Carnegie Investment Counsel, an RIA with $4.5 billion in AUM, turned 50 this year. It got its start as part of the investment firm Prescott, Ball & Turben in 1974 and emerged as an independent RIA under the name Carnegie Capital Asset Management Company in 1991. Today, the firm operates across five states and serves individual investors, as well as families, non-profits, retirement plan sponsors, foundations and endowments. Over the decades, Carnegie Investment Counsel found its sweet spot for investing by sticking to stocks and bonds. We recently spoke to Richard Alt, the firm’s principal and CEO, about the firm’s investment philosophy and why it ultimately feels that simpler is better. The conversation took place just before the markets turned volatile on Aug. 5.
This Q&A has been edited for length, style and clarity.
WealthManagement.com: What’s in your model portfolio?
Richard Alt: Our model portfolio is made up of primarily growth companies at this point that have done very well in the last 14 years. It’s evolved over time, but for the most part, we have been highly weighted in large-cap U.S. tech companies. That’s starting to shift a little bit, with the movement more into smaller caps and the realization that with some of these great companies that have performed very well, trees can’t grow to the sky. So, we are trimming some of the winners and reinvesting. Selling tech and buying financials is what we’ve been doing.
WM: Can you give a breakdown of the asset classes in which you are invested?
RA: Asset class year-to-date, we are probably 70% in stocks and 30% in bonds. We are at the high end of our weighting, and it’s reflective of where we think the returns have been in the market. Bonds are basically flat and we don’t have much expectation. We only have bonds in portfolios that need income. Everyone else is pretty overweight on the equity side of things. In terms of sectors, it’s been tech, industrials, and financials, where we think a fair amount of profits and earnings growth have been made. We are kind of underweighting all the other sectors.
WM: It sounds like you did change your allocations a bit in the past six months or so.
RA: I would call it more fine-tuning, taking some of the dollars off the table, and it’s been a little sporadic. Some names we reduced in February. Some just this month. It comes down to the financial sector is trading at a much lower multiple than than tech, even though they are not far behind on their total earnings that they are expected to make in 2024. We think there should be a little rebalancing in the total returns for financials moving forward. These numbers aren’t exact, but if you have technology driving $55 in earnings this year and financials are driving roughly $50 in combined earnings to the S&P 500, and one is trading at 30 times, and one is trading at ten times, we think there’s a bit of an imbalance. And the banks have had really stellar numbers and if interest rates do drop, that’s just going to be more beneficial to them.
WM: It seems the Fed’s next meeting is more likely to be a rate cut. Do you think that will impact your allocations in any significant way?
RA: I think it’s known at this point what the Fed is going to do. They’ve done a good job communicating what the likelihood will be. With both Europe and Canada having already dropped the rates and the U.S. economy a little bit stronger, it certainly justifies a reason to put off the drop in interest rates a little bit. We started the year with five to six rate cuts expected, and now we are down to two. I have to admit the Federal Reserve is doing a good job. They just might stick a soft landing. I thought they were raising interest rates too far too fast back in 2022, but it has worked, and the economy has survived. Both housing and autos, which are two areas that typically get hurt during a rising interest rate market, have survived, and neither industry has gone into a recession. If they goose the economy a little bit with falling interest rates, I don’t think it will hurt the economy.
WM: On a more general level, how often do you tend to make changes to your allocations?
RA: We don’t do it on an incremental basis, meaning quarterly or monthly. We do it when we think it’s timely. We subscribe to a fair amount of outside macro research. One thing we’ve learned is that this pullback that’s happening right now it’s shaping up almost like a classic intra-bull run drop in valuations. There’s nothing fundamental that justifies as sharp of a pullback as we’ve had. So, we think this drop in share prices is simply a great opportunity and we are watching the VIX quite closely. If it gets to 19-20, there is, by definition, some capitulation out there. It’s going to give us the ability to buy the same companies we like at cheaper share prices. As a firm that has a fair amount of new accounts coming in, it creates a good opportunity for us. So, to answer your questions, it could be mid-week, it could be mid-quarter, it could be whenever we think the timing is right.
WM: What differentiates your portfolio?
RA: We are a little bit more concentrated than most firms and don’t believe in over-diversifying into sectors and industries that add risk. We don’t buy foreign debt, we don’t buy micro-cap companies, we have very little exposure to overseas. That brings in government risk and currency risk and other issues. We just learned to follow where profits are made. Overtime, we’ve learned not to buy commodities, we don’t buy cryptocurrency, we don’t get into fadish investments. Just own quality companies.
WM: Do you work with any asset managers?
RA: No.
WM: Can you talk about some specific companies you invest in?
