Tyler Vernon is a Principal and Portfolio Manager at Princeton,
Biltmore Capital Advisors
We had the opportunity to ask Tyler how he's allocating among
different asset classes in this environment, and what his overall
strategy is for outperformance in 2010.
• • •
Seeking Alpha ((
)): In your portfolio currently, how are you allocating among
different asset classes?
Tyler Vernon ((
We believe diversification is the key to protecting assets and
compounding returns over the long term. While correlation of asset
classes was dramatically high in 2008 and 2009, we believe 2010
will be much different. As such, to determine over and
underweightings of portfolios, the investment committee of Biltmore
Capital Advisors takes a macro view of the economy and looks at
valuations of various asset classes relative to economic realities
that we see over the next 12-24 months.
While we think the stock market is properly valued as a whole,
there are still undervalued areas of the market where returns can
be made. In particular, the riskier, smaller companies with higher
P/Es and lower dividends outperformed last year, keeping the
larger, higher dividend yielding companies at fairly attractive
current prices. We believe that individuals should focus on these
larger multinational companies as they will capitalize on deriving
a large majority of their revenue from the faster recovering
Additionally, we believe that the "risk trade" will end over the
next 12 months as investors grow more concerned about a tightening
Federal Reserve and that investors will flock to safety at that
Our strategy focuses on not only diversifying by size, style,
and sector, but also on employing covered call strategies on
approximately 50-60 percent of our long equity positions. Coming
off a 55 percent increase from market lows, we feel that the
economy needs to show signs of improvement and corporate profits
will need to see top line revenue growth before this market regains
momentum. As such, we feel that the market will trade in a range
for a considerable period of time and covered call strategies will
For income oriented investors, if we can target large companies
issuing 3 percent dividend yields, and collect a 10 percent
annualized yield from call writing, we are accomplishing their
income goals without taking interest rate risk inherent in the
current bond market. Even for total return investors, if we can
collect a 9-12 percent dividend and income stream in flat markets
using these strategies, we believe people will be better off over
the long haul than owning the S&P outright.
When viewing market investments, we believe risk management is
more important than ever and that professionals and individual
investors alike don't accurately understand the risk inherent in
portfolios. Biltmore Capital believes it's important to purchase
out-of-the-money protective puts on at least 50 percent of the
equity portfolio in attempt to protect against another black swan
event. While there is obviously an expense to purchase these
out-of-the-money puts, only a small portion of the covered call
premium is used to buy this protection.
We also practice risk management by employing a 15 percent
allocation to structured notes. These investments, generally
principal protected by an underlying bond or CD, give our clients
the ability to profit by making directional views of currency,
domestic and international markets, metals, and other commodities.
Our investment committee will customize these investments according
to long term themes we see materializing in the economy. Generally,
the investor gives up some upside in their returns in exchange for
the principal protection inherent in these investments.
We believe that 20 percent should continue to be in alternative
investments. Within this space, 30 percent should be allocated to
managed futures and the rest to macro and event driven hedge fund
strategies. We believe that managed futures should be able to
capitalize on any shock to the economy such as inflation, dollar
crisis, or market turmoil and perform the way they did in 2008.
Additionally, we believe that low to non-correlated alternative
investment strategies are key to diversification within a
portfolio. Having the ability to go long, or short almost any asset
class including currency, energy, metals, commodities,
international and domestic equity markets as well as bond markets
gives this strategy flexibility to capitalize on any trend that
develops while properly hedging downside. After the robust run up
in the equity markets over the past 11 months, we feel that a focus
on alternative investments is more important than ever.
Fixed income is always a vital part of any portfolio but we feel
it's prudent to be underweight that asset class after historical
inflows. Additionally, we at Biltmore Capital have been shortening
duration on our fixed income portfolios to mitigate interest rate
risk. We believe a 30 percent allocation to this asset group is
SA: Which single asset class do you think will perform
best in 2010? What stocks or ETF would you choose to capture
We believe a combination of covered call strategies and managed
futures should perform well in 2010. Since they historically aren't
correlated to each other, overweightings in these areas make
At Biltmore, we customize our own covered call portfolios for
clients as they generally have larger asset bases giving us proper
capital to diversify. For the average investor, there are such ETFs
as the Madison/Claymore Covered Call & Equity Strategy Fund (
) that employ covered call strategies. It is important to note
though that an ETF like MCN does not trade at NAV like a customized
portfolio of stocks and options, so volatility can be much greater
than owning the underlying positions. For this reason, we prefer
customized covered call portfolios for our clients, but other
options do exist.
SA: What instruments do you generally use to capture
particular asset classes?
We are fortunate to be able to work with individuals with
established wealth of between $3-$40 million in investable assets.
Because of this, we can produce customized portfolios for
individuals using in house and outside institutional managers and
don't need to purchase tax unfriendly and high fee mutual funds. We
can seek out institutional quality managers to manage separate
pieces of client portfolios, ones who have proven track records of
success in the strategy.
The alternative investments are generally the toughest to
access, with lower minimums and fee structure. Having said this,
funds have popped up over the past 5 years that give qualified
investors access to managed futures at minimums as low at $10,000
as well as access to reputable hedge funds.
Have any new instruments emerged in the past few years
that you've adopted in your portfolio construction?
There have been two major developments in the past few years that
have made it easier for individuals to enter sectors of the markets
as well as alternative investments.
First, funds have opened up all over with lower minimums to
quality alternative investment managers such as managed futures and
hedge funds. Qualified investors can access these funds for as
little as $10,000 where in the past one would need a minimum
investment of a million dollars. This has been a major win for
individual investors as these asset classes have the ability to
perform very well when markets fall, thus providing a vital element
of risk management.
Second, ETFs have been the other major development over the last
couple of years. We have made strategic allocations to these
investments to capitalize on specific views of our investment
committee. We at Biltmore have made allocations to ETFs such as
GLD, TBT and others, enabling us to capitalize on leveraged
directional views of bond prices and metals.
Seeking Alpha: Thank you very much for sharing your current
Happy to participate.
If you are a fund manager and interested in doing an interview
with us on your highest conviction stock holding, please email
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