Morningstar Advisor - February/March 2011 - (Page 14)

Advisor Profile Best of Both Worlds By Kate Stalter Two advisors—one who uses active strategies, one who uses passive—take different approaches in their portfolios to achieve the same goals: low risk and stability. From Stock-Picker to Passive Investor Tom Posey was confident he was a good enough stock-picker to beat the market. So, when the Houston-based advisor opened his business in 2000, it followed that he chose actively managed mutual funds for his clients. Before launching Posey Capital Management with his wife, Sarka, Posey had been an attorney and a chief financial officer in the oil industry. In the latter role, he had evaluated investments and acquisition opportunities, and he developed a knack for spotting prospects. “I felt I could do pretty well as an active manager, and that’s what I had in mind doing,” he says. Rather than choosing individual stocks, the fee-only advisor zeroed in on actively managed mutual funds to achieve more diversification for his clients. He was happy with the funds he chose, which included the Clipper Fund CFIMX and some from Dodge & Cox. These were funds with good track records and relatively low management fees. Posey was aware of research showing that indexed funds delivered better returns than actively managed funds. But he remained skeptical, convinced that he could beat the market by choosing the right actively managed instruments. The Go-To Advisor It’s important to note that Posey’s business doesn’t center around money management as a stand-alone service. Instead, Posey emphasizes that his company offers comprehensive financial planning, which includes investing, among other services. He credits his background for shaping his approach. In addition to his earlier careers as attorney and CFO, he spent about 18 months at an advisory firm that specialized in insurance products. “We do retirement cash-flow planning and complete risk management and asset protection,” he says. For example, “even after a client has enough property and casualty insurance, we’ll look at whether they should have legal vehicles to protect their assets beyond that.” Posey’s firm also offers estate planning, charitable giving, and wealth transfer. Services include tax-loss harvesting, wherein a loss on paper can offset future taxable gains. Posey aims to be clients’ go-to for all financial issues. If he doesn’t have a staff expert in a specific legal or tax question, he refers clients to a network of trusted outside consultants. Most clients are 55 or older, with at least $2 million in assets. The firm has about $90 million under management. With his comprehensive management philosophy in mind, he began searching in 2002 for a low-risk investment for a client. He was seeking something that didn’t use derivatives but delivered a good yield and held little interest-rate sensitivity. “At that time, there were a bunch of ultrashort-term bond funds that had really high yields, but they were using all kinds of derivatives,” he says. “And some of those, like Fidelity’s Short-Term Bond Fund FSHBX and Schwab YieldPlus SWYSX, just got nailed after a couple of years.” He wanted something for his client with more stability and less volatility. DFA Beckons This search resulted in Posey shifting his approach toward a more passive investing style and away from actively managed funds. He found a one-year fixed-income fund from Dimensional Fund Advisors that fit his requirements perfectly. “It was just a plain-vanilla bond fund, and I thought it looked great,” he says. Having no inkling how DFA funds are distributed, Posey tried to buy the fund through Fidelity, the custodian for all his clients. Fidelity’s website wouldn’t allow him to make the purchase, so he called Fidelity to see what 14 Morningstar Advisor February/March 2011

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2011

Morningstar Advisor - February/March 2011
Letter From the Editor
First, Do No Harm
Do You Use Active or Passive Investment Strategies?
Best of Both Worlds
How to Build an Index
Accountable Investor
Nice Guys Finish First
Four Picks for the Present
Investment Briefs
A New Guardrail Against Risk
Tech Loosens the Purse Strings (a Bit)
It’s More About Costs Than Active or Passive
Play Your Stars
In Between Active and Passive
Selling Beta as Alpha
The Weighting Game, and Other Puzzles of Indexing
Leaving the Nest
Redefining Credit Risk
Another Vote for Market-Based Credit-Risk Measures
Big Opportunities in Small-Cap Stocks
Benchmarks? What Benchmarks?
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VA Sales Slide, but Assets on the Rise
Indexing’s Lunatic Fringe

Morningstar Advisor - February/March 2011