We’re proud to say that our Director of Investments, Todd Jones (CAIA), was recently quoted in the Forbes article “3 Lessons Traders Can Learn from Investors.” He was the article’s primary source.

The Forbes article details the dangers of emotionally charged investments, the importance of keeping a balanced portfolio and the difference between risk and volatility in investments.

Todd is quoted on the importance of keeping a balanced portfolio (which we cover a lot in our insights, including this one on the benefits of alternative investments and portfolio diversification).

On the issue of short-term traders selling quickly in times of stress, Todd says, “To me, this makes no sense, as the need to rebalance should be based on the returns of each asset class as they relate to each other. This prevents unnecessary trading/capital gains and maintains a consistent risk profile.”

As for volatility, “It’s just noise,” says Todd. Invest in your own knowledge of fundamentals: it’ll help you understand if there is a risk in sudden stock surges or dips or if it is simply the natural highs and lows of the market itself.

At Gratus Capital, we serve clients across the US with a tailored team approach based on the principles expressed by Todd in this article. We’re a boutique wealth management firm focused on serving successful individuals, families, foundations, and endowments with a low client-to-advisor ratio and fee-based advisory services. What new financial goals do you have in mind? Contact us to learn how we can help.

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Your financial health is essential to all the things you want to do in life. Now is the perfect time to reflect, reset, and plan. This guide outlines four financial resolutions that can improve your lifestyle in the new year.


  • Aspects of your financial health you need to examine
  • What you need to know about the new tax law. Will you be rid of the alternative minimum tax in 2018?
  • Common money drains that can quickly zap wealth

Resolve to make 2018 a prosperous year. Click here to immediately access your guide.

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With retirement on the horizon, it’s imperative to consider several key financial factors before entering what may be the most enjoyable and relaxing time of your life. If you bypass these considerations, there is a significant chance you’ll end up with less money saved.

Therefore, to boost your retirement savings, ask yourself these seven key questions:

#1 – Does my ability to afford retirement depend on Social Security benefits?

According to Kevin Woods, CFP® and Director of Financial Planning at Gratus Capital, the answer to this question will ultimately determine when to begin collecting Social Security. It’s important to know that if you postpone collecting Social Security benefits by four years, from age 66 to age 70, you’ll receive additional Social Security income. However, many investors neglect to run a breakeven analysis regarding this income postponement.

Keep in mind that it takes about 11 years to reach the breakeven associated with delaying your benefits until age 70. Specifically, it isn’t until every year past age 81 that you’ll begin to receive more overall from Social Security than if you started collecting at age 66.

Beyond pressing financial needs, another key determination of when to begin collecting Social Security benefits is your health. Waiting 11 years may be a long time for some individuals, but not others. Ask yourself how healthy you are and if your parents lived well into their nineties? If so, then it may make sense for you to postpone taking Social Security.

Overall, without running a breakeven analysis, you won’t have a complete financial picture.

Helpful Resource: The Social Security Administration offers a simplified document explaining when to start receiving retirement benefits.[i]

#2 – When should I enroll in Medicare medical insurance?

“Every 65-year-old should enroll in Medicare Part B, whether retired or not,” said Woods. “If you don’t enroll during the enrollment period for Medicare Part B or prescription drug coverage, you run the risk of being charged higher premiums for the rest of your life. There is a seven-month window for enrolling in Medicare Part B, beginning three months before you turn age 65. Also, you’ll want to research supplemental insurance coverage, which could ultimately save you thousands of dollars in retirement.”

Helpful Resource: Detailed instructions for applying for Medicare.[ii]

#3 – What is the tax impact on my retirement savings?

Your Individual Retirement Account (IRA) savings are not all yours,” said Woods. “Expect to pay roughly 25 to 30 percent of your Traditional IRA or 401(k) savings toward taxes. For example, if you believe you have $80,000 to live off each year, yet haven’t accounted for taxes, then in reality your income is closer to $55,000 after taxes.

Also, keep in mind that you may need to pay taxes on your Social Security benefits.[iii]

#4 – Should I hold onto my life insurance policy?

There are a couple key reasons to maintain life insurance policies throughout retirement.

First, it’s important to conduct a liability risk review. Specifically, if you’re sued during retirement, ask yourself how much of your nest egg is exposed? Keep in mind that an IRA is only protected up to the first one million dollars. This becomes particularly important if you’ve rolled other financial funds into this one vehicle, surpassing the protection threshold.

In many instances, and depending on the structure of your policy, life insurance assets are protected from creditors and other judgments. However, without a comprehensive risk analysis, it’s difficult to determine whether continuing to pay life insurance premiums makes sense or not.

