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Slow and Steady Wins the Race

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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.

His response is that almost all of his clients live in the United States, get paid in U.S. dollars, own U.S. real estate, and before they started working with him were likely to have a portfolio that was 90% dollar-based. “When you’ve got all your money in dollars, you are making a currency bet,” he says. “The more money that we move into other globally representative currencies, we’re making less of a bet, we’re trying to reflect the overall exposure of the world.”

Yankwitt doesn’t take the approach that he’s smarter than everybody else or that he can figure out what’s going to happen to the dollar relative to the euro or the yen over the next few weeks, but that there’s a foreign source component to whatever American consumers buy, whether at Wal-Mart or any other retailer.

“If the dollar’s going down, that’s just another way of saying you get less for what you have,” he says. “If inflation includes a wage/price spiral, but you’re not working or plan to stop working, you’re just getting the price spike part of that spiral. So inflation’s a huge issue.”

One solution that Yankwitt suggests is buying high-quality government bonds in denominations other than the U.S. dollar. “If the dollar doesn’t do well, we’re going to get a lot of juice from this side of our portfolio,” he notes. “Last year non-dollar, high-quality government bonds did phenomenally well and provided a source of return when the U.S. market was certainly challenged.

“It’s hard for me to see the dollar bouncing back really hard,” he continues. “On the other hand, things that are hard to see happen all the time and you protect against what’s possible.”

Personalized Investing

Some advisory firms use a handful of investment models into which they steer clients based on such measurements as the client’s investment horizons and risk tolerances, but that doesn’t really work at Tortoise Investment Management, where Yankwitt says that investments are more personalized. It’s also why he says that for a one-principal shop he has a support staff of three-and-a-half people. “I have a full-time assistant, an operations specialist, a research specialist, and the half is a business manager/tax researcher/wife,” he explains, adding that it’s the business manager/tax researcher/wife, Rochelle Halpern Yankwitt, who handles all those time-sucking details of running a business, thereby giving him the freedom to focus on serving his clients and managing their investments.

While the portfolios he manages are personalized, Yankwitt acknowledges that his clients do fall into several niches, one of which is tenured faculty members. “Their employment is as secure as it comes,” says the advisor. “All other things being equal, someone whose employment is bullet-proof . . . suggests one thing for their portfolio.”

He looks at clients who are partners in New York law firms the same way. “It tends to be at the very big firms that they’re going to make X plus 10% a year for the next 30 years. That suggests something for a portfolio.”

Yankwitt also has a coterie of investment bankers, hedge fund managers, and private equity players. “Somebody who has a sector-specific private equity fund that is his principle source of income, well, I should be avoiding the hell out of that sector in what I manage for him,” he observes.

“I have two clients that are very successful personal injury lawyers. Their income could be anything from a very high number to a negative number. They could put lots of money into cases and lose. Who knows what they’re going to make? In the sense that their employment is more like a derivative, then the portfolio I manage should be more like Treasury bonds,” he says.

“Compare that with other extreme–tenured faculty members and law firm partners–their employment is more like a bond, so we can goose their portfolio up, within the overall conservative context, a little bit more,” he concludes. “It’s very personalized.”

Who Knows What’s Coming?

Like many advisors, Yankwitt spent much of December talking to clients about their investments and revisiting their risk tolerances. “I try and do that as often as I can,” he says. “You never know what the future’s going to hold. You build these portfolios with certain risk measurements in mind and on the one hand it’s about the long run, but the long run is a collection of short runs.”

He says that although all of his clients would probably consider themselves average working people, they all have more money than they ever thought they would. His job is to help them hold onto as much of that money as possible, by making sure that they are comfortable with whatever risks they are taking. “The problem with a long-term plan is that you have to stick with it over the long term,” he says. “You want to have a portfolio that everyone is so comfortable with that when the market overreacts, they’re prepared to buy and take advantage of the opportunity. Everyone’s familiar with the Rothschild comment that the best time to buy is when there’s blood in the streets. But it’s better if it’s not your own blood.”

Although Yankwitt acknowledges that he may need to take on another advisor in a peer position at some point, he’s also comfortable with his ability to grow his practice using the current business model, primarily due to the quality of his support staff. “I think we’ve done–and when I say ‘We,’ I mean entirely my wife–a really good job in hiring. I’m really very, very happy with the three other people that we’ve hired. They’re all young, they’re all bright, and they’re all very talented. So as they grow and can take on more responsibility that will keep up with our growth.”

He thinks that the firm could more than double the level of assets under management, though not if all that money came in tomorrow. It also depends on what size accounts come in the door. As he points out, five $10 million accounts is not as much work as 50 $1 million accounts.

“One of the things that we’ve done very well is stay focused on who are the clients that we can best serve and how can we serve them well and not jeopardizing the franchise,” says Yankwitt. “All of my business comes from client referrals, so rule number one has to be ‘Do a good job, take care of your existing clients.’ Rule number two has to be, ‘Follow rule number one.’ Everything else flows from that.”

Managing Editor Robert F. Keane can be reached at [email protected].