Welcome to Research magazine’s second annual ETF Hall of Fame. This year, we honor two sole practitioners and a team of three. All the advisors had been tenaciously seeking specific investment solutions, and they indeed found them in versatile, no-surprises exchange-traded funds, now central to their business.
Boasting transparency, tax efficiency and low costs, ETFs have immediate client appeal. And our winners agree they will continue their sharp growth in grabbing market share away from mutual funds. Today, there are more than 600 ETFs on the market — and at least as many in registration.
Our contest judge, Ronald L. DeLegge, contributor of Research’s monthly ETF Reporter department and editor of www.etfguide.com, chose advisors who not only have a large portion of AUM in ETFs but who use the funds creatively and properly: through multiple-model portfolios that can be mixed and matched according to client needs.
Congratulations to all our Hall of Fame inductees. Here’s a glimpse of how they’ve made ETFs star players.
John BoukampMerrill LynchAdvisor since: 1985Home base: Bloomfield Hills, MichiganETF AUM: $150 million (of total $305 million)Community activities: Lighthouse PATH of Oakland County for homeless mothers and children; Oakland Hills Scholarship Trust Fund
Shifting 90 percent of his managed accounts to all-ETF accounts was far easier than John Boukamp ever expected: Clients were deeply disappointed with independent money managers’ underperformance. Obviously, so was Boukamp.
“With ETFs, there’s never having to explain why a particular ETF is underperforming the benchmark because it is the benchmark. You know exactly what you’re getting when you buy it. Clients were very much in agreement with the ETF strategy — and it also brought in more assets because they liked the idea of consolidating,” says Boukamp, 52.
Boukamp puts ETFs to use as clients’ main equity position. Rather than focusing on certain sectors, he likes to invest in ETFs for size and style. Right now, the FA, whose target account is in the $500,000 to $5 million range, favors large-cap for both growth and value.
Prior to investing in ETFs — he began in 2004 — Boukamp often would be unable to properly diversify a $500,000 account, constrained as he was by manager minimums. “So I’d have to leave out certain sizes and styles. With ETFs, the ability to diversify and change the portfolio rapidly if we need to…all adds up to a better mousetrap,” he says. “We’ve been able to consistently add value to the asset allocation process.”
Boukamp actively manages a global index strategy, chiefly with families of ETFs offered by Vanguard and Barclays Global Investors.
“By using indexing, you pretty much assure your clients of what they’re getting, and you can allocate their assets correctly between size and style. If you use the passive indexes, there are no surprises, no manager mistakes…That’s why I love ETFs,” says the advisor, noting that 80 percent of active managers fail to beat the benchmarks against which they’re measured.
Another big advantage to ETFs, Boukamp says, is the ability to write covered calls against them, thus boosting returns.
“Taking call premiums,” he notes, “helps on the down side or in a stagnant market.”
The funds are geared to the long-term, Boukamp says. “This is not a trading vehicle…If we were, for instance, in emerging markets and felt that it had its run, we would downsize our position. It would be unusual for us to do away with a complete style or size in our equity model.”
His criteria for selecting ETFs centers on the correlation between “the index and what the ETF does. For example,” he says, “if we’re trying to index the Russell 1000 Value, we want to make sure there’s a high correlation between that index and what the ETF is claiming to do.” He also closely examines expense ratios.
Boukamp lauds ETFs as “the wave of the future. They’ll continue to grow. They offer the individual many options at a very low cost and with a lot of efficiency.”
But, he cautions, advisors should beware of “the big push to put actively managed ETFs out there. Because then you’re right back to: Do they underperform or overperform the benchmark? What are they doing? How are they doing it? It kind of defeats the purpose of what I’m trying to achieve for my clients.”
From Port Huron, Michigan, Boukamp grew up enamored with the idea of becoming a retail stockbroker. He opted nonetheless to spend the first seven years of his career as a steel company account manager.
But when foreign competition began making inroads, he decided to change courses and try brokerage. That way, he’d put to much better use his bachelor’s degree in finance and marketing from Michigan State, and his MBA, with emphasis on finance, earned at Loyola University Chicago.