Second, some investors have single-life pension benefits that end upon the insured person’s death. This loss of income could negatively impact your spouse or another loved one.

#5 – Can I afford to continue my charitable giving in retirement?

Having a fixed income in retirement doesn’t mean that there isn’t room for charitable giving in your financial plan. Consider giving a percentage of either your total net worth or of your annual net income.

Let’s say you’ve been earning $300,000 annually for the past many years and donating five percent of your annual income meaning $15,000 each year. Then, consider the same approach in retirement.

For example, if your retirement income is now $150,000 per year, you could continue to contribute five percent ($7,500) in annual giving. “This way you can continue to make a positive impact within your community, yet realign your approach with your revised retirement income,” said Woods.

Helpful Resource: Comprehensive Charitable Giving: 7 Steps to Create Positive Impact & Change

#6 – What am I retiring to?

Have you considered what your retirement days will look like 365 days a year, year after year? Many pre-retirees neglect this important process. Will you volunteer, golf, travel, watch your grandchildren or something different altogether? If so, how often, and what will you do with your remaining time beyond these activities?

According to Woods, picturing the life you’ll pursue while retired is a critical planning step towards experience a fulfilling retirement.

#7 – Should I pay off my mortgage?

“If at all possible, retire debt free,” said Woods. “At the very least, own what you can afford since you’ll be using your retirement savings to pay off your mortgage. The years just before retiring are an excellent time to reset your mindset regarding spending. For example, if the new Lexus you want today at $50,000 equals five percent of your future retirement savings, are you still okay with this purchase? Only you can decide. However, the closer you are to retiring, the more aware you should become about large purchases as well as other long-term financial commitments and their respective impact on your retirement savings.”

In Closing

The questions to ask yourself in preparation for retirement can sometimes seem daunting. The sooner you start tackling these questions, the better. We can help.  If you have questions pertaining to any element of your financial life, including retirement, estate, insurance, tax and philanthropic planning or asset management, please contact us.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.





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AdvisoryHQ recently released their 2018 ranking of the “Top 10 Best Financial Advisors in Atlanta, GA,” and we are proud to announce our inclusion on the list!

AdvisoryHQ developed a breakthrough “Top-Down Advisor Selection Methodology” that is based on a wide range of filters including fiduciary duty, independence, transparency, level of customized service, history of innovation, fee structure, quality of services provided, team excellence, and wealth of experience.

We are extremely honored to be recognized by AdvisoryHQ this year.

What makes this recognition even more special is the element of surprise.  Since AdvisoryHQ reviews and ranking articles are always 100% independently researched and written, firms do not even realize that they are being reviewed by AdvisoryHQ until after reviews have been completed and published to the public.

Read more at AdvisoryHQ:

Rankings and recognitions by unaffiliated publications should not be construed by a client or prospective client as a guarantee that Gratus Capital will provide a certain level of results in client accounts, nor should they be construed as current or past endorsements of Gratus Capital by clients. AdvisoryHQ based its selection on publicly available information. Gratus Capital is not responsible for any content prepared by AdvisoryHQ regarding the services offered by Gratus Capital. Additional details regarding the criteria and process utilized in formulating these rankings can be found by clicking here.
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Forest fires are terrifying to witness. Having lived in California for a couple of years in the mid 2000’s, I didn’t have to go far to find traces of nature’s fury given the dry climate. Once started, forest fires have little hope of being extinguished by human efforts – only contained. The goal of the heroic fire crews that battle the inferno is to “control burn” as much fuel in advance of the actual blaze so that there is nothing left to burn once the fire arrives. There is no doubt, on seeing an actual forest fire from a distance or its aftermath, that the intensity is high, the path is indiscriminate, and the damage is quick but severe.

Activity in global equities over the past three trading sessions (February 2nd, 5th, and 6th) is allegorical to forest fires, seeing steep daily declines in stocks for seemingly no reason. Yet, was there really no reason for the recent declines? As we’ve indicated since Q4 of 2017, the fuel for the recent forest fire was created through the combination of (1) excessively high investor sentiment, (2) exceedingly low volatility (e.g., VIX), and (3) large money flows into stocks. Each one of these, alone, was not problematic, but all combined made a different situation entirely. Incidentally, observation of the conditions above led our Investment Committee to recommend a portfolio rebalance prior to the recent drop.

What sparked the sell-off?

