D E C E M B E R 2 0 1 9 | A PUBLICATION OF INSTITUTIONAL REAL ESTATE, INC.

Diversification strategies for private wealth advisers

CIO Michelle Mathieu is the strategist in charge of 'gender-lens' investing at Fulcrum Capital, a women-founded RIA

RoundtableHow should the SEC and FINRA modernize their regulations?

The retail e-volutionFive predictions about the industry through 2025

Forecast 2020The indicators say the economic caution flag is out

Gender forward

Disclosure: Fulcrum Capital did not have editorial control over the article, and there are a few inaccuracies we need to correct: 1. Fulcrum was 50% women-founded, not 100%. 2. Fulcrum’s CEO Darcy Johnson is leading the charge on Fulcrum’s Gender Forward initiative. Michelle Mathieu is supporting Darcy, not singlehandedly leading the effort. 3. We have nine personnel, not seven. 4. Fulcrum does not offer or manage funds, contrary to some of the statements in the article. All our advisory accounts are separately-managed. 5. Fulcrum does not make specific recommendations about real estate, though the firm may provide advice about securities that invest in real estate. A copy of our ADV Part 2 disclosure brochure, which describes our services and fees is available upon request at no charge. Also, as a regulated entity, we need to correct a couple of references to performance. Past performance is not a guarantee of future results and there is no guarantee that investing with a gender lens will improve performance or avoid loss. For details on research related to diverse teams, please contact us. Fulcrum Capital does not recommend or use the Pax Ellevate Global Women’s Leadership Fund in its portfolios. Alternative investments vary widely and pose a number of risks that are not appropriate for all investors. We make recommendations only after understanding each client’s individual circumstances, needs, and risk tolerance.

Please contact us with any questions at info@fulcrumcapll.com or calling 206.223.9790.

Fulcrum Capital 1111 Third Ave Suite 1880 Seattle, WA 98101 P: 206.223.9790 F: 888.761.8709 fulcrumcapllc.com

D E C E M B E R 2 0 1 9VOLUME 6 | NUMBER 11

FEATURES

CONTENTS

ON THE COVER

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47 D E C E M B E R 2 0 1 9 | A PUBLICATION OF INSTITUTIONAL REAL ESTATE, INC.

Diversification strategies for private wealth advisers

CIO Michelle Mathieu is the strategist in charge of 'gender-lens' investing at Fulcrum Capital, a women-founded RIA

RoundtableHow should the SEC and FINRA modernize their regulations?

The retail e-volutionFive predictions about the industry through 2025

Forecast 2020The indicators say the economic caution flag is out

Gender forward

1REALASSETS ADVISER | DECEMBER 2019

28 | Gender forwardCIO Michelle Mathieu is the strategist in charge of ‘gender-lens’ investing at Fulcrum Capital, a women-founded RIA with a ‘gender-lens’ approach By Mike Consol

36 | Forecast 2020The economic caution flag is out By Sheila Hopkins

42 | Opportunity zonesgaining momentum Multifamily appears to be the property category with the most potential for development in opportunity zones By Joseph Dobrian

47 | The retail e-volutionFive predictions about the industry through 2025 KC Conway with Mike Consol

51 | RoundtableHow should the SEC and FINRA modernize their regulations to better serve the interests of RIAs, broker/dealers and investors? By contributing executives

54 | Record demandin senior housing But new supply is outstripping the market’s rate of absorption By contributing executives

Michelle Mathieu, chief investment officer of Fulcrum Capital

Photo Credit:Marcus Donner

forwardforwardGender

The professional turning point in Michelle Mathieu’s career came in March 2007 while attending a keynote address by T. Boone Pickens at the

New York Athletic Club. Pickens was talking about oil prices, which were going crazy at the time, to a group composed almost entirely of men. Mathieu, who was CIO of a trust com-pany at the time, had flown from her native Seattle to New York City to attend the strategy and research conference, geared toward institu-tional investment managers. She was sitting at a table with a group of big-city men donned in slick, dark suits listening to them banter with one another. It was then an epiphany struck with “crystal clarity.”

“I realized these guys didn’t know any more than I did about what was going to happen, whether it was oil prices or the capital markets,” she says. “I realized these guys aren’t rocket sci-entists, they aren’t any smarter than me. It was like a bomb went off in my head, that I had done all this work and didn’t have to prove myself anymore.”