RA: They are all publicly traded; they are all well-known names for the most part. I’ll give you a couple that I think are doing fantastically well in this market. Progressive Insurance is hitting it on all cylinders, Heaton Corporation—those two happen to be companies that are physically located close to us. There are a lot of companies that use artificial intelligence, but they are not in the tech sector. Cintas is a wonderful company that does a very boring job of cleaning uniforms and delivering carpet mats, but they use artificial intelligence to make their routes denser. Republic Services, the second largest waste management/garbage hauler, uses artificial intelligence to make their routes faster and better. They save two minutes on a route across the whole breadth of the country; it’s millions of dollars to them. Kindsale Capital, which is a property and casualty insurance company, has more coders than underwriters because that’s how they make money. Sherwyn-Williams, again, is another boring industrial name, but they’ve been able to use technology to improve their delivery system and improve their product. They’ve been able to consistently raise prices by 8% to 10% per year and pass that on successfully.
WM: If you feel that you have any contrarian picks among your holdings right now, what are they?
RA: I don’t know how contrarian they are without being able to read what other asset managers are doing. I think we are contrarian in that we don’t invest in throwing things against the wall, being a broad diversifying company or feeling compelled we need to put money into emerging markets or feel compelled we need to put money into mid-caps or small caps necessarily or force our way into buying international because international has lagged for nine of the past 10 years. There is a fundamental reason international indices are behind. Money is fundable, and it goes where the profits are. You’ve got to continue to keep capital where it’s profitable.
WM: It sounds like you are not allocating to private markets or alternatives, correct?
RA: We don’t, just because we want every client to have something that’s liquid. We want the markets to set prices, not the private market to set prices.
WM: You mentioned you are not investing in cryptocurrency. Do you have any interest when it comes to Bitcoin ETFs? What’s your thinking on those?
RA: No. Our clients pay us to make money for them, and investing in something that we can’t justify an earnings valuation is a little bit like somebody asking us to buy gold for them. We don’t know the future value of gold, or copper, or aluminum, or brass, or nickel. They don’t make any earnings, so we just simply don’t go down that path. It’s a guesstimate based on future demand, and that’s not our skill set. I think we are in a very narrow land of what we know, and we stick to that. Bitcoin, or Bitcoin ETFs, is produced by money gatherers who are trying to make money on the fees that go into it. It doesn’t mean it’s profitable for the client.
WM: Do you hold any cash, and if so, how much? What’s your rationale for holding cash?
RA: We do. The answer is 7% across the firm right now. It’s just opportunistic. We held much less cash when interest rates were zero. We have a little more cash than normal just because we can make 4.9% in the money market. On days like today, we’ve been more buyers using some of that cash than sellers.
WM: Do you use any direct indexing?
RA: No, we do not.
WM: Is considering ESG practices when investing in your portfolio something that’s important to you or not something that you are paying much attention to?
RA: We do pay attention to it. It’s just one of probably 15 different factors. As shareholders, if the management is doing something that we don’t think is good long term, whether it’s for the environment or for social or just on an individual basis, we simply don’t want to be a shareholder. So, it’s one of the many boxes we check before we pull the trigger to move forward. It doesn’t drive our process, but it can certainly blackball our process.
WM: Can you tell me some of the other factors of those 15 that may not be as obvious that are going into your investing decisions?
RA: Valuation is certainly one. Momentum. Are the insiders buying? Is it in an industry that has fundamental characteristics that are rising? If the price of oil is going up, it’s certainly beneficial to large oil companies. Government regulations on an industry would bar us from making an investment sometimes. So, just a lot of moving factors are weighted in the decision to purchase or sell something.
WM: Is there anything else you feel people should know about your firm’s investment philosophy?
RA: I would just suggest this is our 50th year of being in the business as an asset manager, and we’ve evolved to the place that you and I discussed. And it’s not just we are closed to private equity investments, we did plenty of them in the 70s and 80s. But we just learned over time that it’s not appropriate for our kind of clients. For the most part, we’ve evolved through experience. We learned the simpler the investment, the more you understand it and the more success you have by knowing what the future value is. There are a lot of great companies out there that warrant client capital, but there are far more that don’t. If you think about it, over 200,000 publicly traded companies were created in the last 100 years. There are only 55,000 left, and there is a reason for that. Not everything that’s produced is good.
WM: Can you give me an average profile of the type of client that you serve?
RA: Just surveying our clients, our typical client is something like $3 to $5 million range. Many are much larger, we have some that are smaller, of course. But I’ll tell you the makeup of them. They tend to be frugal, they tend to put their kids through college, they stay in the same house for over 30 years, they stay married, and they live within their means. They don’t like debt. That’s the typical client we serve.