Defining a Global Macro Strategy

05/31/2012 7:30 am EST

Focus: ALTERNATIVE INVESTMENTS

Brent Hankins and Chris Keenan of Welton Investments tell MoneyShow.com about their firm, which specializes in alternative investments, using managed futures and a systematic global macro approach.

Kate Stalter: Today, I’m speaking with Brent Hankins and Chris Keenan of Welton Investments. Now, I wanted to start out today by letting you talk a little bit about the company, before we get into some other questions. Describe Welton Investments for me: How was this founded and what are the company’s overall objectives?

Chris Keenan: Hi. Welton Investments was founded 24 years ago, in 1988. The firm has been focused ever since then on identifying non-correlated investment strategies, particularly within the systematic global macro and managed futures space.

We currently are about $1 billion in assets under management, and our flagship program is the Global Directional Portfolio, which we refer to as GDP.

Kate Stalter: Chris, you alluded to something that I had wanted to ask you about, that I was very curious about. What is the GDP? Can you guys talk a little bit about these objectives, and who this is targeted toward?

Chris Keenan: Absolutely, I’m going to let our portfolio manager Brent Hankins elaborate on that.

Brent Hankins: Kate, the product is targeted towards primarily institutional investors. High-net-worth investors have been our primary target client base, and the goals, really, for the product are focused on a couple of areas.

The diversification that is inherent in the managed futures strategy has been of value to those investors. What we see there is that, in general, we’ll have a very low correlation to the major traditional asset classes of stocks and bonds, so that is of strong value.

In addition, this particular strategy tends to have strong periods of return during periods of negative return, or tail-like events for those asset classes. So when equities will do poorly, that can be a very good period for our strategy in total, and a lot of that comes from the overall strategy of momentum investing. So we would be buying strength and selling weakness, and the diversification benefits that are attributed with that are of strong value to our investors.

Kate Stalter: Let me follow up a little bit on that then, Brent. How do you recommend that this strategy be used in conjunction with an overall portfolio? That, of course, would consist of, say, regular equity and fixed income?

Brent Hankins: We don’t generally get into recommending specific percentages to investors. That’s really dependent on their own investment mandate. What we do try to focus on are the benefits of investing in this space and in this strategy.

If we look at the strategy in total, we have access to all of the major asset classes. So it would include commodities, global currencies, equity indices, and fixed income. Each of those are a meaningful part of our portfolio, and we have the flexibility to have invest both long or short, so we can go in either direction in each of those asset classes.

That freedom creates a lot of full opportunity for return, but it also results in meaningful diversification benefits for our investors. And we freely make our overall returns available to investors, and we explain the strategy prior to them investing, and then how much they choose to invest and how they decide to put this into a portfolio is really at their overall discretion.

Chris Keenan: Kate, maybe I’ll offer some elaborative points to what Brent talked about. Brent mentioned diversification. You know, one of the reasons why our firm has committed to this strategy class is because we have known that it is one of the few truly diversified investments.

As a lot of investors found, even alternative investments they had, say, in the 2008 collapse, they all correlated together and went the way of the equity markets. And one of the lessons from that is that the managed futures strategy was one of the few that actually did not.

Whereas the equity markets collapsed in 2008, managed futures as a whole performed strongly positive—you know, high teens, mid 20s, and even some managed higher than that. That has really put the strategy on a lot of people’s radar for that diversification and tail-risk element of performance.

Continued…

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The other thing I would offer is that so many investors have to think about discretionarily having to allocate their portfolio in response to what they think the markets will bring, and that is a very stressful and difficult challenge. So investors may think, “Oh my goodness, I should be responding in a flight to quality and move with my portfolio. I need to allocate things differently.”

Our strategy dynamically allocates, and it dynamically allocates among the four major asset groups of equities, fixed income, currencies, and commodities, which means that based on our systems that we’ve developed, we are dynamically moving within all those things daily, weekly, monthly. And our exposure is changing in ways that we think advantages our portfolio toward edge where we see it.

Kate Stalter: I wanted to just talk for a moment about some of the vehicles you do tend to use within the strategy. As I understand it, you are not doing something so simple as, for example, trading the SPDR S&P 500 (SPY), but you are using S&P 500 futures, for instance?

Brent Hankins: That’s correct, Kate. We do trade the S&P 500 futures as one component in our portfolio. In fact, we trade over 100 futures and currency forward markets in this particular product, so investors really get a very broadly diversified portfolio at all times when they are investing in the GDP.

Kate Stalter: There were a couple things on your Web site that I found interesting. You talked about on the site the scientific approach and transparent operations. I found that intriguing. Can you say a bit about that?

Brent Hankins: Sure. The scientific approach is really what leads all of our research that goes into our strategies. We try to utilize and follow that scientific approach, in both generating an idea, and then taking that idea all the way through inception, including testing and then follow-up Q&A.

With regard to transparent operations, we run a very transparent, open strategy in our shop, so that all of our traders, portfolio managers, and risk management staff are well aware of everything that is going on in the portfolio at all times.

Kate Stalter: You know, this is really interesting. Chris, before we got on the call today, I understand that you do have some ideas for some of our listeners and readers who would like some more information about some of these strategies.

Chris Keenan: We do. We publish something called the Welton Visual Insight Series. These are mini white papers, and they are not focused on any narrow topics.

We realize that investors are looking for information about asset allocation and how to achieve their objectives, and so we have written on things like tail risk. We have written about diversification, actually very related to what we are talking about here. We have looked at the shortfall that pensions are likely to face, and how to try to rectify that.

We put all these in white papers, and we make them freely available on our site. So it’s something that’s available to your readership that we’d be happy to share.

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