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Staying Nimble

A core strategy is important, says Bruce Meyer, but so is the ability to respond to changing economic environments.

Ilana Polyak, 07/30/2009

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A core strategy is important, says Bruce Meyer, but so is the ability to respond to changing economic environments.

A law degree, says Bruce Meyer of Copper-wynd Financial in Scottsdale, Ariz., is "the greatest education you could ever have, but the worst way to make a living."

Meyer has seen both sides of the coin after working as an estate-planning and pension attorney for seven years in Cleveland. Studying law helps to develop an analytical mind, Meyer says. "Coming from a law background gives me a comprehensive view of investing," he says about how he approaches money management. "I run my practice very similarly to the way a law firm would work, or an accounting firm."

But practicing law can be draining because people typically see a lawyer when something has gone wrong in their lives. So when the uncle of Meyer's wife was looking for an exit strategy for his financial-advice practice in Arizona, Meyer packed up his family of five for the move to the desert. "Now I get to work more in depth with clients on an ongoing basis, not on a transactional basis," he says.

'Core and Explore'
From his predecessor, Meyer inherited portfolios of solid core funds. "He came out of the commission business, where you sat on your investments most of the time and rebalanced periodically," Meyer says. "Investing now requires you to be much more tactile in nature, based on what's happening."

To build on these portfolios, Meyer developed what he calls a "core and explore" strategy.

The core portfolio is made up of funds that he considers all-weather holdings, though most have a value tilt. He is indifferent to what kind of market cap the managers veer toward or what sectors they find attractive. He buys the managers' talents more than the fund they're managing.

"I'm paying for active management, and I want the managers to be using their best ideas, so I don't want to pigeonhole them," he says.

Currently, about 30% of client assets are invested with these core funds, among which are Fairholme FAIRX, First Eagle Global SGENX, Manning & Napier Equity EXEYX, and Longleaf Partners LLPFX. Under normal market conditions, however, 60% of assets are dedicated to these holdings. "As the markets broke down, we needed to be more and more defensive," Meyer says. "I really don't want to market-time. But when we break below certain technical levels, I'm going to get a little bit more defensive."

Although he has high conviction in the core investment selections and they change little over time, Meyer does not shy away from taking bold action. In the summer of 2008, for example, Meyer sold his stakes in Third Avenue Value Fund TAVFX, run by manager Marty Whitman. He still liked Whitman's value methodology, but the fact that the fund held large amounts of financial stocks going into the market meltdown spoke to a management blind spot, Meyer says. (He has since added Third Avenue Value back into the mix given the opportunities he thinks Whitman can find now.)

Making Macro Calls
The explore strategy is the part of the portfolio where Meyer ventures further afield and puts his macroeconomic views into practice. "I have an economic belief right now that the economy will eventually get better, but it will have starts and stops over the next little bit," he says.

So in the first two months of 2009, as the market continued to decline further, Meyer raised his cash stake, topping out at around 20%. "I needed to reduce risk," he says. As the market improved, he looked for areas that could benefit from the upswing, and that became his explore portfolio at the time.

Among the funds he used for this purpose were Loomis Sayles Strategic Income NEFZX, the iShares S&P U.S. Preferred Stock Index PFF, and other exchange-traded funds. In addition, he added five individual stocks: Procter & Gamble PG, General Electric GE, Berkshire Hathaway BRK.B, Google GOOG, and Devon Energy DVN.

"I was treating this as a bear-market rally," Meyer says. "I wanted to participate on the way up, but I wanted to be able to sell off, too, if I needed to."

Meyer sees an inflationary period ahead for the U.S. economy, though it might take a few years. Mountains of borrowing for the government's myriad bailout plans will drive inflation higher in coming years, he says. "That means that some of these bonds are going to get hit pretty hard. Why would you want to invest for 20 years at a less than 3% return?"

He has positioned some clients in the UltraShort 20+ Year Treasury ProShares TBT, which invests inverse to the 20-year government bond. And he intends to move more heavily into hard assets such as energy and commodities in coming years.

Once his portfolio is constructed, Meyer says that he uses Morningstar Advisor Workstation to get a deeper look at the mix he has created. It helps him understand his sector weightings and risk/return profile and avoid overlap.

Admitting Mistakes
Like any advisor, Meyer has made his share of mistakes, he acknowledges. The key is to own up to them and figure out a way not to repeat them. This past year, Meyer got burned on Oppenheimer Champion Income OPCHX, which employs a total return strategy by casting a wide net on income-producing investments.

He bought the fund in 2008 with the hope of shielding his clients from the credit crunch because he found ordinary bonds too volatile. But Oppenheimer Champion Income spent 2008 weaving into all the wrong corners of the fixed-income market in this quest. Its losses mounted and mounted. All told, the fund plummeted more than 78% in 2008, leading to the departure of the lead manager. (See "Where Leverage Lurks" in the April/May issue.) Meyer and his clients rode the fund all the way down.

He sold the fund in January. Though it had been a small position of just 5%, his clients suffered alongside other shareholders.

"The lesson for me was that even though I thought I had done my due diligence, I still needed to dig deeper in order to find out what was really happening with this fund," he says. "That was a humbling experience."

Then there are times when he owns up to mistakes because it's good business sense. Case in point: Longleaf Partners, a deep-value offering with little turnover. "They are going to own things that are out of favor for long periods of time," he says about managers Mason Hawkins and Staley Cates' approach. "They are going to stick with it no matter how ugly things get."

Meyer believes in the managers' ability to find solid long-term investments, but many of his clients couldn't stomach Longleaf's 50.6% drop in 2008, and Meyer sold it out of some of his accounts.

"Just because I'm right, it won't help if I'm fired in the short run," he says. "The hardest part of our job is managing people's emotions."

Fortunately, that's the part of his job Meyer likes the most, and it's something that being a lawyer can't hold a stick to.

Ilana Polyak is a New York-based freelance writer. 

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