Stephen Cucchiaro, founder, chief investment officer and oracle-in-residence at Windhaven Investment Management, took to the stage Monday at the Grand Hyatt in Times Square to share his portfolio-hedging secrets at the 2013 New York Conference of the Investment Management Consultants Association.
Cucchiaro, who has a mathematics degree from the Massachusetts Institute of Technology, an MBA from the Wharton School of the University of Pennsylvania, and was a technology entrepreneur and Olympic-grade yacht racer, sent shock waves through the RIA business when he sold his ETF manager for the envy-provoking sum of $150 million in cash and stock. See: A look inside Schwab’s big deal with a small asset manager.
Since 2010 he has been deploying his talents on behalf of Charles Schwab & Co. Inc. when the San Francisco giant bought out Boston-based Windward Investment Management and renamed it Windhaven. See: Schwab closes the Windward Investment Management deal but relinquishes the brand.
It’s proved to be a wise, perhaps stellar, investment on Schwab’s part. Windhaven has been bringing in money by the bucketload with its assets growing from more than $4 billion in November 2010 to $14 billion as of Jan 31 — a near quadrupling. See: Schwab adds $2 billion of assets from Windhaven, with RIA help, and another $2 billion of assets from 41 new RIAs.
Imagine the (awful) possibilities
Cucchiaro’s winning strategy can be boiled down to good old diversification — but with an ETF twist and a sky-is-falling wrinkle or two. His key to keeping clients afloat in turbulent waters is to visualize a plethora of disastrous national and world scenarios coming down the pike, match them to the right asset strategies, and then make sure that clients get a little of each strategy in their portfolio.
“Go through history and then use your imagination and think of all the bad things that could happen in the future and relate them to the market cycle,” Cucchiaro told about an audience of about 200. “What is the perfect asset class? What will go up when everything goes down? Imagine 10 extreme scenarios and 10 asset strategies.”
When a scenario arises for which an asset class does not yet exist, Cucchiaro says he will create an ETF to fill that gap. See: Windhaven’s success draws attention to emerging ETF managers.
The last bond war
It’s important, he says, to ignore economic projections and macro-concepts and concentrate on past economic cycles when conjuring up concrete scenarios. Also ignore modern portfolio theory, which Cucchiaro calls “discredited.” See: Why the Yale endowment model has potentially calamitous pitfalls according to … Yale itself.
Clues to the future debacles, however, may be gleaned from studying past economic cycles. Evaluating the state of the bond market, for instance, Cucchiaro noted that the yield of the 10-year Treasury, which hit a 16% high in 1981, fell to a nearly two-century low of 1.5% and now is hovering around 2%.
“Clients don’t remember what it was like [in the ’80s.] It was painful. Ever since, the wind has been at their back.”
So much so that most clients may have a feeling of false security when it comes to bonds. “After all, in the last decade the best performer has been the bond market. Ten-year Treasuries have doubled. No wonder we’re fighting the last war.” See: What plunging equity prices say about bonds as a hedge for stocks.
Cucchiaro’s conclusion: “Don’t sell all your bonds because there could be another recession — but don’t think of them as no-risk. [There is more risk] than clients might realize.” See: Bond puts mutual fund assets in PowerShares’ ETF sights.
Stocks didn’t do as well as bonds in the last decade but did better than cash — at least on paper.
And paper, according to Cucchiaro, is about what that metric is worth, since the Federal Reserve and central banks the world over have been “printing money” for decades.
“Why are we using money as our yardstick?” he asks. “It’s manipulated. Don’t measure in dollars but in other measures not so easily manipulated.”
Gold, for instance, is a good frame of reference, and judged by the gold standard, Cucchiaro says, the United States has been in a bear market since March 2000.
“To protect from the possibility that economy will stay simulative, a little gold a good thing. We’ve been overweighting gold since the tech crash, and its been a good investment.” See: Should RIAs buy gold now as a hedge?.
Windhaven also cast a favorable eye on international real estate last year. “It was hit hard and now it has leverage, because [European and other] central banks are helping them,” Cucchiaro says.