A deep foundation of trust is invariably the cornerstone of any really good advisor/client relationship. Ian Yankwitt, founder of Tortoise Investment Management in White Plains, New York, learned a few things about building that kind of trust with clients in his previous profession. Before he became a full-time investment advisor, Yankwitt was a federal public defender.
“At the end of the day as a public defender, you need to get your clients who are suspicious, and who have reason to be suspicious, to do what you tell them to do, even though it seems like a terrible idea to them,” he recalls. “The way you get that trust is very simple: you tell them what you’re going to do, and then you do it. If you say you’re going to do it, you’ve got to do it. It’s that simple.”
That’s the same approach he’s taken in building Tortoise Investment Management from a firm with just about $11 million in assets under management when he opened his office to one with some $109 million just four years later.
Although he knows that some clients don’t really care for the name of his firm, Yankwitt chose it because it conveys succinctly the strategy he follows, self-described as “doing it right” and growing the portfolio over time. “We’re going to underperform in a roaring bull market,” he admits. “We’re going to make you money, but when the Nasdaq’s up 42% and the S&P’s up 26%, we’re not going to be up 35%.”
While he’s not out to beat the market and knows, as he puts it, that his clients “chose Tortoise Investment Management, not Velocity Capital,” Yankwitt is looking to deliver the best returns he can with the least possible risk and low fees by creating customized portfolios comprising mutual funds, ETFs, and individual securities.
An International Bias
Although many advisors strenuously avoid the purchase of individual stocks, Yankwitt has found that under the right conditions it’s a smart bet. “One of the reasons is the tax efficiencies that you get with individual securities,” he explains. “We own an individual security primarily because of how it fits in with an individual portfolio, not because we think we have any unique insight into what IBM is going to announce in the next quarter.”
Yankwitt’s strategy when it comes to individual equities is to “buy blue-chip, dividend-paying stocks and write covered calls on top of that.” Between the dividend and the covered call, he figures the strategy can generate a return of between 8% and 12% even if the stock goes nowhere. If the stock does have a steep fall, that return can cushion the blow and if it goes up, well, who’s going to argue with that?
Since the firm’s inception, Yankwitt has been heavily weighted in the international sector. “When we started out, it was very easy for me to say, why would anybody rule out half the world’s economy?” Yankwitt notes. It’s in the overseas markets that he often looks to invest directly in major players rather than in mutual funds. He feels that by buying directly many of the names that are likely to be in an international large cap mutual fund, his clients can reap the benefits. “We’re buying many of those same big names as part of a long-term philosophy and collecting the dividends. By owning them individually, you cut out one layer of fees and we’re able to write covered calls on them to generate additional total revenue,” he says.
Although there are no options traded on its stock, Yankwitt also holds a fairly large, proportionately, stake in Berkshire Hathaway. “That’s another individual security that I don’t need to go out and buy a fund and pay an expense ratio on both the holdings and the cash, especially since funds that tend to hold Berkshire tend to hold a lot of it,” he explains. “Why not just own that directly, especially if you view it as a core, long-term holding, not as a trading vehicle.”
Of course evaluating his clients’ risks and making sure their portfolios remain diversified is a constant challenge. “We’ve taken a lot of international exposure on the fixed-income side,” he says. “How much exposure we should have on the equity side weighs on my mind. It’s sort of a view of a total risk measure.”
Avoiding Hubris; Embracing Overseas
Mutual funds and ETFs come into play for Yankwitt in his international small cap investments, as well as for exposure to the bond market and to the major indexes. He says he’s also likely to use some actively managed funds in cases where he feels the manager can add alpha. “My experience and bias tends to be value stocks,” he says. “I don’t feel as comfortable investing on my own in the fast growers. So, we would use a growth fund to complement the fact that most of the individual names we own tend to be value.”
While Yankwitt has macro ideas and knows the big players on the international scene, “It would be hubris to think that I could be an expert in everything,” he says. “The only thing I can really be an expert in is listening to my clients–listening to what they say and asking the right questions–to figure out what they are looking for.”
When it comes time to choose specific investments in Asia, Yankwitt feels that his clients are better off if he can outsource that investment to a manager with a record of making good choices and doing so at a fair price. The real dilemma for him is deciding just how much exposure to overseas markets is right in the current environment.
There’s another issue with international: In a global economy, just what is an overseas stock, anyway? “Take something which is technically a domestic stock–Las Vegas Sands. The driver of its earnings in the future and the driver in the short term of its stock price is what’s happening in Macao,” he says. “So for better or for worse, that’s really a play on increasing wealth in that part of the world. Now it happens to be a U.S. stock, but for our analysis internally, we treat that as an international stock because that’s where its business comes from.”
In the large-cap space, Yankwitt finds there is a great deal of increased correlation and that to get diversification internationally, one has to get down into smaller-cap, more locally oriented businesses. “You’re also getting currency diversification,” he adds. “We do a lot of international investing on the fixed-income side and that’s entirely through no-load mutual funds and ETFs. That’s worked out phenomenally well for us and that’s what worries me.”
As any type of investment becomes more mainstream, Yankwitt feels it’s likely that the best money has already been made and investors run the risk of being trampled by the herd. “We were dramatically overweight on international, both on the equity side and the fixed-income side for years. I am trying to bring that much closer to balance.”
He’s currently looking for a 50/50 domestic/international split, but notes that for him 50% international is on the low side. Another thing that makes Yankwitt’s international investing unusual is his take on currency exposure. “On the international bond portfolio we do only open currency,” he explains, adding that initially many clients resist this approach, saying they don’t want to make a bet on the currency market.