Hired by Prudential Bache as an advisor trainee, Boukamp moved to E.F. Hutton after nine months, staying on with successor firm Smith Barney until this summer, when he moved to Merrill Lynch.
Toughest time? “The first two years in the brokerage business — the hours, the cold-calling, being beat-up and worked over,” he says.
All that’s history — except, perhaps, the hours. Today his “love” is getting to know clients, and their kids and grandchildren. Working on estate planning, in particular, he says, is “what floats my boat.”
Richard S. Farkas President, Strategic Global Investment Services, affiliated with Raymond James Financial ServicesAdvisor since: 1997Home base: Campbell, Calif.ETF AUM: $50 million-plus (of total of about $60 million)Community activities: Charter member and past treasurer, Los Gatos Morning Rotary
Out of the tech wreck, came something wonderful for Richard Farkas: a practice built on investing in ETFs.
In the challenging market of 2000, “I was looking for mutual funds that weren’t tech-heavy. I needed a vehicle that would give me exposure to something that was working, rather than a broad-based exposure to mimicking and underperforming an index,” recalls Farkas, a member of Raymond James’ Executive Council.
Holding seminars to encourage folks to invest in sectors other than tech, Farkas touted something new: exchange-traded funds. At that early juncture, most hadn’t heard about them. Farkas quickly clued them in to the funds’ key advantages of transparency, tax efficiency and low costs.
Today, the fee-based Farkas, 53, is recognized as a San Francisco Bay area expert in ETFs. Focusing on global investing, he uses funds — from major vendors like iShares and Wisdom Tree — almost exclusively to create customized portfolios for his high-net-worth clients.
“By taking a global approach, it’s relatively easy to find good value and good returns,” says the independent, who builds portfolios using special global matrixes he develops that, for example, show the best performing individual country funds year to year.
In recent times, the majority of Farkas’ clients have invested most of their money overseas, notes the FA. “ETFs allow you to have a diversified approach…The economy in Australia has a large exposure to natural resources and basic materials. Those have been some outstanding sectors you can participate in via either the international country funds, or the global or international sector funds.”
A frequent public speaker about ETFs for civic groups, like the Rotary and Lions Clubs, as well as presentation-giver to CPAs and attorneys in his own conference room, Farkas details how ETFs differ from mutual funds.
“It’s important to get the word out,” says Farkas, who is amazed at the lack of knowledge about ETFs. That goes for advisors too. “I’m really a little flabbergasted that people don’t know exactly what they are in spite of all the advertising,” he says. “And, gee whiz, institutions have been using them for nearly a decade now.”
Farkas’ ETF strategy revolves around relative strength, which measures, on an ongoing basis, one sector against another and also against the broad market. Thus, he says, “it’s very clear to see who the winners are and who the losers are.”
A highly disciplined investor, Farkas has strict guidelines ruling what ETFs he’ll even consider. For instance, the fund must be trading for at least six months and have a minimum of $25 million in assets under management.
Once an ETF passes those tests, then the FA enters it into one or more matrixes to see how it’s performing relative to other ETFs “covering the same space.” He looks, too, for true tax efficiency, “portfolio relevancy and its potential for contributing value,” he says.
An “ill-fated goal” and “mantra of old” is the notion of beating an index, Farkas insists. These days, it’s all about “setting and achieving goals appropriate to a client’s risk tolerance and time horizon…Clients like the simple elegance of ETFs and the access to niche markets they might not be able to invest in without incurring volatility. And if need be, you can sell them in the morning — unlike a mutual fund.”
Born in Morristown, N.J., Farkas grew up in Cupertino, Calif. As a flight-simulator specialist from 1973 to 1977, he trained pilots at Hill Air Force Base in Utah and even worked on the first helicopter simulator.
After that military service and picking up a BS in business administration at Weber State College, his route to financial advisory was circuitous: first, he owned and operated some restaurants. Then, he spent a decade as a California state-certified general real estate appraiser.
Finally, with a feel for the market inspired by his dad’s kitchen-table investing dissertations decades before, Farkas sallied forth and was hired as an A.G. Edwards advisor trainee.