Her realization was well timed, because just hours later news broke that Bear Stearns was collapsing, the first domino to fall in what became the global financial crisis.

“That confidence was like, ‘Alright, I got this. I am ready’,” she recalls.

Another confidence-builder for Mathieu, only 31 years old at the time, came when she was tapped to launch the investment division of a trust company for law firm Perkins Coie. As chief investment officer at the organization, Mathieu took Perkins Coie from zero to $500 million in only nine years.

It also didn’t hurt to have a good, albeit unof-ficial, mentor named Peter Glidden during her stint at First Interstate Banks (now Wells Fargo). Rather than making pronouncements or asking probing questions, Glidden kept toss-ing increasingly complex projects at Mathieu, as well as opening doors and making key introduc-tions.

“He saw more potential in me than I even knew was possible,” she says. “He just made things happen and kept giving me more chal-lenging projects and opportunities.”

Given that experience, it’s little wonder that Mathieu eventually found her way to Ful-crum Capital, a firm whose most cherished values include gender, ethnic, and other forms

REALASSETS ADVISER | DECEMBER 2019 29

of diversity. Fulcrum is 100 percent employee owned and 100 percent female owned and founded, which Mathieu and her colleagues consider a differentiator, especially considering that only 2 percent of U.S. wealth advisory firm are women-owned, and almost half do not have a single female adviser.

“Diversity for us means 50 percent women, or at least something more than 30 percent and something less than 100,” she says. “In other words, having all women is not diverse either. We are striving for diversity in perspective and opinion and ability to engage and interact with clients. We take that very seriously.”

Fulcrum’s philosophy is that integrating sus-tainability into all investment decisions leads to stronger and more durable portfolios, and

quality governance is one of the key drivers of sustainable portfolios, and that includes diverse leadership teams.

In broad terms, there are two approaches to gender-lens investing: One is to invest in com-panies that improve the lives of women and chil-dren; the other is to invest in companies where the leadership and policies promote gender diver-sity, which Fulcrum considers a proxy for other kinds of diversity. Diverse leadership teams have more than 30 percent representation of women on companies’ boards of directors and executive suites, and “quality” parental leave policies.

“Diverse teams make better decisions, and diverse companies have better performance in terms of return on equity and even share-price performance,” she says. “That evidence is avail-able in several studies over the past decade.”

Among other metrics, Mathieu points to the five-year track record of the Pax Ellevate Global Women’s Leadership Fund, which tracks the first index focused on women on boards and in executive management.

The firm coined its own imprimatur for its philosophy: gender forward. As part of that ethos, Fulcrum Capital launched its gender-focused portfolio in June, which it considers a separate account. The firm raised seed capital to launch the fund that invests on behalf of individuals, though it is also open to

families and nonprofits. The fund invests in 25 equally weighted stocks the firm considers leaders in gender diversity, as well as meeting other criteria such as growth and valuation characteristics. It is not an index, Mathieu stresses, because the firm researches, analyzes and actively selects and manages the fund’s constituent stocks.

ENTER ARCHIMEDES When Fulcrum Capital was founded back in 2007, CEO Darcy Johnson declared the firm was not about them, that it was about

something much greater than them. Johnson cherished the famous quotation from Archi-medes, the Greek mathematician: “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

“That is what Fulcrum is,” Mathieu asserts. “Finance is a force for change. By helping our clients align the pursuit of profit and purpose, they can leverage the impact on the things that matter most to them.”

Mathieu came aboard and began applying her pressure to the fulcrum three years ago. She hails from Richland, Wash., a member of the trio of cities that make up that region’s tri-cities area (the others being Pasco and Kennewick). Richland is home to the Columbia Generating Station nuclear power plant.

“My high school was called the Richland Bombers and our symbol was a mushroom cloud,” she says. “During World War II, Rich-land was founded as a government town where the fuel for the atomic bombs was produced. They are very proud of their nuclear heritage.”

Having started kindergarten early, Mathieu was younger and smaller than her classmates and that turned her into an “outsider.” She spoke with a lisp and was bullied by the other girls. Her alienation was compounded when it was discovered Mathieu had attention defi-cit disorder and was dyslexic, requiring her to spend recess receiving specialized tutoring while her fellow pupils were on the playground engaged in recreational activities.