While pinpointing the exact reason is almost impossible, the most likely source of the recent selling pressure has been the upward movement in US interest rates. As can be seen in the chart below, recent moves in the 10yr US Treasury bond have brought rates to near 3%, a level not seen since 2013 during the so-called “taper tantrum.” Higher rates become an issue because, at some point, bonds become competitive with stocks for portfolio allocations.

In our opinion, the other root cause of the sell-off has to do with the unwinding of the short volatility trade that has been very popular with both hedge funds and pension funds. Essentially, since the “flash crash” (which occurred in late 2015), volatility in the options markets (as measured by the VIX index, seen below) has moved to extremely low levels. This low reading in the VIX index signals that portfolio hedging with options has not been occurring to any significant degree. Further, this expectation of low future volatility was being speculated on by many (to include pension funds) as a way to enhance return in a portfolio. The problem with this strategy, however, is that once investors begin to unwind these speculative VIX positions, this process creates a positive feedback loop sending volatility higher. Many taking these speculative positions may have only fully realized the risks inherent in such a strategy once the sell-off began.

Where do we go from here?

Just like in a forest fire, while the intensity is high and the moves are erratic, we don’t see the selling pressure lasting for much longer once the fuel of interest rate movements and VIX position unwinding dissipates. That is not to say that equity markets could not move lower from here over the near term. But given the tinder of suppressed volatility, low interest rates, and excessive investor sentiment, a garden variety correction in the 5-10% range makes sense. On the other side of this current corrective phase for equity markets, the excesses will have been cleared out, allowing investors to focus on some of the positive factors present in the markets. In our view, global equity markets can move higher over the remainder of the year based on a combination of the following positive dynamics:

(1) Global earnings and revenue growth are strong
(2) All major economic regions around the globe are in a synchronized expansion
(3) US Interest rates aren’t rising in a disorderly manner
(4) High Yield bonds aren’t signaling duress
(5) Global inflation remains modest (between 2-3%)

In summary, as we await the culmination of the current corrective phase in equity markets, we would like to highlight that periods like this underscore the need for diversified investment portfolios. This diversification includes allocations to cash, fixed income and, where appropriate, alternative assets. Specific to cash holdings, most portfolios have been positioned with elevated cash levels due to our recent rebalancing activity. This cash will give us optionality in the case that equity prices decide to move markedly further from current levels. We’ll look to redeploy this cash as opportunities arise.

As we approach the final stages of the current bull market, episodes like the one we currently find ourselves in should be considered the norm as opposed to the exception. This heightened level of equity volatility will test resolve and challenge investor convictions, which is why we’ve been revisiting client risk profiles and cash flow goals in recent months. Rest assured, we are mindful of many of the risks being discussed in the equity markets. If the fundamentals of this aging economic recovery change then we will take appropriate action. For now, we need to let the fire burn the accumulated tinder on the forest floor so that we can move higher from here.

Authored By:

Gratus Capital is an SEC-registered investment advisor. Registration with the SEC does not imply any level of skill or training. Our ADV documents are available upon request. The opinions expressed are as of February 2018 and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities. No graph or chart by itself can be used to determine which securities to buy or sell or when to buy or sell them. As with any investments, past performance is not a guarantee of future results. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

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On December 12th, Gratus team members spent the day helping families in need shop for the holidays at MUST Ministries Marietta.  A nonprofit organization, MUST Ministries addresses the basic needs of individuals, families, and children living in poverty and residing throughout Cobb and Cherokee counties.  The ministry provides food, clothing, housing, and employment services.

Our goal was to help parents and other caregivers provide a joyful Christmas for their children without the financial stress that often accompanies the holiday season.

Plentiful Toy Shop

At the Cobb Toy Shop, moms, dads and other caregivers arrived by appointment to holiday shop for their children at no cost.  The gift stations were organized by age ranges.  Our roles were numerous, including escorting caregivers through the many shopping stations.  For each child, the caregiver selected one large gift, such as a doll, scooter or bike, and several smaller gifts, including puzzles, books, and hats. Gratus team members also helped restock shelves and box and carry gifts to caregivers’ vehicles.

More than 10,000 volunteers help MUST Ministries achieve its goal of being Georgia’s most respected servant leader.  The Gratus team is immensely grateful to have been a part of this incredible community effort.  We experienced firsthand how serving others positively changes lives.  Our team left the ministry with a deep appreciation for those who struggle to provide for their families and for the role others can take to assist families in need.

