoke portfolio.
WM: Within your equities allocation, how much do you dedicate to international equities, and which markets do you prefer?
CO: We do have a home bias in general. We are about 70/30 on U.S. to international, with a little heavier allocation on the emerging market side vs. the developed economy side. We find some developed markets offer some attractive dynamics. Japan, for instance, is going through a shareholder renaissance, with a heavier emphasis on profitability. It’s very healthy long-term.
However, when you look at the anemic growth and the recent surge of inflation across developed markets, it has tempered our expectations. In developed markets, we are still market neutral. We feel there are conflicting signals on both the positive and the negative side. And it’s the same in emerging markets. We do like some countries more than others in terms of where they are in their own maturation. However, a stronger dollar, geopolitics and the war in Iran lead us to be more conservative.
WM: Do you work with third-party asset managers?
CO: We do. I would say we utilize third-party managers, both active and passive, in mutual funds and ETFs, on equities primarily. On fixed income, we have a high-quality institutional team housed within Fifth Third Wealth Advisors. They manage a good portion of our clients’ fixed-income allocations. Those are going to be customized individual bond portfolios. Depending on the objective of the account, it could contain municipal or taxable type of fixed income.
Then we look to broaden our exposure to fixed income with more diversifiers that are more difficult to implement in an individual bond strategy. A good example would be multi-sector or strategic income, where asset managers can be a little more nimble—perhaps ultra-short, perhaps heavier in the securitized type of fixed income, things of that nature.
WM: How do you choose which asset managers you want to work with?
CO: A lot of it comes down to our due diligence process. We spend a great deal of time really getting to know the team, the strategy, the investment philosophy and understanding the environment a strategy should do really well in and when it could potentially struggle. Then we are looking for consistency across those environments.
Within public markets, we are looking at having quarterly calls or meetings with the managers. When it comes to private markets, that’s even more emphasized. We spend a lot of time getting to know private market asset managers. We do every investment with a strategic mindset. However, the permanency of capital in private markets is longer.
WM: Do you invest in digital assets, whether it be through ETFs or directly?
CO: First, we do have ETFs that are specifically designed to target exposure to the build-out of artificial intelligence and digital infrastructure. We do look at the digital transformation we are currently undergoing as a long-term secular thing.
However, there is also a tendency that someone can be very concentrated in these things, even if it’s unintended. So, we try to promote exposure, but in a very balanced approach.
WM: How often does your investment committee review allocations on a firmwide level?
CO: We meet at least quarterly. However, if we need to meet more frequently or off-cycle, we do. It might be through an email communication or an impromptu call.
WM: When was the last time you made any meaningful changes?
CO: We’ve been overweight in small and mid caps since December of last year, as well as real assets, particularly global infrastructure. We were also overweight in emerging-market debt as a replacement for U.S. high-yield bonds. Spreads were at historic tightness, and the hyperscaler debt issuance was making us a little uneasy, so we found the emerging market debt, particularly in the face of a declining dollar at that time, to be more attractive on a risk-adjusted basis.
We did unwind that in our July investment committee meeting and removed that overweight in high yield into more what we call “fixed income-related” type of investments. That would be strategic bonds, with some collateralized loan obligation exposure. Things of that nature.
Right now, we are considering if we should remove the overweight to small and mid caps as, much like a lot of the market, there are conflicting headwinds and tailwinds. The biggest risk out there being the cost of capital and higher yields, which negatively affect interest rate-sensitive sectors.
WM: Do you use direct indexing? Do you do it in-house or outsource it?
CO: Yes, we do. We use multiple managers for our tax-managed equity.
WM: Where do you see the biggest risk and opportunities in today’s market?
CO: I do think that global infrastructure presents a tremendous opportunity right now, both in public and private markets. I lean a little bit more toward opportunities in the private markets, where a lot of value can be extracted, and you can get a more pure allocation to infrastructure. When I brought up infrastructure 10 years ago, there was effectively no interest. Now, everyone seems to want exposure. But I think a lot of investors tend to gravitate to only look at infrastructure to capitalize on the digital transformation and the AI buildout. All that is critical. However, I think infrastructure presents exposure to two existing parallel themes. You have the AI, but you also have the global industrial modernization we are seeing unfold. Post-COVID, companies were forced to redesign their supply chains. We’ve seen a steady increase in deglobalization, onshoring, reshoring. In addition, you have developed economies replacing obsolete infrastructure, and in emerging markets, you have countries establishing new infrastructure. So, I think there are two secular themes working in parallel that infrastructure allows you to take advantage of.
Then you factor in the contractual cash flows that a lot of infrastructure [assets] have. You can get a good hedge against inflation. And infrastructure investments tend to be both income- and growth-oriented, so there are a lot of benefits that are associated with it.
Another great asset class in the real asset category where we believe there is a good opportunity is in mission-critical triple-net lease industrial real estate. When you have a triple net lease structure, effectively, a lot of the input costs get pushed back to the tenant. As the owner of the real estate, you get a lot of inflation protection just through the net lease structure, and then you also have contractual cash flows that also have rent escalators often tied to CPI. And you get some appreciation from the underlying real estate.
As we look at playing on inflation and the higher-for-longer interest rate environment, we look at traditional alternative income. That tends to be senior secured, floating-rate type of debt. It has historically proven to do really well in rising interest rates and inflationary periods.
The largest risk out there right now is yields, the global rise in yields. When we look at just the U.S., I think there are some different variables pulling the yield curve in different directions. The Fed could still increase rates from here. On the long end, you do have some inflation pressure. But we believe, based on where long-term inflation break-evens are, that inflation is not being priced too much into the long end of the curve. However, the longer Iran goes on, and energy prices remain elevated, that could work itself into the long end of the curve.
We think fiscal deficits and this overall competition for capital is driving long-term yields higher. With the competition for capital, I would point to rising global yields—Japan, the Eurozone, U.S. Look at what’s going on in France. You have global yields running at multi-decade highs that are causing this competition for capital. But then you have this massive AI debt-funded CAPEX spending. You have investment-grade companies that are issuing debt at yields equivalent to junk bonds, and these are long-term bonds. This is all applying pressure to the long end of the curve as investors demand more compensation for buying long-term U.S. debt. It all creates this enormous competition for capital. If rates remain elevated for significantly longer or they continue to go higher, it poses significant risks to equities, particularly interest rate-sensitive equities such as tech-oriented, growth-oriented small and mid-cap companies.
Also, we have this refinancing risk as we start entering this wall of maturities as they come due. A lot of companies that issued debt during or post-COVID in a near-zero rate environment, as their loans become due, they are going to be taking on more debt at higher interest rates. What impact does it have on margins and the ability to continue to deliver strong earnings?
Monetary policy is also a risk, with [Kevin] Warsh going back to a kind of an old-guard regime that is not as transparent about telegraphing its future monetary policy changes.