Looking ahead, the FA, who left Edwards — now part of Wachovia Securities — a year ago to become an independent, believes that the mutual fund and separately managed account industries need to “wake up to the fact that ETFs are without a doubt the future of diversified investments.”
O’Hern, Mandryk and Driftmier Group, Merrill LynchWilliam Paul O’Hern, vice president-wealth management advisor, portfolio managerJohn P. Mandryk, first vice president-wealth management advisor, portfolio managerKeith D. Driftmier, assistant Vice president, wealth management advisor, portfolio managerAdvisors since: 1983 (Mandryk), 1985 (O’Hern), 1996 (Driftmier)Home base: State College, Penn.ETF AUM: $100 million (of total $650 million)Community activities: Pre-marriage counseling (O’Hern), Steering Committee-Mount Nittany Medical Center’s capital campaign (Mandryk), United Way Day of Caring site coordinator (Driftmier)
Every Tuesday morning, the OMD Group meets to pore over Merrill Lynch research to find themes that are timely in the short term. Then, to exploit such short-term opportunities, the advisors invest in ETFs linked to those trends. It’s an essential step in their tactical asset-allocation overlay process.
ETFs are in fact the team’s core focus and “the most exciting and energetic part of our work,” says John Mandryk, 59, a visionary who leads OMD’s investment discipline. “We’re changing our clients’ accounts to reinvigorate and re-invent them. ETFs are 100 percent responsible for that.”
The six-person team, formed in 2000, manages over 250 accounts under Merrill’s discretionary asset management program called Personal Investment Advisory. OMD is the firm’s No. 1 PIA group in Pennsylvania. The advisors target the $250,000 to $2.5 million household in their area, a college community that’s home to Pennsylvania State University.
In the Tuesday sessions, the advisors scour research, then try “to pick the ETFs that would match up on the tactical side,” says O’Hern, 63, an MBA who 23 years ago switched from engineering to financial advisory. He manages the team’s PIA program. “Right now, we really like the natural gas ETF and the agricultural ETF.”
The Group has grown its ETF business from $10 million in AUM in 2004 to an anticipated $125 million-plus by the close of this year.
Exchange-traded funds free the FAs from “being stuck in a stock-bond-cash world. Previously, we didn’t have the ability to invest in alternative asset classes,” notes CFP John Mandryk, 59, a native of British Columbia, Canada, and formerly director of institutional research for one of the State Universities of New York.
With ETFs, adds Keith Driftmier, 52, who holds a master’s of education and is known as the team’s “coach,” “you’re not getting a manager who might be in the right sector but who has the wrong stocks. ETFs are good for every spectrum of any investment you’d like to be involved with.”
Before teaming up and moving into ETFs, each advisor had been significantly frustrated with his respective method of managing money: Mandryk’s separately managed accounts, O’Hern’s stock trading, Driftmier’s mutual fund trading.
“In many cases, the fee we were paying professional managers to manage money was a fee to mismanage the account,” Mandryk says.
The first move in the Group’s effort — to resolve problems such as embedded capital gains and complex reporting statements — was to use iShares ETFs to replace large-cap and small-cap domestic managers. They now also use Vanguard and State Street Global Advisors’ SPDRs, among others.
Because Merrill Lynch economists forecast “downward [recessionary] pressures probably through next March,” Mandryk notes, “tactically, we can use cash positions for indices that we believe will outperform in that kind of climate. We want to provide a better ride for our clients.”
He continues “Market-weighted ETFs can be “counted on to outperform what the index is going to perform. There are absolutely no surprises,” Mandryk says.
He is wary of indices that are not market-weighted but designed instead to try to beat the market.
“They’re based on theoretical concepts. We have yet to see that they actually live up to their promises.”
The three FAs agree unanimously that going forward, the market will see less invested in mutual funds — and much more in ETFs.
“If you don’t present ETFs to your clients, somebody else will,” says Driftmier, formerly director of sports and competition for Special Olympics International.
Without a doubt, ETFs will dominate the marketplace, Mandryk says. In time, he predicts, “mutual funds will go the way of the buffalo.”
Freelance writer Jane Wollman Rusoff is a Los Angeles-based contributing editor of Research and is the founder of Family Star Productions.