For More Information

The needs of our greater community underscore Gratus’ purpose.  Together, we can make a difference in others’ lives by volunteering and providing in-kind and monetary donations.  To learn more about MUST Ministries, please visit their website at

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Is your estate plan set up to manage some of the most common problems that happen in life? Does it reflect your latest wishes as well as the current estate tax environment? For example, have you moved, had another child or reached a financial threshold that necessitates planning for additional tax-saving maneuvers to help your heirs?

Today, we’ll discuss the five most common estate planning mistakes so that you may account for them, ultimately helping you to create a stronger estate plan.

Mistake #1 – Neglecting to Maintain Current Estate Documents

“Individuals and families should review their estate planning documents every few years and sometimes more frequently in the event of significant tax reform like we’ve just seen or if there are changes within a family such as death of a spouse, birth of a child or material net worth changes,” said Jennifer Jones, CPA, CFP®, CTFA and Estate Planning Consultant with Gratus Capital. “There are two key areas to consider when updating your estate documents: specifically, tax and non-tax considerations, the former of which affects fewer people due to recent tax law changes. It’s important to ensure that your estate plan aligns with your current balance sheet and overall situation.”

Jones highlights two key situations that typically necessitate updating estate plans:

  • Change in Circumstances: It’s important to ask yourself what has changed in your life in the last few years.

For Example:

Is your executor still alive, mentally sharp and in good standing in order to still manage your estate when you’re gone? Or, are your children now adults who no longer need the protective measures your estate plans dictate? If one of your children works in a highly litigious field, have you accounted for this within your estate plans? Or, if a loved one is fighting substance abuse issues, should you update your estate plans to include a contingency on passing a drug test before any distributions?

  • Change in State Residency: Some states have their own transfer tax laws. Therefore, it’s important to understand if the state you’re considering moving to or purchasing a second home in could have an impact on your estate planning.

By planning ahead, you may create the opportunity to minimize or defer these taxes. Most licensed attorneys are familiar with planning strategies specific to their states such as using a Credit Shelter Trust[i] for applicable state exemptions.

Mistake #2 – Possessing Non-Flexible Documents

“Well-written estate documents have built-in flexibility,” said Jones. “Equipping executors with flexibility at the time of an individual’s death is extremely important, particularly with the ongoing uncertainty surrounding the future of estate tax laws. Flexible documents enable the executor of your estate to make decisions based on circumstances at the time of death, rather than what was drafted years earlier. Flexibility can help your executor avoid making unnecessary tax payments.  For example, a disclaimer may allow the surviving spouse to decide whether to receive funds outright or via a Credit Shelter Trust, depending on circumstances at the time their spouse dies rather than having the trust automatically fund.  A potential benefit of not automatically funding a Credit Shelter Trust is that the assets would receive a second basis step up on the subsequent death of the surviving spouse. With estate exemptions continuing to rise, this type of income tax planning may trump more traditional estate tax planning such as the automatic Credit Shelter Trust funding. Your advisor team can evaluate sensible options based on the specifics of your situation.

Naming a trust protector is another approach to incorporate flexiblity. A trust protector is someone who is appointed to watch over a trust to ensure it is not adversely affected by changes in the law or circumstances through powers granted to modify the trust as applicable in the future.

Mistake #3 – Failing to Plan Holistically

It’s important to view your estate plans holistically. Titling and beneficiary designations are often overlooked areas of estate planning. Jointly titled property and beneficiary designated assets such as retirement accounts and life insurance typically will not flow through your will, so care should be taken to ensure planning for these assets is consistent with the rest of the estate plan. A comprehensive plan accounts for all of your assets.

Some clients opt to use Revocable Trusts. In addition to providing for management of affairs in event of client incapacity, Revocable Trust assets do not pass through probate which protects clients’ privacy and can also expedite distribution of assets to beneficiaries. In certain situations, clients might instead use transfer on death (TOD) accounts to avoid probate.

Overall, using a holistic estate planning approach helps to:

  • Ensure distribution of assets consistent with testator intent
  • Distribute assets in an estate and income tax-efficient manner
  • Maintain client privacy
  • Reduce probate fees
  • Provide loved ones quicker access to your assets

#4 – Lacking Access to Estate Plans

In the event of your death, it’s important for your loved ones and your executor know where your estate documents are stored. In order for your executor to probate your will, he or she will need access to your original will. This then raises the question of where to store your original documents.

“Many attorneys will retain original documents in their firm’s safe.  This is a good option to ensure originals can be obtained when needed.  Sometimes clients prefer to store their documents in their home safe,” said Jones. “Regardless of where you choose to store them, make sure your advisors and/or executor know where to find the original documents.”

