Many advisory firms split responsibilities among the principals of the firm, and many aim to provide clients with market-beating returns. Ben Warwick's firm does the same, but with a purpose and a methodology that sets it apart, not least in his embrace of alternative investments. A renaissance man in many ways, Warwick is chief investment officer for Sovereign Wealth Management, which employs 17 people in two offices separated by design, both geographically and functionally: client service in Memphis, and asset management in Denver. A prolific writer, Warwick is heavily involved in his community and family, like many of his advisor peers. He also can quote Benjamin Graham and make allusions to George Orwell and Kurt Vonnegut in the same breath: in his 2000 book Searching for Alpha (Wiley), two of the major characters are named Kilgore Trout and Winston Smith. Literary allusions aside, Warwick is a keen-eyed judge of investing strategies who doesn't fear to tread in the quant jungle in his search for alpha on behalf of his clients.
Tell me about your firm.
Sovereign Wealth Management has a unique model, because we have two distinct roles in our investment advisory work. The first is taking care of clients and marketing, and the second role is asset management.
As CIO, our objective overall in our portfolios is to beat our benchmarks. We want to beat our benchmarks to the extent that our service to our clients doesn't cost them anything. As long as I can produce a return in excess of our benchmark return, that pays for our fees, so effectively our clients are getting our services for free. There are a couple of different ways that we do that. One is tilting our portfolios to emphasize certain parts of the market. By tilt I don't mean a dramatic bet on a sector--the way we look at the equity universe is from a Russell standpoint, where there's large and small stocks and value and growth stocks, that's like a style box. So depending on economic conditions and other things, we might emphasize one part of that style box over another. Right now we've got a tilt toward large cap stocks, for valuation purposes more than anything else--we feel that large cap stocks are cheaper, and have greater value for our clients. We're about 50-50 on value, so we don't have a tilt there. On the fixed income side, we have for the last year-and-a-half or so maintained a slightly lower duration in our fixed-income portfolio than in our benchmark--that's another way we add value in that asset class. The third way is through alternative investments. We've been managing our own hedge fund of funds products since 2002 that have done really well and have helped our clients generate market-beating returns. We use other asset classes, like REITs, to give our clients additional diversification. We also use global equity and global fixed-income positions.
Do you describe this approach to your clients?
We've found that with our high-net-worth clients, performance is pretty important--it's not enough to do a great job servicing accounts, you've got to do a good job managing the money and also communicating what you're doing. We'll make anywhere from one to four portfolio changes a year, and we always send a letter to the clients, letting them know what our mindset is for that. We always have quarterly conference calls where our clients can call an 800 number, where we discuss market conditions, and what we see looking forward.
We do an annual state-of-the market event: I go to Memphis, we rent a big venue, and I get up and talk about the economy for an hour or so and take questions. That's been really popular. It was somewhat surprising to us, we thought our clients just wanted us to manage the money and didn't care about that stuff--but it turns out there is a lot of interest in our views on the market.
The high-net-worth want you to beat the benchmarks, but what else?
They want you to solve a problem for them. A problem an investor might have is to say "I have this bunch of money, and I want to retire, how do I do it?" Or maybe they're already retired, and they say "This is how much we live on, how long will it last?" We have clients who are worth $100 million that wonder if they have enough money. That's a universal concern, no matter what their amount of wealth. A big part of investing is having a long-term outlook, so one of the keys to being a good wealth manager is to keep people invested in down periods. You have to make sure that the portfolio you create for a client matches their ability to withstand risk.
That's the main service you provide clients? Understanding their needs, and solving their problem by putting in a portfolio that matches their needs, but keeping an eye on risk?
That's the art of portfolio management. There's such a risk as shortfall risk--that you'll run out of money. Shortfall risk is a very big issue in terms of the future, and the ways that people will manage money going forward.
One of the big scary questions out there is will my beta investments, my stock and bond investments that rely mainly on the direction of the markets, perform in a manner that will match my liability stream going forward? Will the long run returns of stocks and bonds be what they've been? What we're seeing is a real interest in separating the beta from the active return, which are the two big components of portable alpha. So you're going to take your active management return, separate it from your market return, and now you've got an opportunity to blend those together in different ways to better construct portfolios so the shortfall risk is minimized.
How did you get into the business?
I was in engineering school, a junior, when my father died. My mother had this life insurance policy, got this money, and we wondered what to do with it. Even at that young age, I instinctively understood that you couldn't trust a stockbroker, so I just started studying the markets--going to the library and picking up a book. I got intrigued, and after graduating from engineering school and after a few years working as an engineer, decided to get an MBA, because investment management had become much more interesting, an intellectual challenge.
There's a famous quote from Warren Buffett: It's better to be mediocre in a great business, than great in a mediocre business. At that young age [in 1988], I realized that the possibilities of being a quantitative person in investment management was not that common.
What advice would you give to someone starting out in the business?
Figure out why you want to get into the business. It's usually an either/or thing. Either people are really interested in the markets, or they're really interested in marketing to high-net-worth individuals. I think people are much better off picking one of those two rather than trying to do both in a mediocre way.
The key to this business, like any other, is to match your passion with the job description. So don't get into the RIA business because you love asset management but then you've got to go out and get clients, because you'll be miserable.
The other thing from a business development standpoint is to figure out how you'll differentiate yourself. Will you compete on fees, will you add value by offering unique products or service? Or by the type of clients you'll take--the high-net-worth, or up-and-coming corporate executives? There are all sorts of ways to do that.