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Taking the Lead

Elyse Foster has learned that clients need a confident hand guiding them in times of trouble.

Kate Stalter, 07/07/2011

This article first appeared in the June/July 2011 issue of Morningstar Advisor magazine. Get your free subscription here. 

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Elyse Foster, CFP, principal, Harbor Financial Group

How she caught our eye: Creates three-tiered portfolios for clients, including a strategic area that emphasizes long-term holdings such as real estate and natural gas.

Career path: Graduated from the University of Colorado in 1977 with a degree in political science and comprehensive studies in economics. Early career included corporate accounting and investment banking. Founded Harbor Financial Group in 1988.

Personal: Married with two children.

Favorite funds: Fairholme FAIRX, Yacktman YACKX, First Eagle Overseas SGOVX, Permanent Portfolio PRPFX, Ivy Global Natural Resources IGNAX, Templeton Global Bond Adv TGBAX.

Elyse Foster believes that one of an advisor's most important roles is that of leader. That's a key lesson she learned from the 2008 market downturn, and one that she conveys to her staff at Harbor Financial Group in Boulder, Colo.

It's a starting point for Foster as she seeks to guide clients toward financial security. "A very big goal I have is giving my clients freedom from worry," she says.

Foster founded Harbor in 1988, after working for a couple of years as an accountant. During that time, she learned of the Denver-based College for Financial Planning and enrolled there. Afterward, she joined a financial-planning and asset-management firm, where she stayed for about five years, becoming director of operations. After a short stint in investment banking, she started her own firm. Harbor has three Certified Financial Planners, including Foster. They are joined by an analyst, a para-analyst, and administrative staff. The firm has $108 million under management.

Three Tiers, Six Models
When it comes to asset management, Harbor employs a three-tiered approach to investments based on six detailed models that the firm has created. The models essentially serve as benchmarks, so Harbor can allocate ownership percentages to various asset categories. They are constructed to fit the needs of clients at different stages of life and with different levels of net worth. The models can also accommodate unique situations that an individual may have, such as capital gains treatment. Foster uses the example of a client for whom a growth-and-income portfolio would be appropriate. In that case, she would use the firm's growth-and-income model to determine investment percentages in cash, growth stocks, value stocks, and other instruments.

Based upon these allocations, client portfolios are further delineated into three tiers.

The first tier of Foster's approach is the core holdings. Here, portfolios consist of cash, fixed income, domestic stocks, and international stocks. Assets are separated into categories, including large-cap growth, large-cap value, mid-cap, small cap, and emerging markets.

Next is tactical. "We try to determine which sections of the market will do the best, from a value retention perspective," she says. Commodities and other hard assets, such as real estate, could be considered here. Recently, Harbor put energy assets into the tactical section. Health care and a hedge category have also been included. This section is somewhat fluid, with a tendency to change every year or two, depending on the leadership or leadership potential of asset classes.

"Tactical changed after the crash of '08," Foster says. "It has a firm anchor now with the hedge funds and commodities." Some assets here are chosen to provide downside protection. Before 2008, Harbor's sector allocation included investments in financials and other areas that no longer offered the same upside potential.PAGEBREAK

Many of the tactical assets are publicly traded. That's not always the case in Harbor's third tier, which Foster calls the strategic area. Its application varies between clients, depending on portfolio size. Unlike tactical, in which holdings can change more frequently, Harbor selects strategic-area holdings for the long term.

"We have real estate holdings and energy holdings--primarily natural gas drilling, where we've been for a number of years," she says. Clients with large portfolios might go directly into hard assets, such as the natural-gas wells. The time horizon is longer on these investments, perhaps spanning 30 years. Other assets, like real estate, could warrant a five- or seven-year holding period. Higher-end portfolios may also contain individual stocks and bonds. For clients with less to invest, Foster may give them exposure to natural resources and other asset classes, such as gold and real estate, via mutual funds. "The Permanent Portfolio PRPFX is a favorite," she says, "because it puts that all together in one package."

Foster uses Morningstar data to analyze investment vehicles, holdings, management styles, and other factors as she builds client portfolios. She tracks ongoing fund performance using the data, as well. Her team also relies on Morningstar news for updates on managerial changes within funds, ownership data for various instruments, and other information that they review regularly.

A Wary Eye
In 2007, she began to hear murmurings of trouble at Lehman Brothers. Also, she recalls, "credit at all the banks was way too easy, and we became uncomfortable with the financials and any kind of banking stock early that year."

At that point, Harbor made the decision to exit financials. The firm first cleaned out ETFs containing financial stocks, then turned to mutual funds. It added to its high-quality bond holdings and looked for places to take profits from riskier assets and enter more-conservative investments. "We believed that our return environment was changing, and we'd no longer have the high returns we'd enjoyed for years. We were looking for dividend yields."

Because Harbor had sold its financials, those were no longer a path to dividends. Foster turned to fixed-income investments and institutional-quality stocks with dividend yields. As the markets fell in the autumn of 2008, Harbor was well positioned. Foster made the call that the firm would sell its equities as prices fell 20%. Foster soon realized she needed to do the same with mutual funds, and Harbor began to exit those as they dropped 20%. The cash emphasis helped Harbor minimize losses in late 2008 and early 2009.

A Change of Philosophy
Emerging from the bear market in 2009, Foster wanted to focus on high-quality firms that could weather further storms, so the firm's philosophy shifted to concentrated equity. Funds from Fairholme FAIRX and Yacktman YACKX anchored the large-cap and value segments of the firm's portfolios.

"Other favorite choices from that time were First Eagle Global SGENX and First Eagle Overseas SGOVX," she says. "They performed well in the downturn, and they're long-term holds that we've had success with."

Ivy Global Natural Resources IGNAX is another top choice to anchor Harbor's natural-resources plays. On the fixed-income side, Vanguard GNMA Fund VFIIX offered exposure to government paper without the riskier Freddies and Fannies. As of early 2011, Harbor continues to become more fully invested, with some downside protection still in place. Foster cites Hussman Funds as offering downside help, and Harbor continues to invest in real estate, commodities, and inflation-protection instruments.

The 2008 downturn showed Foster the need to provide consistent leadership and guidance to clients. "So, when they called me with questions, I didn't hem and haw. I didn't avoid them. I told them what the plan was, what I thought possible upsides and downsides might be, looking ahead, and what direction I believed we needed to take," she says.

Looking to the Future
Foster is guiding her associates to apply new ideas and technology and understand the needs of the post-baby boomer generations. "They realize their access to wealth is going to be different, and their job security and careers are going to be different. Rather than building a wall between us, I'd rather look at their view of the world and embrace it."

Kate Stalter is a columnist for RealMoney at TheStreet.com and editor-at-large for StockChartReader.com.

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