In today’s digital age, it is likely passwords to your asset-related accounts will be helpful to your executor.  Your family may also find comfort in having access to other accounts, such as online photos and social media. Digital password managers can be helpful for maintaining passwords. Generally, with a digital password manager, you’ll only need to remember one master password. This one password can be kept with your estate planning documents.

#5 – Ignoring Tax Implications

If you have considerable assets, proper planning can prevent your heirs from incurring avoidable inheritance taxes.

Irrevocable Life Insurance Trust (ILIT)

One strategy to help minimize estate taxes and provide financial resources to help your heirs pay estate taxes is to use an Irrevocable Life Insurance Trust. A life insurance trust is an irrevocable trust that both owns and is the beneficiary of one or more life insurance policies. Upon the death of the insured, the trustee invests the insurance proceeds and administers the trust for one or more beneficiaries.

If properly set up and administered, assets owned by the ILIT will not be considered part of your estate for estate tax purposes—meaning your heirs won’t have to pay transfer taxes on the life insurance death benefits received after your death. With higher exemptions (approximately $22 million per couple under the Tax Cuts & Jobs Act), the tax planning aspect of ILITs are not relevant to as many clients, but for those that still have taxable estates, they can be an excellent strategy.

“ILITs should not be taken lightly,” said Jones. “It is important that administrative procedures are followed in order for the benefits of ILITs to be fully realized.”  For example, the ILIT should have its own bank account from which life insurance premiums are paid. Additionally, “Crummey notices,” which let beneficiaries know of contributions to the trust and their rights to those contributions, are often required to qualify contributions to the trust for the annual gift tax exclusion. While cumbersome to some, in many cases, the tax-savings of ILITs can be well worth the extra effort.

In Closing

Estate planning can be quite complex, particularly in an ever-changing tax policy environment. If you have estate planning questions or other concerns regarding any element of your financial life, please contact us. We welcome the opportunity to be your financial advocates and provide you well-informed and clear answers.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.



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This quarter, we asked Gratus Capital Director of Investments Todd Jones, MBA, CAIA, to weigh in on the current financial environment and critical market trends.

Here’s what Todd is talking about this quarter. 

Are there any specific Q1 market trends you’re monitoring?

The first of the year is shaping up to be positive as earnings are still very strong. In fact, for the first time in the past five years, U.S. and international companies are reporting increasing earnings, strengthening the equity market.

However, at Gratus we continue to believe that it’s likely the market will experience a pullback during the first half of the year. The equity markets have been growing for so long without a significant correction that it’s likely to happen at any time. Click here to read Todd’s February Market Update

It’s a different story for the fixed-income markets. Here, we see an elevated level of risk as opposed to years past because starting yields are so low. In addition, the degree to which the Fed can manage their balance sheet reduction is critical to a continuation of upward movement for risk asset management. Because there is a likelihood of fixed-income assets not being priced accurately, they have the potential to introduce a lot of risk. 

For Example

If the interest rate program that the Fed has been pursuing leads to a disorderly sell-off in the bond market, we could see some severe downside movement in risk markets, such as equities and high-yield bonds.

Commodities and Emerging Markets

For other 2018 trends, we’re starting to take a closer look at asset classes we haven’t considered in a while, specifically commodities and emerging markets. The conditions are much more favorable than they have been in several years. 

Emerging markets have experienced considerable structural changes in corporate governance. Brazil’s crackdown on government corruption and China’s tightening of non-bank lending and increased control of state-owned enterprises are just a few examples. These structural government reforms are key factors in whether Gratus is willing to commit capital to this asset class.

However, recently, commodities have become more attractive, because they’re trading at all-time lows relative to equities. Back in 2011, Gratus sold out of these positions. Today, we’re taking a hard look at them.

What should investors be concerned about regarding the Fed and inflation?

The key question that needs to be answered is, why hasn’t there been any inflation in the economy? 

Generally speaking, inflation is toxic for equity and fixed-income assets. However, it’s important to keep the following in mind: If the Fed continues with its proposed interest rate program, rates are scheduled to increase three to four times in 2018. If the Fed proceeds with this plan and inflation doesn’t appear, the Fed runs the risk of creating an inverted yield curve, meaning short-term interest rates are higher than long-term interest rates.

Gratus believes the Fed will not proceed with their interest rate program in 2018, because economic growth won’t substantiate the current proposal. This means long-term interest rates will remain level. Although stable interest rates are good for valuation, it’s problematic long term for the economy.

Going back the past 60 years, every time there has been an inverted yield curve,
a recession has followed.

If we can’t generate the inflation in the economy that the Fed hopes for, we run into the problem of another recession hitting while low inflation occurs. If this happens, the Fed will have limited tools to combat the problem.

