“Have a variant view.” With Jason Hartman & Jeffrey Fulk

For both personal and financial health, I think it is important to avoid bouncing from one news headline to the next. I certainly see the emotional strain of the news cycle reflected in investment markets, where investors’ short-term reactions often work counter to their long-term investment goals. We often remind clients that today’s news is […]

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For both personal and financial health, I think it is important to avoid bouncing from one news headline to the next. I certainly see the emotional strain of the news cycle reflected in investment markets, where investors’ short-term reactions often work counter to their long-term investment goals. We often remind clients that today’s news is already reflected in asset prices, whereas the success of their portfolio will be determined by what the world looks like in three to five years. From a personal perspective, I also find it helpful to have a long-term focus on what is truly most important, like cultivating relationships, living a healthy lifestyle, and giving back to local communities.

Jeffrey Fulk is a Managing Director at Alvarium, an independent global wealth advisory firm. He is a portfolio manager for Alvarium’s ultra-high-net-worth clients and a member of the firm’s investment committee. Throughout his 15-year career, he’s focused on investing in hedge funds and other alternative investments, essential for structuring institutional-style portfolios for clients.

Thank you for joining us Jeffrey! Can you tell us the “backstory” about what brought you to the finance industry?

I’ve been interested in markets for as long as I can remember, starting in sixth grade when our teacher asked us to pick a stock to follow. I decided on Wells Fargo and would come home every day after school to check the price in the local paper. A few years later, I went to my father with $100 to purchase Price Club stock. It was not even enough money to buy more than one whole share, but he carved out a position of his investment for me. The stock subsequently declined by 15 or 20 percent, which was devastating at the time. To comfort me, he offered to make me whole, returning my $100, but I also had to forfeit my investment claim. Not long afterward, Price Club got acquired by Costco, and even that $100 would have been worth a lot of money today. Since then, I’ve wanted to learn everything I could about investing.

Can you share with our readers the most interesting or amusing story that occurred to you in your career so far? Can you share the lesson or take away you took out of that story?

In 2009, I was working for a firm that invested in hedge funds. One of the funds had become a disproportionately large holding in our portfolio after making 200 percent in 2008 and 50 percent in January and February of 2009. It was heavily short several money center banks, and we were worried that its losses would be severe if the stock market reversed its declines. In an attempt to offset a portion of the risk, we purchased options in a financial sector exchange-traded fund (ETF) even though the manager had been the most successful investment in our portfolio for over 12 months. Around March 9th, the market bottomed, and the manager lost almost 20 percent in March and 50 percent in April. If left alone, the investment would have significantly impacted our clients’ returns in an environment where they expected us to generate positive performance.

The lessons were profound:

  1. Investment returns are rarely convex, meaning investments capable of generating outsized returns can also lose a lot, too.
  2. Risk is not linear, meaning expected losses change over time. In this case, the market had declined significantly already, making the short positions riskier as the likelihood of further declines became less probable.
  3. Short-term thinking is dangerous. At the time, being heavily short banks made sense because everyone was worried about which would be the next bank to go bankrupt after Lehman Brothers. However, looking back, it was precisely the moment when investors should have been making investments based on what the world would look like in three to five years, not next month.

Are you working on any exciting new projects now? How do you think that will help people?

We are working on a concept that will help clients get index-like exposure to hedge funds. The pandemic is a reminder that diversification is the best way to preserve wealth over the long-term. Hedge funds can provide uncorrelated returns that are critically important during periods of volatility; however, it is an asset class that is difficult for investors to access.

None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?

Before getting into finance, I was a golf instructor at a private club. During winter months when we were not busy, I used to eat lunch with the members. One of them was a hedge fund manager, and I found his investment stories fascinating. I ended up going back to graduate school for my MBA. Shortly after graduating, I ran into him at the coffee shop that was in my office building. By then he was a partner in a Swiss-based investment firm that was growing and looking to expand its U.S. operations. I had no industry experience, but because he knew I was interested in investing, he eventually took a risk on me and ended up offering me a job. When I started, we worked out of his basement, so knowing his wife and kids from the golf club was helpful. Given my limited experience, he had to take extra time to teach me everything about the business. He always included me in important meetings, which accelerated my development. I would not be where I am today without him giving me an opportunity.