Mathieu’s father was a computer scientist who taught her math at home during evenings. By fifth grade she was doing math at a sev-enth-grade level.

“My family was extremely religious,” she says. “My younger sister and I weren’t allowed to go trick-or-treating. We were allowed to dress in costumes to hand out pamphlets of Bible verses at Halloween so, of course, our house would get egged or toilet-papered every year at Halloween. We weren’t allowed to watch TV shows or cartoons.”

There were many parental rules, one of which was the Mathieu children were required to carry through to completion anything they started. That discipline paid off, as Mathieu claims that persistence is the single characteristic that most contributed to her professional advancement.

“I have this ruthless ability to focus and do what it takes to get the job done,” she remarks.

Fulcrum Capital by the NumbersYear founded2007

Ownership100 percent women- and employee-owned

Assets under management$510 million

Assets under advisement$550 million

Three-year average annual AUM growth34 percent

Average client relationship$6.9 million

Client retention rate98 percent

Client makeup65 families and nine nonprofits 49 percent of primary decision- makers are women

PersonnelFour partners, three investment professionals

OfficeSeattle

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What alternatives and real assets has your firm been recommending to its clients?Examples of the strategies that we have used in the past or currently use in client portfolios include core and core-plus private real estate, distressed or opportunistic real estate, insurance-linked securities, structured credit, private credit, timber/farmland, and commodities. We also analyze and recommend client-specific direct private placements, venture investments and commercial real estate opportunities, as well as mission-related pri-vate placements such as investments in women-owned businesses, student housing, opportunity zone funds, environmentally sustainable businesses and funds, and other socially responsible strategies for select qualified clients.

Which specific real asset subsectors have you been using?While we have used a wide range of real assets over the years, at present we are generally recommending core and core-plus real estate, insurance-linked securities, and the client-specific opportunities mentioned above.

Talk about the role of alternatives and real assets in your client portfolios.For qualified clients, we invest in alternative investments and real assets where we believe the benefits outweigh the burdens of high fees, illiquidity, leverage, lack of transparency and other factors. When we do employ alter-natives, these securities serve a very clear role: to generate income or long-term capital appreciation from sources other than traditional stocks and bonds. In other words, we employ alternatives in order to enhance returns, not to diversify the portfolio or reduce risk. Fulcrum does not recommend and never has recommended hedge funds. We also employ alternatives and real assets to achieve client-specific directives. We believe our boutique size, experience, and institutional networks give us access to rifle-shot opportu-nities to enhance returns. We are wary of the pitfalls of overdiversification and unnecessary layers of fees. Rather than “spray and pray,” we strive to know what we own.

Do you expect alternatives and real assets to hold bigger positions in client portfolios in the years to come?Yes. In general, we expect alternative investments will play a greater role in our portfolios. Costs are coming down, transparency and liquidity are rising, and returns to traditional investments are likely to be lower than experienced in the past decade. We are also evaluating private placement investments in women-owned businesses, environmentally sustainable busi-nesses, and other socially responsible enterprises for select qualified clients.

What are your concentration limits for alternatives and real assets?For most families we recommend up to 20 percent in alternatives and real assets, although this figure varies by client depending on objectives, liquid-

Mathieu’s sister is a Christian missionary in Niger, Africa, with her husband and three chil-dren.

“I don’t have children, and I’m kind of the capitalist of the family,” she jokes. “I am no lon-ger religious.”

Indeed, Mathieu took up belly dancing at age 26 and belly-danced professionally for 16 years. At the time, her male coworkers had encouraged her to take up golf, like the rest of the guys. She determined to flout convention by doing something far afield, something artis-tic and noncompetitive. She considered Bon-sai trimming or chocolate making classes, but passed on those when she came across a Middle Eastern tribal dance class.

“I actually took up belly dancing because it was the opposite of golf,” she recalls. “I danced at Moroccan restaurants, festivals, nightclubs and even theaters with an audience of 8,000 people. I did the whole gamut. Now I do Bra-zilian samba.”