Case in Point

The Bank of Japan has fought deflationary forces for more than 30 years and has essentially made no economic progress.

However, there is one key caveat: If the just passed tax reform act combined with deregulation stirred real economic growth above 4%, we would likely change our minds on the forward path for interest rate increases.

What is the real impact of the recent and anticipated tax regulation changes?

The recent tax law changes are the biggest sweeping changes to the tax code since the last comprehensive tax reform in 1986.

Short-Term Positives

Tax rates are coming down for U.S. companies, and incentives to invest in the U.S. are much higher than they were a year ago. Currently, the United States is a destination for domestic and international capital inflow.

Long-Term Warning Signs

We still see some warning signs in the economy.

First, the act wasn’t paid for. These tax cuts are being funded by increasing the budget deficit, which is a deflationary action.

Second, the primary beneficiaries are typically wealthier individuals. Getting people to back this act could be challenging if it is seen as self-serving.

Third, the tax cut is creating an incentive for companies to bring dollars back to the United States. This isn’t a bad thing BUT has the potential of strengthening the U.S. dollar as a currency versus other currencies, and as a by-product, would increase risk in the financial system. When the dollar goes up, other currencies, as a by-product, would come down relative to it. If the dollar goes up against all other currencies, it makes international trade potentially more expensive.

Overall, because the act isn’t paid for, Gratus believes that any economic growth generated by this tax reform act has the potential to be offset to some degree by deflationary forces of the debt that was created to generate growth. Many investors are overlooking the cost of the act.

Would you share some insights regarding Bitcoin and Blockchain?

Blockchain, the technology behind Bitcoin, is an important technology. It has the potential to transform how the financial industry processes payments and keeps records.

However, Bitcoin is still a highly speculative asset. Therefore, any investor contemplating a Bitcoin investment should be prepared for extreme outcomes, e.g., 20X growth or zero. In addition, it’s important to recognize that Bitcoin has not been in existence long enough to have survived a severe financial crisis, such as the ones experienced in 2000 and 2008. We have no history for how Bitcoin will perform in such extreme depressed markets.

Currently, Gratus is not including Bitcoin in our client portfolios. However, Bitcoin as an asset class has the potential to be a very meaningful diversifier due to its unique attributes. Still, we encourage investors involved with Bitcoin to be modest with their investments relative to the percentage of an individual’s net worth and be prepared for extreme outcomes in either direction. 

Is there a key consideration investors should contemplate in Q1? 

With markets at all-time highs, it’s a good time to consider risk management in a portfolio.

In the near future, Gratus will rebalance portfolios back to target weights. Specifically, we’ll be selling equities and buying fixed-income assets. We’ll also raise cash levels for clients with foreseeable withdrawals. Simultaneously, we’ll continue to review assets and other financial strategies that don’t highly correlate to equities, such as commodities.

Authored By:

Gratus Capital is an SEC-registered investment advisor. Registration with the SEC does not imply any level of skill or training. Our ADV documents are available upon request.  The opinions expressed are as of October 2017 and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities.  As with any investments, past performance is not a guarantee of future results. In illiquid alternative investments, returns will be reduced by investment management fees and fund expenses. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

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“There is an art to science, and a science in art: the two are not enemies, but different aspects of the whole.”  —Isaac Asimov

“Rely on the ordinary virtues that intelligent, balanced human beings have relied on for centuries: common sense, thrift, realistic expectations, patience, and perseverance.”  — John C. Bogle

“Never buy anything from someone who is out of breath.”  —Burton Malkiel

Patrick Nolan, CAIA, Portfolio Manager – Private Markets  — At Gratus Capital, my role includes sourcing and screening investments, conducting due diligence, negotiating investment terms and monitoring performance of private investment opportunities.  In this post, I want to describe the process I use and share some interesting experiences I have encountered along the way.

Sourcing, Screening and Due Diligence

Due diligence is the research and analysis of a company or organization done in preparation for a business transaction [i].  Of the “investable universe,” select firms are identified as potential investment candidates.  Of these, fewer make it through a preliminary screening and are reviewed more deeply.  From the firms selected for review, only a small portion are selected for a full due diligence review.

I introduce this process to demonstrate that conducting due diligence according to a standard requires considerable effort.  After sourcing and screening, I use metrics to disqualify managers and judge the best from the rest.  I developed this due diligence process from my experience in institutional-level timberland and apartment investing.  In addition to my experience, I rely heavily on the Institutional Limited Partners Association’s (ILPA) [ii] sample Due Diligence Questionnaire and Chartered Alternative Investment Analyst Association publications.

