Search far and wide, but you’re unlikely to find many financial advisors as shrewd about investing with exchange-traded funds as Shelley Bergman, managing director-senior portfolio manager of The Bergman Group at Morgan Stanley on Fifth Avenue in New York City.
Bergman was smart enough to start using ETFs more than eight years ago, when the flexible investment vehicle was in its infancy. Today, the ETF market boasts a whopping $2 trillion in assets and is the fastest growing product on the market. Bergman and his clients are, increasingly, reaping the rewards.
He is a 30-year-plus advisor and ranked No. 5 on Barron’s Top 100 Advisors list for 2014. A Chairman’s Club member, Bergman is the sole advisor of his eight-person team, managing about $3.5 billion in assets for high-net-worth and ultra-high-net-worth clients.
With a deep knowledge of the ETF universe, Bergman, 52, a Queens, New York, native, knows just how to make the most of these funds’ potential for boosted performance and better client outcomes.
So expert is Bergman that he’s the go-to guy for many other investment professionals, including hedge fund managers who hire him to manage their personal accounts.
Indeed, one client who relies on his judgment is head of ETFs at a competing brokerage firm.
“He knows ETFs like the back of his hand, but he can’t pull the trigger at the right time to invest in them. There are a lot of people like that. After about 35 years in the business, I have no problem going into the burning building to try to find out whether we can make some money. It’s something I was born with,” says the tall, bespectacled Bergman, who was with Bear Stearns for 20 years before joining Morgan Stanley in January 2008.
Over two decades, the investments he has managed have far exceeded the major indexes, he says. In the last five years, the FA has stressed ETF investing and is, more and more, moving clients into these funds.
“History suggests that the vast majority of active managers underperform their benchmark. The benefits of ETFs are very, very strong,” Bergman says. “ETFs are game-changing: They give you the ability to mix stocks and bonds, and to make a sector investment in a particular area and get a very exposed piece of an asset allocation focused in that area.”
In the advisor’s overall book, 20–25% of clients are in ETFs, with at least $250 million invested in the funds daily. That amount can rise to as much as $400 million to $500 million depending on Bergman’s special short-term calls, which are typically contrarian.
For his balanced accounts, about $200 million to $250 million is allocated to ETFs, which are managed with a proprietary, broad-based ETF-only strategy; closed-end funds are used occasionally. For his other platform, the advisor manages $250 million in ETFs and $500 million in individual stocks and bonds. Another $2.5–3 billion is in mostly fixed income.
Bergman doesn’t buy ETFs only to put them on set-and-forget automatic pilot. In fact, that’s one of the worst ways to use these funds, he says. Bergman actively manages them with the distinct investment strategy that he, along with his group’s portfolio manager, Kurt Walters, has developed.
Using a core and satellite approach, it aims for broad diversification and increased risk-adjusted performance. The core (strategic) portion is for global diversification and may include, for example, large and small cap securities, short-term credit fixed income and commodities. The satellite (tactical) portion, to generate some alpha, is designed for targeted allocation of specific themes, sectors, asset classes and valuations; usually these are short-term plays.
Bergman offers clients three ETF portfolios based on risk tolerance: The aggressive one consists of 70% core and 30% satellite ETFs; the moderate and conservative portfolios are 74%–26% and 78%–22%, respectively.
Over the years, Bergman has made some controversial sector recommendations, for which ETFs were used as the investment vehicle. Indeed, he has a history of stepping into sectors when everyone else is getting out—and his results are impressive. A recent ETF home run was in natural gas.
“We just exited half the position up 50%,” Bergman enthuses. “We thought the easy money had been made.”
He suggests using ETFs to all his clients—including those not already in them—for investing in sectors or themes about which he feels strongly. That’s where his tactical strategy comes in.
This year, Bergman made at least two against-the-grain calls. Emerging markets was one: When the sector was down 30–40% with record outflows in March and April, he took a large position in a Latin American ETF. By summer, it was up 20%.
Another triumph came earlier this year when the common wisdom on the Street was to flee investments in the developing BRICs countries—Brazil, Russia, India and China. Instead, contrarian Bergman used ETFs to get into the BRICs.
“Since April,” he points out, “the best performing markets have been Brazil, Russia, India and China. In three months, China was up 20%.”
ETFs are famed for being liquid, low cost, tax efficient and transparent. That they also can be traded at any time during the day is perhaps their most appealing feature.
“ETFs give you the ability to capitalize on an investment class, segment or theme more quickly than you could in the past,” Bergman notes. The advantage of all-day trading “is where they really make a difference.”
For instance, eight years ago, when a plane crashed into a New York City high-rise building, the event set off fears that it was another terrorist attack; and the market plunged.
Bergman saw opportunity. “I was able to go in [quickly] and buy a particular ETF that I wanted, which was down 3–5%. Within only 15 minutes, they confirmed that it was a private plane piloted by a Yankees pitcher,” he recalls. “So there are dislocations from time to time that make being able to trade during the day a big advantage.”
Bergman made that notable investment around the time he was developing his core/satellite ETF strategy. As a senior managing director at Bear Stearns, he was doing a deep dive into ETF research, testing funds in his personal accounts and determining which types of ETFs made the most sense and which to avoid.