DIVERSITY, YES, BUT LET’S NOT GO OVERBOARD Interestingly, one of Fulcrum Capital’s focal points is to guard against over diversifica-tion, dubbed the “spray and pray” method of investing by Mathieu. She reasons that a U.S. equity portfolio of 30 to 50 stocks achieves the same diversification and risk reduction as a 1,000-stock portfolio or index, and allows Fulcrum to be intimately familiar with its clients’ holdings.

“If you’re striving for mediocrity or the aver-age that is fine,” she says of portfolios contain-ing hundreds or thousands of stocks. “We are trying to be much more intentional about what we own and why we own it. A little diversifica-tion goes a long way.”

Though Fulcrum makes full use of alterna-tives and real assets, Mathieu’s favorite asset class

REALASSETS ADVISER | DECEMBER 201931

is publicly traded stocks, pointing out that she has been in the business almost 30 years and during that time has witnessed public stocks outperform just about every other asset class, including median private equity managers.

“Public stocks are still under-appreciated and underrated relative to private investments,” she says. “You can’t go wrong with public stocks over the long term.”

On the real estate front, though, she prefers operating companies or direct investments in property rather than REITs for long-term investors.

Strategically, impact investing and ESG (environment, social, governance) excites Mathieu, though she acknowledges they are in their early stages of development and will require some maturation before their full power can be deployed.

“ESG and impact investing are here to stay,” she declares. “Our clients love knowing their money isn’t just working for them once or twice, it is working for them three times — delivering performance, being invested in a way that aligns with their values, and investing with a firm that represents those values.”

What’s more, Fulcrum Capital donates 10 percent of its annual profit to charity.

That charitable streak has Mathieu serving on three nonprofit boards, as well, something she regards as a civic obligation.

Meanwhile, the firm, based in the thriv-ing Seattle market, is recruiting new advisers, looking to build capacity for the future. It has not taken another epiphany for Mathieu, or her colleagues, to see there is a strong and abiding future in the wealth advisory business, especially when focused on the mass market of underserved U.S. women.

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

ity needs, leverage, portfolio size, etc. Many of our clients are business owners or direct real estate investors, so they already have a material concentrated private investment. Our managing partners also serve on investment committees for large endowments totaling over $1 billion in assets, where the allocation and approach to alternatives is scaled accordingly, e.g., up to 40 percent in private or illiquid investments.

Do you see those concentration limits changing in the future?It’s unlikely we will increase these concentration limits, aside from changes driven by specific client circumstances. Most of Fulcrum’s clients are far below the limit at this point, so we have plenty of room before we hit the ceiling.

What liquid alternatives and real assets are commonly used for your clients?We don’t use daily-traded liquid alts. In the past, we have used commodity ETFs and ETNs.

What illiquid alternatives and real assets are commonly used?For clients of Fulcrum, we currently employ registered interval funds with quar-terly or semiannual liquidity. We also evaluate LPs, property syndications, and private placements on a client-by-client basis.

Do you provide separate accounts, club deals, etc., to your firm’s individual high-net-worth clients and families? If so, explain the basic structures used.We do not offer any proprietary products or SMAs. We invest each client directly in a customized portfolio of individual stocks and bonds, as well as mutual funds, ETFs and other securities, tailored to their values and objectives. We also offer a gender-focused equity investment strategy, but it’s not a separately managed account per se. For most clients we do engage subadvisers for core bonds as well as ESG/impact bonds.

What alternatives and real assets are you especially optimistic about over the next two to five years?We’re excited about real estate and venture capital opportunities here in the Northwest. Technology is driving a real estate renaissance, fueled by an abun-dance of cheap capital. Companies like Amazon, Microsoft, Google and Alibaba are hiring thousands of employees and consuming millions of square feet of real estate, and all this growth attracts billions of dollars from sovereign wealth funds and other institutional investors. It’s also attracting a talented high-earning workforce. The pains of rising urban density are very real here — not just traf-fic, but homelessness, addiction and health issues. Public/private partnerships, zoning changes and new technologies like cross-laminated timber are address-ing these issues, lowering costs, improving access and extending the real estate cycle. Workforce housing, co-living startups, affordable housing, student housing appeal to our clients who want their investments aligned with their values of social justice and sustainability. Meanwhile, we expect the cycle of innovation has further to run with spinoffs and startups over the next few years.

32REALASSETS ADVISER | DECEMBER 2019