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Bringing High-Level ETF Strategies to a Lower Price Point

Andrew Gogerty

Andrew Gogerty: Hi, I’m Andrew Gogerty, and we’re here at the 25th anniversary of the Morningstar Investment Conference. 

Technology has definitely changed the landscape of involved investment options over the last quarter century, and one of those has been the ETF. The technology has really democratized investing and given access to far-flung and niche areas of the market that historically have only been available to institutions. Joining me today for a discussion on how this impacts smaller dollar account investors is Mitch Reiner, managing partner of the Wela Strategies.

Mitch, thank you for joining me.

Mitch Reiner: Thanks, Andy.

Gogerty: You’ve borne well out of a larger investment advisor, Capital Investment Advisors in Atlanta. Why start a new firm to roll out the ETF strategies?

Reiner: Ultimately because all investors don't need a super high-touch wealth management approach. Many investors just need a simple investment philosophy and strategy to implement with their assets. Why make it so difficult and add layers and layers of costs on to make something more comprehensive than it actually needs to be? Therefore, we developed a separate institution, with a separate brand, that leveraged the resources of our larger RIA firm.

Gogerty: Let's talk about that leverage of resourcing. Your Wela Strategies have an own-your-age or almost target-date lineup type of investment options. Then you also have a multiasset income and an aggregate growth strategy. How do those portfolios, or that investment process, differ from the larger RIA? How are those portfolios the same and/or different?

Reiner: It's the same investment committee. There are nine members of the investment committee that make the investment decisions for the $1.2 billion wealth management firm. Why not take those exact same decisions that have worked for a long time--strategic decisions, large-cap versus small-cap, international versus domestic--and funnel them into just much more consolidated all-ETF portfolios, using low-cost tools with ETFs and making the same strategic decisions?

Ultimately they are just children of the same decisions of the investment committee. We’re making strategic decisions in the investment committee, funneling them down and creating basically nine to 15 model ETF portfolios. It's simple, it's low-cost, and it’s automatic. The way it's different is that it's just not as in-depth. You’re not dealing with as much tax-loss harvesting or individual security selection.

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Gogerty: One of the things that the ETF has allowed lower-cost and even lower-dollar accounts to do, is build this concept of multiasset income, something that historically you wouldn't be able to do in a cost-effective manner in a single portfolio, unless you are large institution. What are some of the changes or opportunities that you have implemented in that portfolio over the first half of this year? What have been some of the investment highlights in the multiasset space this year?

Reiner: We have a reallocation cycle really just twice a year [August and February]. Again, we’re trying to keep it simple, trying to keep it low-turnover. Last August, real estate had just potentially gotten beaten up throughout the summer. There was an opportunity, so we added an allocation to REITs. Then in the February reallocation time period, they had done so well and outperformed all the other multiasset classes that it appeared to be a time to take some profit off the table. And MLPs, energy investments, had actually taken it on the chin with the whole fiscal cliff and concern about growth economically around the world, and that was an opportunity to shift a capital gain opportunity with REITs into something like MLPs.

Again, for you to be able to do that in the equity market pre-ETFs, you had to be choosing the selection of individual REITs and individual MLPs and dealing with K-1s and so on and so forth. It’s a fundamentally changing factor with investment.

Gogerty: One follow-up to that. It looks like, given that February and August reallocation period, we’re between the two periods now. And obviously there was a lot of news around the world about rates and yields have changed dramatically or they’ve been more volatile than normal in the last two to three weeks leading up to the conference. What does that do to the research between those allocations or what are some of the things that you're going to be watching leading up to that August allocation?

Reiner: We’ve had exhaustive conversations. When yields move 50 basis points in 30 days, you’ve got an extraordinary event on your hands. We’re absolutely watching it and discussing it internally. We do have the discretion to be able to make a change in between the two allocation periods, but we really like to stick to the process and keep it repetitive over time, but ultimately we’re watching whether or not it was a gut reaction shift to the Fed actually coming out and discussing unwind. We’re watching whether 50 basis points in a 30-day period is an anomaly or whether it's the norm. Ultimately, if it is an anomaly and it has created disruption and dislocation in specific markets, for example, closed-end funds, where share prices have fallen significantly more than NAVs, that maybe a perfect opportunity for us to shift our allocation and take advantage of that.

Gogerty: Thank you for joining us here at the Morningstar conference and for providing your insight.

Reiner: I appreciate it.

Gogerty: This has been Andrew Gogerty with Mitch Reiner from the 25th Annual Morningstar Investment Conference. Thank you for joining us.