Most financial advisors like to fancy themselves contrarians. But Steve Henningsen, partner and principal of the Wealth Conservancy in Boulder, Colo., really walks the talk. He has avoided much of the downside in what he considers a long-term secular bear market by minimizing risks and buying enormous quantities of gold and silver for his clients.
Henningsen started buying gold when it was selling between $300 and $400 an ounce in 2003; he is still buying it at $1,350. Aside from exposure through some absolute return and precious metals mutual funds, there are no U.S. equities in his model portfolio. None.
The downside to not following the herd? "You have to be willing to look like an idiot," he quips.
His function as chief investment strategist for the Wealth Conservancy won't be found on Henningsen's business card. He eschews titles, along with what passes for investment theory these days. "The fly in the ointment of rational market theory is that people are rational," he says, "which is clearly not the case."
Fresh out of Amherst with a bachelor's degree in business and a double minor in economics and computer science, he worked as a bank auditor for seven years, followed by a few years as a financial advisor with American Express. After a brief stint with a large wealth management firm outside his hometown of Boston, he joined the Wealth Conservancy in 2000. Today he spends much of his day reading and monitoring current market conditions. "I just love information," he confesses.
DO NO HARM
The Wealth Conservancy specializes in coaching individuals with windfall wealth. Its clientele, primarily inheritors, also includes people who have sold a business or been blessed by some other liquidity event. With over $200 million in assets under advisement, the firm serves 45 clients, primarily on a retainer basis; a minority are billed an average of 60 to 70 basis points on assets under management. The current client asset minimum is $4 million.
Henningsen sums up the firm's mission: "We focus on wealth preservation for people with a large pot of money that they do not want to lose."
This emphasis on wealth preservation simplifies Henningsen's strategy. His initial rule of thumb echoes the Greek physician Hippocrates: "First, do no harm." That rule leads directly to his second rule: Manage risk before managing return. In practice, this means that no matter how enticing a particular investment, Henningsen puts only so much into it-say, 3% of the total portfolio-that a total loss of the investment's value would not change the client's lifestyle. Here he gleans his wisdom from poker, advising clients, "Don't bet more than you can afford to lose."
Henningsen's third rule of thumb? Ignore recent history. He began buying gold and the then-new PIMCO Commodity Real Return Strategy fund in 2003, the same year he started moving his clients out of broad index funds. The traditional index portfolio of 60% stocks and 40% bonds was fashioned around the equity bull market of the 1980s and 1990s, the likes of which probably will not be seen in the near future. Since the current investment environment is unlike any from the recent past, Henningsen reasons, chances are the future will look different too.
One historically unique factor in the current economic climate is the unprecedented level of global debt, particularly in the United States, Japan, Britain and the so-called European PIIGS-Portugal, Ireland, Italy, Greece and Spain. "You simply can't borrow yourself out of debt," Henningsen observes. "At some point we will hit the debt wall." The easy money solution of the Fed only portends more disaster, he believes.
In fact, in November, global and U.S. markets were reeling from the budgetary and banking crisis playing out in Ireland. The 50% drop in the price of the average Irish bank cast doubt on the viability of similar institutions in Portugal and Spain. And investors seemed to have little patience for another bailout, believing that the European bank stress-tests in July had put the issue to rest for a while.
The long-term history of gold-say, 5,000 years-shows the cycle of hard currency followed by fiat currency repeating itself endlessly. Investors move into hard assets (commodities) when they lose faith in their government's management of the currency. Henningsen believes central banks will return to currency systems backed at least partially by hard assets such as gold-a standard abandoned by Nixon in 1971 to prevent governments from printing and debasing currency at whim.
Henningsen's model portfolio reveals a highly defensive stance. Gold and silver bullion make up 27% to 30%, via the closed-end mutual fund Central Fund of Canada, which allocates a 60% gold and 40% silver bullion mix. He also counsels clients to buy gold and silver coins. Gold and silver equity mining shares make up another 10% of his portfolio and operate like leveraged bullion, more volatile on both the up and down sides.
With 40% in gold and silver, he currently has a 20% stake in absolute-return mutual funds. Many of these include both long and short positions that allow them to make money even in a down market. Some of his preferred funds in this category are Caldwell & Orkin Market Opportunity, Hussman Strategic Growth and PIMCO All Asset, All Authority.
Approximately 13% of his model portfolio is invested in PIMCO institutional bond funds, including the Real Return and Unconstrained funds. His clients are totally out of the municipal bond market for the time being because of the massive debt state and local governments face. He accepts that tax hikes may cause temporary interest in municipal bonds, but believes the default risks are not properly factored into current prices.
Henningsen holds 4% to 5% of the total portfolio in the Powershares DB Agriculture Fund, which captures soft commodities such as wheat, corn and sugar. Another 15% to 20% is in cash, including foreign currencies, awaiting investment opportunities. In order to diversify and hedge against a debased dollar, Henningsen utilizes foreign currency exchange-traded funds (ETFs) as well as the Merk Asian Currency Fund.
Any money left over is invested in the Wealth Conservancy's alternative asset bucket, which is used to increase or decrease exposure to various risks. For example, the firm currently holds positions in ETFs that sort the euro currency and various U.S. stock indexes.
Henningsen doesn't think much of real estate investment trusts: "Although I have been wrong about their recent performance, I wouldn't put a dime in them," he says. "Residential property prices are going to follow the increasing number of foreclosures down over the next couple of years. And commercial real estate is simply an accident waiting to happen."
What about equities? "I will return to a more 'normal' equity allocation when the rotten foundation of our financial system has been fixed."
Henningsen clearly identifies himself with the Austrian school of economics and its libertarian emphasis on free markets and individual rights. He sees the current market as based more on artificial stimulants than on real economic growth. The situation will not reverse itself until the current credit-based financial system is replaced by something more sustainable, he believes.
True to his aversion to titles, the investment manager likens himself to a weather forecaster, saying: "You are never going to be right all the time, but you must always monitor current conditions nevertheless."
Jim Grote, CFP, contributes regularly to Financial Planning.
The Wealth Conservancy
BS, Amherst College
Assets under management:
$200 million (firm)
"I will return to a more 'normal' equity allocation when the rotten foundation of our financial system has been fixed."
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