According to Brown, Fraser and Liang, the cost of due diligence depends on a series of factors, including the time spent, the level of thoroughness and whether accounting firms, law firms, third-party service providers and consulting firms are used. These authors assume “a conservative cost of due diligence of $50,000 to $100,000 [per single institutional hedge fund allocation]” but contend that effective due diligence of funds in the selection of fund managers can generate alpha for an investor’s portfolio [iii].

I’ve heard that there is an art and a science behind any worthwhile endeavor.  Gratus’s due diligence process has a solid foundation in the “science” of private investing.  Having proper procedures in place is critical, but so is a focus on the spirit of the task.  Procedure must not cloud the goal of judging the worthiness of a manager and the overall attractiveness of an opportunity.  To demonstrate the two sides of due diligence, I’ll list some of the questions behind the “science” and then share the more interesting anecdotes that make up the “art”.

The “Science” of Due Diligence

Below are a few of the ILPA’s recommended BASIC questions for Limited Partners to present to Investment Managers:

  • Will Placement Agents be used during the fundraising process?
  • Were there any carry clawback situations in any of the Firm’s prior funds?
  • Are any investments in the Firm’s track record excluded from provided materials?

And a sampling of recommended DETAILED questions to an Investment Manager:

  • Describe any significant staff departures that are expected to occur between now and the end of the Fund’s investment period.
  • How will investment opportunities be allocated between active funds? Discuss any funds and/or separate accounts with potential allocation considerations.
  • During deal structuring, what is the process for integrating ESG-related consideration into the deal documentation and/ or the post-investment action plan? (ESG: Environmental, Social and corporate Governance)

In addition to 15 pages of similar questions, the ILPA goes on to provide multi-page templates for reporting portfolio investments, funds, professional references and team member biographies.  To top it all off, the ILPA ends with a list of 33 requested documents including Firm budgets, a list of LP secondary sales, and annual meeting presentations for the last 2 years!  Lastly, third-party auditors, custodians, accountants and investigators are suggested in order to triangulate and verify the subject’s response.  The result is a pile of information that may be erroneous or even fraudulent.  The process may create value, but it may also only create a false sense of security.

The “Art” of Due Diligence

Clearly the ILPA provides a road map for thorough institutional private investment due diligence.  The inclusion of third-parties to verify facts creates another layer of confidence.  But at what cost?  What resources are required of both the interviewer and interviewee to conduct such a review?  What great opportunities are missed if the ILPA is followed too closely?  Clearly there is a role for these questions if the investor is a public institution that is highly sensitive to any type of headline risk.  But many investors are not political targets with a large public presence.  Additionally, most investments only carry a small portion of the possible risks covered by the ILPA.  Common sense is in order.  Relying too heavily on the ILPA would be counterproductive for some investors’ task at hand.  This is where I value the “art” rather than the “science” of due diligence.  Below I’ve categorized some examples that capture the subtleties of properly evaluating a manager and a potential private investment.

Lack of Professionalism

  • What should you do when a manager is unreliable during the due diligence process?  Do they say they will do things and not follow through?  Can you responsibly trust a manager to conduct themselves professionally after they’ve been awarded your money if they are unreliable before they’ve received your money?  Better to pass on the relationship.
  • How should you approach an opportunity with incomplete information?  Many popular managers request verbal commitments prior to having finalized legal documents.  This tells me a few things: either they are well-seasoned and have numerous relationships or they are trying to pressure investors into a deal while withholding details. Verbal commitments with pre-existing managers is one thing, but making first-time investments with a manager that requires commitments prior to providing complete information is a bad idea.  Lastly, this may reveal that the manager’s clients have become complacent and are relying on the persistence of past performance. These are signs of a mature and well-worn strategy that may be better to avoid [iv].

