Liquid Alternatives Manager of 2022: Capital Wealth Planning

Liquid Alts covers a lot of territory, but for Capital Wealth Planning, which won the category in the 2022 Envestnet/Investment Advisor Asset Manager of the Year award, it was its covered call writing that brought it home.

Keep in mind that the equity portfolio is an enhanced dividend income strategy that also has covered calls in its quiver, said portfolio manager Kevin Simpson. “We endeavor to capture 80% to 90% of a rising market,” he said. “We know we’re not going to capture or outperform it more times than not, but if we can capture most of it, that’s the objective.”

In 2021, the fund returned 21%. As Envestnet analysts noted in their report that Capital Wealth did “an excellent job in delivering strong and consistent performance, balancing total return and income generation, and conducting active option overlay.”

The covered call strategy isn’t similar to many that buy and hold. Simpson said they “have a tactical approach to covered call writing, which tends to harvest volatility so our process will engage in more covered call writing when volatility is higher and we’ll dial back when volatility is lower.”

Further, as the analysts pointed out, Capital Wealth “manages its options positions, including closing out or rolling forward before their expiration, to potentially enhance performance. In contrast, many covered call strategies adopt a passive approach in option overlay such as ‘write-and-done.’”

Typically, said Simpson, covered calls are written on 30% to 60% of stocks in the portfolio. To illustrate how effective covered calls can be, Simpson explained that “active management is the thesis behind what we do and covered calls sometimes make it even better,” he said.

One example is a position in which they wrote a covered call on Caterpillar. “We had the covered calls written about $235, after acquiring the stock at $200. We got called away at $235, and the stock continued to go higher. Ultimately, CAT peaked out at $245 before rolling over and trading down to $200 again, so we were able to reenter our position,” Simpson explained.

The team rarely buys an option at the time they buy the stock, he noted: “If we’re investing in a stock, we like the prospects that it might go higher. We would tend to exercise some patience before layering a covered call over the top of it. Our process is very simple. We look for opportunities every day on all the positions that we own. We tend to look for one month out [and use] out-of-the-money covered calls. That’s kind of our spot.”

When the premium is attractive and risk-reward is good, they make the play. “What’s our risk? It is we could forfeit the stock. We want to make sure there’s enough premium there to allow us to capture some upside and [we’re willing] to take that risk,” Simpson explained.

He noted that 2021 was relatively easy for them as stocks were mainly higher. The hardest part from the option side “was the absence of volatility … it made it difficult to generate premium.”

This isn’t necessarily the case in 2022, when the market is giving it back. And although they have to work harder, a volatile market is when their strategy really pans out, Simpson added.

***

Kevin Simpson

Title: Manager; Years with firm: 17; Years in financial services: 30; Investment/Asset Class Focus: Liquid Alternatives; Asset management firm: Capital Wealth Planning; Year firm founded: 2005; Number of employees: 25; AUM as of March 31, 2022: $5.5 billion