Let’s shift a bit to what is happening today in the broader world. Many people have become anxious from the dramatic jolts of the news cycle. The fears related to the coronavirus pandemic have understandably heightened a sense of uncertainty and loneliness. From your experience, what are a few ideas that we can use to effectively offer support to our families and loved ones who are feeling anxious? Can you explain?

For both personal and financial health, I think it is important to avoid bouncing from one news headline to the next. I certainly see the emotional strain of the news cycle reflected in investment markets, where investors’ short-term reactions often work counter to their long-term investment goals. We often remind clients that today’s news is already reflected in asset prices, whereas the success of their portfolio will be determined by what the world looks like in three to five years. From a personal perspective, I also find it helpful to have a long-term focus on what is truly most important, like cultivating relationships, living a healthy lifestyle, and giving back to local communities.

As you know, the stock market and the economy in general have become extremely volatile and uncertain. Many people “dollar cost average” and put aside a monthly sum into a long-term savings plan for retirement, college, or a home purchase. If a loved one or a client came to you and said, “I have been saving and investing $500 every month in an S&P 500 index fund. Over the next few months until the dust settles, should I be doing something else with my money?” what would you say to them?

Maintaining investment discipline during painful periods is critically important for investors that are looking to maximize long-term returns. Declining markets result in improving company valuations, and at the same time, they reduce investors’ exposure to equities as a percentage of their overall wealth. Also, it is difficult to get investment timing perfect. By the time the news improves, prices can be significantly above their lows, making it difficult for investors to figure out when is the right time to buy. Finally, some of the most substantial market increases happen when the news is still negative and missing those up days can materially dilute long-term returns. Where possible, we recommend investors maintain or increase the monthly allocation as the investment landscape becomes more volatile and uncertain.

Eventually the economy will recover and rebound. Certain sectors, like travel and hospitality might be hurting for a while. But other sectors, like technology and healthcare, might do very well. If someone wanted to prepare today to take advantage of the future recovery, what would you suggest they do?

Systemic shocks often materially change the competitive landscape. Therefore, identifying which companies will be in a stronger position in the recovery is important. Since we don’t have a sense of the economic impact of the virus, we are recommending a barbell approach. At one end of the spectrum, we like companies that should benefit from emergent long-term trends, which include robotics, digital infrastructure, working interaction, health care infrastructure, and remote diagnostics. At the other end of the spectrum, we like companies with pristine balance sheets and high franchise value in the hardest-hit sectors. The economic shutdown is going to cause bankruptcies in industries like travel and hospitality, and the surviving companies should be to be able to consolidate market share and improve their competitive positioning in the recovery.

Are there sectors that provide exciting and lucrative investment opportunities today, specifically because of the volatility and uncertainty?

In the recovery, high-quality companies in sectors most impacted by the economic slowdown will likely be the biggest winners. However, given all the volatility and uncertainty, large price swings are likely to continue. Therefore, we recommend using a structured approach to deploy capital methodically in case we see further price declines. We are watching the best-in-class travel, hospitality, mortgage REIT, and energy companies.

Are there alternative investments that you think more people should look more deeply at?

Over the next ten years, we expect the alternative investments industry to benefit from the trends that have played out in other industries. Today, for example, certain online retailers use scale, data analytics, and centralized oversight to create continually improving platforms for sellers, while at the other end of the spectrum, highly specialized product platforms have been taking market share in the luxury market. As shoppers have moved in the direction of these platforms, the department store model has been a clear loser. We expect to see a similar stratification of success in the alternative investment business, with core allocations increasingly going to multiple portfolio manager platforms and high alpha tactical allocations to opportunistic product platforms.

In terms of specific opportunities, we like venture capital (V.C.), secondary private equity (P.E.), and rescue financing funds.

