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How an Advisors’ Advisor Chooses 'Best in Class' Funds

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Eric Haas of Altruist Financial Advisors is an advisor’s advisor.

His expertise is in investment management, and he manages a sizeable advisory practice — $100 million in AUM with just 23 clients.

Thus, he has no need to make cold calls, give seminars or engage in other kinds of marketing.

“Most folks in my profession spend a lot of time prospecting. I do zero,” says the former nuclear submarine officer and engineer, based in Holland, Mich., online. “My marketing strategy is to have a good website and answer the phone.”

And having “a good website” is an understatement for this overachiever.

The site’s “reading room” is one of the very best online investment libraries I’ve ever seen, with content on fundamental topics like bid-ask spreads and commodity futures and on investment esoteric, like the Fama/French Three-Factor Model and synthetic/enhanced indexing.

Most of the linked articles are seminal in their field, some come from easy-to-read consumer titles, and many are accompanied by Haas’ erudite annotation.

Yet Haas manages to avoid a common pitfall of some specialists: the loss of perspective that someone with granular knowledge of a field suffers. Of the best academic journals — the Journal of Financial Economics, the Journal of Portfolio Management, Haas explains: “Most of it isn’t relevant or earth shattering.”

Indeed, Haas’ emphasis on relevance is evident from his website’s investment product research and analysis.

Among mutual funds and portfolio managers he favors DFA, Vanguard and Bridgeway, and he makes use of a number of ETFs, as well.

What’s extraordinary, though, is that he assesses "best in class" products for just about every asset class, ranking the best choices and explaining them in clear and nuanced fashion — explaining, for instance, how the choice would differ for a retirement vs. a taxable  investment account.

This is not something he has allowed to grow stale. Remember, the guy doesn’t make cold calls — so he’s got the time to read and research.

A few months ago, for example, he demoted his former favorite, the PIMCO Commodity Real Return Strategy Fund Institutional Shares (PCRIX) — to the No. 2 spot after DFA introduced its Commodity Strategy Portfolio (DCMSX).

With its 0.55% expense ratio, it “suddenly became the least expensive way” to own this asset class (compared to PCRIX’s 0.74% expense ratio).

In a taxable account — which he does not recommend for this tax-inefficient asset class — Haas would favor PowerShares DB Commodity Index Tracking Fund (DBC),“because of its expected perfect capital-gains tax efficiency as an ETF,” he states on his website. DBC’s expense ratio is 0.83%.

What makes a mutual fund or ETF best in class? “There’s a little bit of art and a little bit of science in answering that question,” he says.

Here’s the science: “Something that is more diversified is better than something that is less diversified; something that’s lower cost is better than something that is higher cost. “In a taxable account, something that’s more tax-efficient is better than something that is less tax efficient. These are undeniable truths. Those are the easy ones,” he shares.

Finding the right small-cap fund would be an example of a harder case involving a bit more of the investment professional’s art.

“What makes it small cap is the smallness of the stocks that it owns. It makes a certain amount of sense to look for smaller small-cap stocks than larger small-caps. But — the smallest small-cap funds are more expensive than the larger ones,” according to Haas.

Thus, the Vanguard Small Cap Index Fund ETF Shares (VB) is cheap; its expense ratio is just 0.15%.

DFA’s U.S. Microcap Portfolio (DFSCX) significantly lowers the average market-cap but charges 52 basis points.

“Costlier” still is theBridgeway Ultra-Small Company Market Fund (BRSIX), but that is Haas’ favorite.

The fund's weighted average market capitalization was 79% smaller than the Vanguard Small Cap Index Fund's and 53% smaller than the DFA US Micro Cap, according to the calculation on his website, which notes that “there is a dramatic difference between how funds investing in the absolute tiniest stocks perform versus those investing in merely ‘small’ stocks.’ ” 

Valuable as all this research and analysis is, Haas views it as “small stuff.” The real value in his work is his relationship with clients, which enables him to prevent them from harming themselves in a market panic.

“We think that having [clients] pick their asset allocations in an informed fashion will help preclude them from panicking when the going gets tough,” says Haas. “It’s going to happen. We don’t know how down it’s going to be, but when it happens, [investors] have a well documented pattern of selling at the worst time. They lock in the losses by putting it in cash, or they take their money and put it into something that’s been doing well recently. Each time they do this it decreases their ending wealth by perhaps 30%.”

Haas is doing well enough pleasing clients from all across America and even as far as Hong Kong. His advice to other advisors, especially poignant in these times of heightened market volatility: “Avoid a subtraction of 30% ending wealth. That’s a huge value added.”


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