Misleading Marketing

  • Sloppy marketing materials are a sign that the manager is likely sloppy in other facets of their business and possibly in their investment underwriting.  When I find marketing materials that specifically contradict or do not mesh with corresponding legal documents, I penalize accordingly.  While these mistakes are likely careless, they may also be purposefully misleading.  I don’t want to deal with a manager that is guilty of either.
  • I’ve come across managers that sell a popular trend, even when it isn’t entirely accurate. For example, one office manager suggested that a property was in the currently en vogue market of Nashville, TN.  Technically the property was a part of the greater metro-area, but it was 17 miles from downtown.  Not exactly an honest description.
  • I often see project-level returns in marketing materials.  This is clearly misleading, because clients will receive the performance net of fees and expenses.
  • Optimism is not a strategy.  I often see deals where the entire strategy is the assumption that past performance will persist or that there will be increased demand for the product in the future.  For me to become comfortable with a deal, I want to see a model with flat or decreasing demand, a.k.a. cap rate expansion.
  • “Cash-On-Cash” return.  What if you gave me $10 today and I gave you $1 each year for 10 years. Does that sound like 10% “Cash-on-Cash” return?  Or even worse, an average of 12.9% “Cash-On-Cash” return?  There are more realistic examples, but I see this line of reasoning often when managers quote “Cash-On-Cash” return.  The confusion stems from unreported losses, return of capital that is not income, or a reduction of capital account balance. Distributions are meaningless if you don’t know whether they represent income or return of capital.  Often, one cannot be certain until the asset is sold and fully realized. Solution: Ask for equity multiples and IRR returns.

Unattractive Terms

  • Conflicts of interest are sometimes unavoidable.  If they are small and are properly transparent, then conflicts of interest will not disqualify a deal. Three conflicts that I recently found were unnecessary and were a somewhat dubious effort to sneak additional fees out of the deal.
    • Fees based on Potential Rent.  Why not compensate on actual rent?  Potential rent can be set by the manager as a benchmark.  ‘Fees based on Potential Rent’ is synonymous with giving the manager a blank check.
    • Acquisition fees based on purchase price. This is pervasive in real estate, but I think it should be challenged more often.  Once a manager has client capital secured, they are actually incentivized to pay more for a property!  I don’t see this going away, but I also like to bring it up with managers and let them know that I do not like this form of compensation.  A better solution might be a percentage of equity, as this would incentivize the manager to balance the proper mix of debt and equity.
    • Fees on construction costs.  This is another perverse misalignment of interests, and managers should be pressured to seek compensation elsewhere [v].
  • Catch-up clauses.  I will try not to get lost in the details here, but catch-up clauses on carried interest are an additional layer of fees that managers often use.  I suspect that many investors do not fully realize the hidden expense of a catch-up clause.  Put simply, think of a catch-up clause as retroactively removing the performance hurdle after it has been achieved.  This is sometimes referred to as a soft hurdle (catch-up) or a hard hurdle (no catch-up).  Consider a 20% carried interest (often called the ‘promote’) and an 8% hurdle (often called the ‘preferred return’).  If there is a 13% return after management fees and expenses, then with no catch-up, the manger would receive 1% (20% of the return above 8%).  With a catch-up, the manager would receive every dollar from 8% to 10% in order to ensure that they receive 20% of all profits, and then 20% of profits from 10% to 13%.  This catch-up comes to 2.6%.  This equates to a 10.4% return for the LP investor instead of 12%.  This also means that the manager has less incentive after a gross return of 10%, because they’ve received most of their compensation already.
  • Lastly, how long do you want to be invested in a deal?  Managers say they will be out of a deal in 5 years, but when you ask for it in writing in the documents, sometimes they won’t agree.  If a manager will not put a 10-year maximum term on a 5-year business plan, then I have less trust in their business plan.  Managers often want full flexibility to hold a property and avoid selling into a poor market.  I’ve worked around this problem by agreeing on buy-out clauses.  In short, a manager’s legal documents should reflect the business plan.

In all, I hope this description relays my view of both the art and the science of private investment due diligence.  The science is certainly an important and necessary step in reviewing an opportunity, but thinking creatively is also important when seeking the best possible managers and investments.   As an alternative asset manager, we will continue to strive to bring both aspects of the process together for the long-term benefit of our clients.

Authored By:

The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal, or other professional advice.  The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities.  As with any investments, past performance is not a guarantee of future results.  In illiquid alternative investments, returns will be reduced by investment management fees and fund expenses.  There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.  Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you or your business.


[i] Merriam Webster Dictionary defines due diligence as: research and analysis of a company or organization done in preparation for a business transaction.

[ii]  “The ILPA is the only global, member-driven organization dedicated exclusively to advancing the interests of private equity Limited Partners through industry-leading education programs, independent research, best practices, networking opportunities and global collaborations.  Initially founded as an informal networking group, the ILPA is a voluntary association funded by its members. The ILPA membership has grown to include over 400 member organizations from around the world representing over US $1 trillion of private assets globally.”

[iii] Hedge Fund Due Diligence: A Source of Alpha in Hedge Fund Portfolio Strategy

[iv] I have noticed this behavior in many apartment community investments.

[v] I often see these fees on projects sponsored by vertically integrated operators.

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