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Preparing for Turbulence

Carl Dockery makes sure he and his clients are thinking about risk in every phase of the investment process.

Josh Charlson, 06/17/2010

Carl Dockery brings a distinctive perspective on risk to the asset-allocation and portfolio-construction work he carries out for clients. Before becoming a financial planner, Dockery spent a dozen years as second in command at a family-owned reinsurance business. Reinsurance involves taking on a portion of the risk embedded in the policies issued by other insurance companies.

"The kind of insurance we provided was long-tail insurance," Dockery says, referring to insurance in which claims may come in long after the policy was written. In turn, that meant that the premiums collected in a given year had to be managed carefully. "The pot of money you took in this year may need to last eight or 10 years or longer," he says.

Dockery, whose practice is based in Lakeland, Fla., believes that a similar dynamic is at work in the investment business. "You need to be prepared not to have your best outcome come about," he says. That means designing portfolios to weather different market conditions and, moreover, having the perspective to see that times may not be as bad as they look when a "long tail" kind of market hits.

The Advantages of Active Management
Dockery's work in the reinsurance business was also instrumental in launching his career as a financial planner. As part of his role at the firm, Dockery worked closely with the institutional equity and fixed-income managers responsible for overseeing the company's reserves. He was impressed with the prudence and long-term approach by which they ran the insurance assets. When the market for reinsurance softened in the late 1990s, Dockery's family began to wind down the business. Dockery used the transition as an opportunity to take stock, and he began to pursue a career in investments. He worked part time for a local broker-dealer in 2001. But he was frustrated in that corner of the industry. He wanted greater fiduciary responsibilities and privileges he'd seen his institutional money managers employ. Seeded by a small book of business from his broker-dealer work, and investments from friends and family, Dockery established Alpha Advisors in 2006.

One of the key tenets of Dockery's investment philosophy, as suggested by his firm's name, is a belief in the value of active investment managers. When he began seeking out managers for clients in 2001, he was impressed by what he found. "I was amazed to find so many managers who have done a very good job on a 10-year basis of outperforming their benchmarks and peers," he says. Such consistency over long periods gives him comfort that his clients' assets will be well cared for in those managers' hands.

Thus, the portfolios Dockery designs for his clients aren't likely to look much like the indexes. He's a big fan of Bruce Berkowitz, for example, the iconoclastic skipper of Fairholme Fund FAIRX, and he has long allocated assets to First Eagle Global SGENX, run for most of the past decade by now-retired value investor Jean-Marie Eveillard. Fund managers like these aren't shy about loading up on cash when they think the market is expensive or building concentrated positions in a stock or asset class in which they have high conviction.

Prepared for Storms
In building portfolios, Dockery also draws on the risk lessons from another experience in his life: flying airplanes. In the mid-1980s, Dockery completed most of the training necessary to get licensed as a pilot of single-engine aircraft. Dockery chose not to pursue the hobby, but the risks of flying remain at the top of his mind. Noting several neighbors and friends who died piloting their own planes, Dockery says that typically it's not one thing that brings down a plane, but a number of smaller problems occurring together.

Dockery applies this idea to his practice by aiming to construct a portfolio diversified enough to withstand many different market environments. A good manager can simply end up in the wrong asset class in the wrong year, Dockery says, so it's critical to not only find managers with long-term records of success but to cover a wide canvas of asset classes and investment strategies in a portfolio.

In addition to diversifying in the standard way across the equity and fixed-income style boxes, Dockery's client portfolios also include mandates for what he labels alpha, strategic/ tactical, and alternative strategies. These categories allow Dockery to cast a net for investment opportunities that don't fit the traditional boxes, provide lower market correlations, and capitalize on shorter-term market opportunities. For example, in early 2009 Dockery added 5% positions in high yield and technology, sensing that both sectors had been oversold relative to the market as a whole. Befitting his conservative temperament, Dockery chose Janus High Yield JAHYX and Ivy Science and Technology WSTAX to make these bets. Both funds are moderate practitioners of their chosen sectors. While neither fund soared to the top of its category during the risk-loving environment of 2009, the sector bets added value over standard benchmarks. PAGEBREAK

A Consistent, Yet Flexible Process
Alpha Advisors typically links its clients to one of five basic portfolios, based on the client's risk profile. Those portfolios are back-tested to fit particular risk and return characteristics, fully detailed in each client's investment policy statement. But Dockery is willing to customize those basic models to match his clients' specific preferences or concerns. One client, for example, long satisfied with a standard aggressive portfolio, expressed a desire for greater exposure to China. So Dockery tweaked the allocations to increase exposure to China, using a combination of Matthews Pacific Tiger MAPTX, Matthews China MCHFX, and Dreyfus Greater China DPCRX.

At every stage of his investment process, Dockery relies on the research and presentation capabilities of Morningstar Office. He begins by using capital market assumptions developed by Ibbotson Associates (a subsidiary of Morningstar) to create risk/return portfolios along an efficient frontier, then matches clients to those portfolios through Morningstar's risk-assessment questionnaire. Dockery regularly runs screens of Morningstar data to rank funds and survey category performance, and he uses Morningstar's portfolio analytic tools, such as Portfolio X-Rays and Snapshots, to verify and test portfolios once they're built.

The "Humble Profession"
Alpha Advisors has about 200 clients, and new growth comes through word of mouth. Dockery prefers to keep things this way. With two full-time assistants, along with the contributions of his wife, Andrea--a former SmithBarney financial advisor who is also a principal in Alpha Advisors--Dockery enjoys the familylike feel of his office and the close contact with clients that the firm's small size facilitates.

Reflecting on the market crash of 2008 and early 2009, Dockery says that it was a time to "measure your clients" to get a better sense of what risk means to them. His firm's portfolios were hardly immune to damage during the downturn, Dockery acknowledges. Many active managers, even great ones, were punished by the market for sticking with their convictions. Dockery is convinced, however, that the year was an anomaly, and that over time, the proven managers he admires will sustain their advantage.

Dockery's clients seem to agree. Sharing his long-term vision, nearly all of the firm's investors were willing to ride out the downturn and stick to their investment plans, he says.

Josh Charlson is a senior mutual fund analyst with Morningstar.

Josh Charlson is a senior fund analyst with Morningstar.

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