A clear view of the present is the only thing that Richard Bregman thinks can guide his investment decisions.
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A few years ago, Richard Bregman was on a family trip to Costa Rica when he and his son, Michael, went out on a WaveRunner. Twenty minutes after setting out on the Pacific Ocean, they hit a swell and the vehicle tipped over. Michael managed to swim away injury-free, but Bregman's right foot was lodged in the WaveRunner's sideboard. When he wiped out, he fractured his ankle, which required two surgeries to repair.
"The chances of having an accident like that were so slim," Bregman, chief executive officer of MJB Asset Management, says from his midtown Manhattan office. "I'm sure somewhere I could find the statistical analysis of what the probability of breaking your ankle while riding a WaveRunner are and it would minuscule, but it doesn't change the fact that I had two screws in my ankle and I spent three months on crutches."
Once-in-a-lifetime events are just that. But they do happen. Yet investment analysis focuses on the vast majority of times when things go as expected. That could leave clients vulnerable to risk and derail a well- laid financial plan decades in the making, Bregman believes. Take 2008's final quarter when all asset classes--bonds, stocks, foreign stocks, natural resources, real estate, everything--fell in tandem. "In the financial world, we call this systemic risk," Bregman says. "But individuals experience this as the scary unknown."
Since the tech bubble burst in 2000, Bregman has been thinking about how to shelter his clients from risk, realizing that many of them simply can't stomach it. He found that the standard one-liners he had used to counsel about the nature of markets and staying the course rang hollow after two years of stock declines. "We're talking about someone's retirement. We're talking about someone's ability to send their kids to college," he says. "Anyone can lose 40% on their own. They don't need me to lose it for them and collect a 1% fee."
His clients began to flee. As his assets under management shrank, Bregman began to think about his business in a different way. Even as the next bull market took off in 2003, Bregman began using hedging strategies. At the time, there were few open-end mutual funds that did these strategies, so he began with just the Merger Fund
Art of Money Management
Bregman's skepticism about the wisdom of investing through thick and thin used to put him at odds with those who espouse a buy-and-hold strategy. But since markets turned brutal last fall, other planners have started to wonder if they could do better by taking a more active role in money management.
To Bregman, buy-and-hold is just one way of managing money. When he was studying for his chartered financial analyst certification in the late 1990s, he was exposed to investment ideas, such as arbitrage pricing theory, other than Modern Portfolio Theory, the cornerstone of many financial-planning practices. He also learned stock analysis. He came to the conclusion that no one way of investing makes sense all the time. Bregman borrows from all these schools of thought. He calls his money management style "investing in the moment."
Proving Its Mettle
Bregman begins each client's investment plan with a one-third allocation each to stocks, bonds, and alternatives. Depending on his view of where the markets are at any given moment, he makes adjustments. While he follows the market constantly, he doesn't trade frequently. But he evaluates whether or not to do so all the time. At the end of 2007, for example, Bregman thought that stocks were trading at peak price/earnings ratios and were too frothy for his taste. The risk of owning them in great quantities far outweighed their potential return, he believed. So, he retreated further into alternative investments. At one point, his portfolios held just 20% in stocks and 20% in bonds and the remainder in hedging strategies. Last fall, he cut his exposure to fixed income entirely and added it to the alternatives. "I thought that the credit market was in disarray, and I didn't want to be near it," he says.
Bregman was early in his moves, and it was a few months more before markets truly imploded. Even the hedges suffered more than he anticipated as arbitrage relationships broke down. Still in 2008, the average client portfolio was down 20% to 22%, much more than he would have wanted, but certainly better than the 38.5% drop in the S&P 500. By early 2009, though, Bregman became more positive on stocks as they sank to deeper lows. "I thought that for the risk inherent in the market, those were great prices," he says. "I didn't know if the prices were going to go up, though."
He hasn't made any changes since then, and the portfolios are now about 40% in stocks, 40% in hedging strategies, and the rest in bonds. Bregman is slightly less bearish on bonds than he was a year ago, but he's still not comfortable with how low rates are on short-term Treasury notes. He has a more favorable view of corporates and high-yield bonds.
For the year through June 30, Bregman's moderate portfolios were up 6% to 7%, well ahead of the S&P's 3.2%.
Portfolio of Funds
Bregman likes fund managers who display an independent streak. He has a value tilt but is neutral on market cap, geographic regions, sectors, and turnover. He uses Morningstar Principia to screen for managers with good relative performance, low expenses, and favorable risk-adjusted returns.
"First and foremost for me is standard deviation, which I want to be below that of the S&P 500," he says. "It's the truest measure of actual volatility as opposed to beta."
His equity holdings include Third Avenue Value
On the bond side, Bregman includes Loomis Sayles Bond
The Sensible Path
Bregman is the first to acknowledge that his investing-in-the-moment style might sound "Zen-like." But in a world of uncertainty, he thinks that the most sensible path is the one immediately ahead of him.
"I don't believe that the past is necessarily prologue, and the future is unknown," he says. "So all we are left with is the present."
Ilana Polyak is a New York-based freelance writer.