Scott Welch, Co-Founder and Senior Managing Director of Fortigent, LLC presented at CFA, and we had a chance to talk with him afterwards. Fortigent provides “wealth management solutions and consulting services to independent investment advisors, banks and trust companies, and break-away brokers,” and his presentation, “The Evolution of Alternative Investing: New Approaches, New Thinking, New Conversations,” was as “Why NOT Alternatives“ as it gets. One exciting note for us was that Managed Futures is “in his bucket of alternatives” and that his outlook is optimistic about the future of the space (despite the current difficult environment)!
Welch said that part of the problem for managed futures in the current trading environment is that the market is being manipulated. The influence of central bankers is getting in the way of the traditional long to medium term trend based managers allowing for the best opportunities on shorter time horizons. In many cases the signals may be good, but manipulation is killing what would otherwise be successful trades.
His market outlook for alternatives, in general, is that they will play important role in portfolios, especially during volatile market regimes. In fact, Welch recommends allocations as high as 30-50% to alternatives.
As investors move more and more toward alternatives, it will be important to think in a “new way” about the markets. Specifically, Long / Short Equity should be considered more of a dynamic stock allocation vs an alternative strategy; investors and their advisors should customize their portfolios with respect to 1. Risk, 2. Return, 3. Liquidity, 4. Fees.; and finally investors and their advisors should be open to a more tactical approach to alternative investing.
Welch emphasized that market regimes change and placed a great deal of importance on portfolio allocation strategy as well as setting realistic investor expectations through up front and ongoing education. In his opinion, the main obstacle holding back RIAs from investing in alternatives is not due to a lack of investor education on alternatives. Instead, he says, RIAs know what they are, but are gun shy after being burned by LPs (limited partnerships) during the global financial crisis (fraud, gates, etc). That said, advisor aversion to LP’s is no longer a viable reason to avoid alternatives, however the due diligence requirements in the space have increased.
We also had a chance to talk with Welch about Fortigent being purchased by LPL Financial. Fortigent and their 100 employees have joined a firm that provides technology, brokerage, and investment advisory services to over 12,500 financial advisors. Welch says that Fortigent will retain its autonomy despite the merger, as the LPL investment team has very specific mandate.
At Fortigent, the investment team remains consistent. They have 10 employees in research that are actively looking for new and unique strategies, which, once approved, are chosen by the advisors. Being able to provide the seal of approval by their 10 person team is the value that Fortigent adds.
We also asked him about alternative investment mutual funds: he thinks there are too many starting too fast, requiring more belief than proof in each product. In his view, due to shorter track records, there is a need to focus greater due diligence on operations, the team, the underlying strategies, etc. This is clearly a strong focus for the firm as Fortigent brought on 20-25 new alternative investment mutual funds last year, and in total the firm has invested two to three billion dollars in AI mutual funds.
The above statements were echoed as it relates to managed futures mutual funds as well; due to the short public track records, more belief than proof in each product is required. This creates a need to focus due diligence efforts on operations, management team, underlying strategies, etc. Scott believes that the industry will continue to grow alongside the regulatory environment adjustments.
The last question, and one our favorites, revolved around the large vs. small manager debate. The data we’ve published (here and here) supports the fact that the larger a manager gets the lower his expected rates of return (Harding admits it it here). Welch agrees, stating that smaller managers have proven that they can be more nimble, invest in less traditional markets, etc; however the bottom line is that investor behavior is not following the talk. Data flows support that investors are willing to trade enterprise strength for lower performance.
We greatly appreciate the opportunity to have met Mr. Welch and his continued advocacy of managed futures as a core part of investor asset allocation strategy.