A growing number of financial advisers who have developed tactical investment strategies — and can point to good track records — are developing a sideline business running money for fellow advisers and for clients they have never met.
A growing number of financial advisers who have developed tactical investment strategies — and can point to good track records — are developing a sideline business running money for fellow advisers and for clients they have never met.
The demand is being driven by advisers whose clients were crushed during the market crash of 2008-09 and who are looking for alternatives to traditional buy- and-hold strategies.
“The bad market is totally driving” the subadvisory business, said Ken Graves, managing partner at Capital Research Advisors LLC, which manages $370 million. About 70% of those assets are in subadvisory relationships using seven different tactical investment strategies.
“The first question we get is, "How'd you do in 2008?' We did pretty well, so we don't mind sending the data” to prospective clients, Mr. Graves said.
Paul Schatz, president of Heritage Capital LLC, said that his subadvisory business “came out of nowhere” after his top-down tactical strategies did well in 2007 and 2008. People found him by word of mouth or on money manager databases, he said.
“People are looking for an oasis,” Mr. Schatz said.
Anthony Welch, co-founder of Sarasota Capital Strategies Inc., has also jumped into the subadvisory business.
“Our [investment] model using currency ETFs ... did extremely well in 2008,” he said.
After speaking at some adviser conferences, Mr. Welch received enough interest from other advisers to launch a mutual fund last year, the Currency Strategies Fund (FOREX), which now has about $31 million in assets. That almost surpasses the $35 million he manages for individuals.
Mr. Welch expects the fund to grow into his biggest pool of assets.
“A lot of [advisers] are getting more tactical” and are looking for managers who have those skills, said Brian Carruthers, president of an eponymous firm that runs $60 million directly for clients and another $45 million on a subadvised basis.
Mr. Carruthers runs five different fixed-income models using bond funds. His typical adviser client is a certified public accountant or certified financial planner who uses a buy-and-hold strategy but needs to offer tactical approaches as well.
“What I do is a complement to what they're doing,” Mr. Carruthers said.
He uses Theta Investment Research LLC to track his performance. Potential subadvisory clients subscribe to the Theta service and are attracted to his low drawdowns, Mr. Carruthers said.
Ralph Doudera, founder of Spectrum Financial Inc., which has about $230 million under management for individual clients, also subadvises three mutual funds — but donates the management fees to charity.
The funds, Direxion Select Alternative Fund (SFEOX), Direxion Global Perspective Fund (SFGPX) and Direxion Equity Opportunity Fund (SFEOX), together have $111 million under management.
“We donate our services,” said Mary Collins, president of Spectrum and co-founder with Mr. Doudera of Hundredfold Advisors LLC, which manages the funds.
“The funds were developed to provide clients with tactical asset management inside a mutual fund,” Ms. Collins said.
“We're seeing a lot [of our advisers] wrapping their strategy up into a mutual fund” to lower costs for existing clients as well as to attract new investors, said Mike Zarren, director of relationship management at Ceros Financial Services Inc., a custodian and broker-dealer that caters to hybrid advisers doing active tactical management.
While it has worked for his business, subadvising is “not for every adviser,” Mr. Welch said.
“It's an awful lot of work, and there's an awful lot of expense” to get set up as an institutional money manager, he said.
And “you better have something different to offer. There are a thousand growth-and-income funds out there,” Mr. Welch added.
Fees for subadvising are also lower than the average retail fee. Mr. Graves and Mr. Carruthers, for example, both charge 50 basis points for their subadvisory services.
Some advisers have access to subadvised clients through a custodian, but in other cases, they sell their trading models to the primary adviser, who then makes the trades.
In the latter case, there may be no way to ensure the other adviser is diligent in following the model.
And of course, there's a real risk that subadvising attracts hot-money clients and advisers who will abandon the strategy when performance cools.
“I've got to believe people will always be people — it's got to happen,” Mr. Graves said. “If we lag a significant amount, I definitely think [an asset drain] will happen.”
Mr. Carruthers said he hasn't found subadvised clients to be flighty, “but I've only been doing it for a couple years, and the bond market is a bit different” than equities, he said.
“It's not sticky money,” Mr. Schatz said.
“You're only as good as your last quarter or year. That's why it's important to build relationships with a [client] firm that's in it for the long haul.”
E-mail Dan Jamieson at djamieson@investmentnews.com.
