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Q&A: Fund founder takes tortoise's approach

By: ANDREW WINEKE
July 22, 2011
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photo - Ted Schwartz of Capstone Investment Financial Group  Photo by
Ted Schwartz of Capstone Investment Financial Group Photo by  

These are nervous days for many investors, but Ted Schwartz of Capstone Investment Financial Group in Colorado Springs sees validation for his investment approach amid all the uncertainty.

Schwartz, a one-time art dealer who switched to the securities industry in 1994, started his own mutual fund in May 2010. The fund, he said, fills a niche in the investing world that no one else had tapped by attempting to duplicate the broad range of investments and relative security that universities shoot for with their endowments.

Schwartz, 63, has raised his own profile recently, becoming a financial columnist on ABC’s website and being featured, with his partner Tim Lawrence, in an article in the July issue of Investment Advisor magazine.

He spoke with The Gazette about his investment strategy, how to run a mutual fund and what’s going to happen with the stock market.

Question: How did you decide to start your own mutual fund?

Answer: The things that prompted us to consider and then finally go through with that were: We did better than most people in the bear market of 2000 to 2002. We learned from that and did considerably better than most people in the bear market of 2008. We did have some advisers we knew that were interested in having us assist them. And we decided the best structure for that going forward was a mutual fund.

The other big reason we wanted to that was that we didn’t think there was really any fund among the 14,000 that did what we really do. What we learned is how to adapt that university endowment model of investment to a retail client.

Q: Can you explain how a mutual fund can invest like a college endowment, and why that’s a good thing?

A: The big things that the university endowment does is it tries to reduce risk and increase returns through constructing an improved portfolio. We think the tools to get that done for a retail client are now in place.

There are three main things that make up what we do and make it unique: The first is we have a global approach. The second, and this is the key to the university-endowment stuff, instead of just stocks bonds and cash, we look at all investable assets. We are interested in investing in real estate, commodities, natural resources, absolute return strategies. We are looking at the whole investment world. It’s a much wider playing field — that is a huge key to decreasing the volatility of a portfolio.

The third thing that we do have is a tactical component. Our focus there is not to try to time the market nor to produce big excess returns, but to use that to try to avoid really big losses. There are times to not be invested in the market. We use our quantitative stuff to determine when is it better to not be invested in stuff.

Q: So, how’s it working out?

A: Our goal here is to build a tortoise rather than a hare that compounds money really effectively.

I would say we’re not aggressive — I would say it’s a moderate to conservative strategy. In a good market, I would expect us not to outperform. On the flip side, both the way we construct the portfolio and the way we manage it, we would expect to outperform, certainly in really bad markets and also in those quiet to flat markets. 2007 was a good year to illustrate that: Stocks were up maybe 7 percent. A lot of other things — commodities, real estate — were up more. The big thing with the tortoise is, if you make 8 percent a year in a steadier portfolio, you can make a lot more money than someone who gets 10 percent a year in a more volatile portfolio.

Q: What sort of investor is this fund aimed at?

A: In a smaller investment, it is a fantastic core position because it is invested in everything. In larger accounts, what we’re seeing advisers do is use it in a tactical position — about a 20 percent share — when they want to have somebody out there who’s trying to protect you from the big losses.

Q: What has been the market’s reaction to your fund?

A: New funds are tough, I won’t lie to you. We’re having more and more advisers adopt the fund. We’ve gotten to the ballpark of breaking even here in one year. It is a fairly steep hill to get advisers you don’t know to use a fund when you’re kind of an unknown.

Q: How big is the fund now?

A: Right now we’re just at $20 million. It’s big enough to do the things we want to do.

Q: Can you keep growing?

A: Being past a year old, there are some people now using the fund that wouldn’t have used it a month ago because it wasn’t a year old. As funds grow, they have to fight against becoming closet index funds that do average. The smaller you are, the more mobile you are and the more you’re going with high-conviction ideas. (As you get bigger), you end up moving toward that S&P 500 or whatever is your benchmark. Being a lot larger would be a nice problem to have, but it does create some problems that you need to work through.

Q: Is running your own fund fun?

A: Absolutely. I think this is a fun field anyway, because it’s always changing. This allows us to explore and improve. We’ve been on a road of learning and getting better at what we’re doing over the last 10 years. The great thing about the fund is it doesn’t stop that. As new things keep coming out, we get to decide, “Is this something good for our shareholders?” It will be a never-ending chance to respond to change, which is great fun, I think.

Q: So, can you pull out your crystal ball and tell us what’s going to happen in the markets?

A: My guess is we’ll calm down enough to notice that “So and so’s earnings are pretty good this quarter.” I still think we have some big risks going forward in longer periods. I’m optimistic shorter-term and neutral middle-term. I think we’re going to see things go up, but not at historic rates in the longer term. What’s going to make it really hard for everybody is that instead of nice, smooth going up, at a longer rate there will be big ups and big downs.

That’s going to be the challenge: Trying to capture some piece of the ups and not getting too much of the downs and ending up about where you started. Hopefully, our tortoise can keep moving ahead.

Call the writer at 636-0275

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