  1. Venture-backed companies are likely to face headwinds in the coming months and years, as capital becomes scarcer. As a result, valuations will be more attractive, and investment rounds should be less competitive. We saw similar opportunities following the 2001 and 2008 recessions, which were both fantastic vintages.
  2. P.E. funds tend to own overleveraged companies, which could struggle in the current market environment. A number of the companies are going to have to move from weak hands to new private equity managers that can inject fresh capital. The new capital providers will likely be able to establish the terms for their transactions, which should include highly attractive valuations.
  3. Public companies will need to fund their operations for multiple quarters at a time when revenues are limited, and the riskiest ones may find it challenging to issue more debt. The capital will likely come from rescue financing funds that will demand some combination of high interest rates and warrants that convert into equity.

If a person in their thirties and forties came to you today and said that they have $10,000 that they want to put away today for a long-term investment what would you advise them to do with it?

Once we fully understand the individual’s future spending plans, risk tolerance, and return expectations, we can create a customized portfolio recommendation. In all likelihood, the portfolio would need a high allocation to global equities (50 percent to 75 percent) to grow the corpus over time. Given where we are in the economic cycle, we would recommend a bias towards value-oriented equity strategies. Fixed income exposure would be a smaller but critical component of the portfolio (20 percent to 40 percent). Given the current level of interest rates in a historical context, we would recommend a bias towards inflation-protected securities. Real assets would be the smallest allocation (5 percent to 10 percent), with a focus on precious metals and energy linked strategies. Most importantly, we would recommend rebalancing the portfolio back to the predetermined targets annually to ensure the portfolio risks remain balanced.

You are a “finance insider.” If you had to advise your adult child about 5 non-intuitive essentials for smart investing what would you say? Can you please give a story or an example for each?

  1. Have a variant view. Successful investing requires ideas that do not rely on a commonly shared narrative. Positioning tends to get crowded when everyone has the same opinion. If the news flow turns more negative, investors may find themselves exposed to a rapid reversal of market sentiment. A hedge fund manager once explained a trade that has become my favorite example of taking a variant view. In 2012, U.S. budget cuts were going to reduce government spending, and it was a commonly held belief that defense contractors were going to be hurt. The stock prices of these companies started to decline as investors priced in the negative news. Instead of selling or going short, the manager bought select defense contractor companies heading into earnings because while he agreed that the budget cuts would have a negative impact, he thought the selling was overdone. His understanding of the fundamentals and investor positioning allowed him to profit when many of his peers lost money.
  2. Carefully consider risk tolerance. Avoiding being forced to sell an investment during a material decline is one of the best ways to help investors compound returns over long periods. Forced selling occurs when an investor is overleveraged, needs cash to fund spending, or underestimates the volatility of the investment. The crystallization of losses prevents investors from realizing the market return over time, which depends on participating in the recovery that inevitably occurs during the recovery.
  3. Growing wealth is different than getting rich. Investing is about compounding returns over long periods. Therefore, making substantial profits in the short term, which exposes investors to more significant potential losses, is less critical than generating consistent returns and limiting downside risk.
  4. The best investments are often the hardest ones to make. In theory, everyone espouses the virtue of being a contrarian, but it is hard to buy when markets are declining rapidly, and markets are volatile. Investors that do it well have a structured approach and an ability to withstand short-term losses.
  5. Be cautious if markets react negatively to positive news. Investor sentiment can be hard to gauge, but one clear sign of expensive markets is when good news does not cause them to go higher.

Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?

“When you look at someone through rose-colored glasses, all the red flags just look like flags.”

The quote from BoJack Horseman is such a straightforward reminder that our decisions are heavily influenced by how we perceive the world and what we want to believe. I have to continually remind myself of this because the allure of high returns can make it challenging to identify investment risks in highly compelling investment opportunities.

You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the greatest amount of people, what would that be?

Helping young adults have access to the tools and support that they need to succeed is a cause that has always been near and dear to my heart. My mom is a retired emotional disorder and learning disabled elementary school teacher, and she always focused on encouragement and positive reinforcement to help her students succeed. By making the overwhelming seem manageable, her students’ success rates would go up dramatically. This concept has always stuck with me, and it seems especially relevant, given the socioeconomic divide that we are facing in the U.S. To ensure a more balanced future, we need to ensure people from all backgrounds have the support systems and tools they need to succeed. The Alvarium Foundation supports the Prince’s Trust’s efforts to help underprivileged young adults start a business, get a job, and build their confidence

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