Preservation Rotation

Preservation Rotation

investment strategy by Mark Gordon | Managing Editor

A small group of money managers are trying to make big gains by combining market-timing skills with market-weary risk ideals.

When money manager Chris Bertelsen stares at the bottom right side of his double-screen Bloomberg terminal, a worn and weary Sticky Note stares back at him. The message, written four times in four different colors: Trust your instincts.

In itself, the mantra is pretty basic stuff for someone in the investment business. But the fact that Bertelsen - a 42-year industry veteran who has been named a Top 100 fund manager by Barron's and has appeared semi-regularly on financial TV shows over the past five years - has to remind himself of it shows just how risk-heavy the money management business could be.

The risks however, haven't prevented Bertelsen from building a long and trusted track record in the industry during a career that has included stints managing $800 million-plus of investments for groups as diverse as the United Arab Emirates Investment Authority and the United Auto Workers. Past mentors include investment gurus David Dreman and Peter Lynch.

And just like the simple mantra stuck to his computer screen, Bertelsen's investing formula, one he learned during the economic crisis of the early 1970s, is in of itself pretty basic stuff. That formula begins and ends with capital preservation, which, in Bertelsen's world, is better known as not being the person to cause big portfolio dips. "I look at how much I can lose," he says before he hits the buy or sell button, "not how much I can make."

Bertelsen, 64, is still putting the formula to good use in his latest venture, picking stocks for Aviance Capital Management, an investment arm of Sarasota-based investment advice firm Global Financial Advisory, Inc. He's added a few twists to the core system and the results, so far, have been stellar: Aviance, formed initially in early 2007, was one of the top ranked money managers in its class last year, according to data compiled by Infoma/PSN.

The firm, which has a headquarters in Sarasota and a second office in Los Angeles, is made up of Bertelsen and a few other money managers and stock pickers, including Bertelsen's son Ed Bertelsen, who previously worked in financial management roles with Solomon Smith Barney, Legg Masson Wood Walker and Raymond James.

Gary Dvorchak, who formerly ran his own hedge fund advisory firm and is an investment columnist for thestreet.com, is in charge of the Los Angeles office. Mike Dixon, a British native who sold a multimillion-dollar software company in his homeland before moving to Sarasota in the late 1990s, runs the day-to-day operations of the whole company as its chief executive officer.

Aviance's biggest client is First Trust Portfolios, a Chicago-based financial services firm that sells a variety of investment products, including mutual funds and exchange traded funds. Last September, Aviance launched the company's First Trust Active Dividend Fund, a closed-end fund with about 2,000 investors, initially worth about $147 million.

A challenging market

The First Trust fund, which trades on the NYSE under the symbol FAV, is Aviance's first, and biggest, example of utilizing what's known as the dividend rotation strategy. This is the twist on preservation capital Chris Bertelsen brought with him to Aviance.

Dividend rotation is essentially the concept of picking stocks based on the dividend rate the company generates, not necessarily its share price or other financial factors. Some institutional investors like to use the concept, or some form of it, in a struggling stock market because the dividend payoff provides a cushion against declining stock prices.

For Aviance, the dividend rotation formula starts by buying stock of a company, or a series of companies from the same sector, before the stock or stocks have reached the ex-dividend date. This allows Aviance to capture the full dividend as an official stockholder of record.

Aviance holds the stock for at least 61 days so it could be taxed the minimum 15% when it sells it. The real trick to dividend rotation is the next step: Timing the sale of the stock and the purchase of the next stock to capitalize on both low share prices and high dividend returns. What's more, the strategy would be counterproductive if the loss on the stock is deeper than the payoff on the dividend.

"A big part of this," says Bertelsen, "is being in the right industry and the right place of that industry."

While Bertelsen and Dixon declined to elaborate on specific stocks they are currently thinking of buying or rotating, a glance at their past purchases indicates the firm is big on blue chips. As of Nov. 30, 2007 for example, holdings in the First Trust fund included Coca-Cola, PepsiCo, IBM and Hewlett-Packard, according to Securities & Exchange documents. Bertelsen adds that McDonald's has been a "huge winner" in past rotations.

Oil and energy companies have also been high on Aviance's list of rotating stocks. Almost 20% of the initial makeup of the First Trust fund, for instance, included companies in the oil, gas and consumable fuels industry and the energy equipment and services sector, SEC records show.

Another key to the dividend rotation formula, Dixon says, is to have maniacal sell discipline, so as not to hold on to a stock longer than necessary to capture the dividend. This might mean selling shares of a company poised for more growth, a difficult concept to master. But, says Dixon, "if it doesn't meet our fundraising criteria, we sell it."

Overall, Aviance's First Trust fund is down about $5 a share since it first began trading Sept. 24, from the low $20 a share range to $15 a share. Still, says Dixon, the rotation strategy has given some investors at least a 9% return, due to the income generated by the dividends.

"The market is tough," says Dixon, "but this is where professionals can really come into their own."

And the topsy-turvy market isn't dampening Dixon's or Bertelsen's enthusiasm for how much Aviance can grow. Dixon predicts by utilizing the dividend rotation strategy, the firm will have $500 million in assets under management by the end of 2008 and could be closing in on $1 billion by 2011.

Talking strategy

But as of mid-March, with about $198 million in assets under management, Aviance is still small by some industry standards and is downright tiny in comparison to some of the heavy hitters Bertelsen has worked with and for in the past. Those companies and funds include Dreman Value Advisers and Phoenix Investment Council.

Bertelsen, the son of a steel worker and a schoolteacher, has been in the money management business since 1966, when he took a job with State Street Bank & Trust Co. in his native Boston. In 2001, Barron's named him one of the Top 100 fund managers in the U.S. and he's since been in the rotation of guests appearing on financial TV shows such as CNBC's Power Lunch.

Despite those credentials, it's actually Chris Bertelsen's son, Ed Bertelsen, who is really behind the formation of Aviance. Turns out Ed Bertelsen and Mike Dixon are neighbors and occasional golf partners, and the younger Bertelsen introduced his father to Dixon a few years ago. The trio began chatting about dividend rotation strategies at family gatherings, conversations that led to Aviance.

And now Aviance's size is a perfect fit for Bertelsen, who says in the last decade he grew weary of working for big firms that went through mergers and buyouts with irritating frequency. Just like bankers who turn to community-based operations after working for regional and national powers that change names, Bertelsen is happy to be completely on his own.

"I've gotten pretty used to the entrepreneurial route," says Bertelsen. "I really like the freedom being an individual manager gives you."

AT A GLANCE

First Trust Active

Dividend Income Fund

Sarasota-based Aviance Capital Management manages the closed-end mutual fund, traded on the NYSE under the symbol FAV. (Data as of market close 3/14/08)

Inception date Sept. 20, 2007

Inception price $20/share

Inception Net Asset Value (NAV) $19.10/share

Closing NAV $14.76

Closing Net Asset Value $16.28

Discount to NAV 9.34%

Total Net Assets $117.32 million

Dividend Frequency Quarterly

Closing share price 52 week high/low $20.75/$14.41

Closing NAV 52-week high/low $19.85/$16.09

Cumulative Total Returns

(Data as of 2/29/08)

Time Period Share Price Net Asset Value

Three Months -6.48% -7%

Year-to-date -4.38% -9.01%

Inception-to-date -16.86% -7.25%

Source: First Trust Portfolios LP

REVIEW SUMMARY

Business: Aviance Capital Management

Industry. Investing, money management

Key. The firm uses a dividend rotation strategy to minimize financial losses.