Reduced Risk

Reduced Risk

investing by Mark Gordon | Managing Editor

Ian Naismith and Tony Welch are the easy-going, kickback and relax kind of business partners. The former wears a Hawaiian shirt and shorts to work, while the latter dons old tennis shoes with his khakis. When the end of the workday comes, their day is over. They walk out the office door and go home.

So it might not make sense, then, that their line of work is the high-stakes field of managing other people's money. Even though the juiced-up, day-trading days of the '90s are long gone, the investment field still has plenty of Gordon Gekko wannabes. The kind who live and die with the CNBC stock crawl and who gasp in horror when shares of their latest "it" stock drops like a barrel over Niagara Falls.

Not Welch and Naismith. Having latched on to their own version of a sure thing, the longtime Sarasota money mangers share a quiet, yet stubborn confidence in their own system. For the past four years, ever since the former American Express financial advisers opened Sarasota Capital Strategies Inc. together, the duo has capitalized on the fledging market of exchange traded funds (ETFs). The funds, a take-off of mutual funds, have been available for about 15 years but have only started to gain popularity over the last two or three years.

"Our idea was not to have to wake up in the morning and see our stocks blow up in our face," says Welch, 45. "We have taken the risk out of the picture. Or at least tried to reduce it substantially."

Welch and Naismith believe their investing model that focuses exclusively on ETFs is the best long-term plan for any investor, and not solely because it makes money. ETFs tend to have lower fees and taxes than most mutual funds and are more transparent than hedge funds, the partners and others promoting and buying ETFs say.

"It's very simple and straight forward," Naismith says from Sarasota Capital's office on Tamiami Trail in the Osprey neighborhood of Sarasota. "It's a well-oiled machine."

'Bull or bear, we don't care'

The machine created by Naismith and Welch was developed over the last 15 years of working in the financial advice field. The pair met while working in the Sarasota office of American Express Financial Advisors. Among other tasks, they presented seminars to woo prospective clients.

Naismith and Welch became friends and would chat about ideas and the market. They talked about short selling, using discounted closed-end funds and risk management. A lot of these conversations took place in 2000 and 2001 when business news was dominated with the likes of Enron, WorldCom and other reports of financial shenanigans that rattled the markets.

They each started their own investment firm before ultimately opening Sarasota Capital in 2002 based on their similar ideas of how to thrive in any market - an attitude Naismith calls "bull or bear, we don't care." Sitting around the conference table in their cramped office suite recently, Naismith and Welch showed how their partnership works so well.

Naismith, a native of McAllen, Texas, a small city near the Mexico border, is the number cruncher and contrarian. He considers math and solving complex algorithms a hobby. Naismith, 43, also plays the guitar, composes music and can be found regularly in shorts and colorful shirts at the office.

Welch, as described by Naismith, is more of the chart-watching type. He grew up in the tiny Iowa farming town of Shenandoah and tracks sports like stocks when he's not working. He has been active in the Sarasota youth baseball community for the past 12 years. He has four children and three grandkids.

Both Welch and Naismith have grown to love their adopted hometown. They chuckle when people suggest the place to be in finance is New York City. "Everyone who works on Wall Street," says Welch, "wants to make a lot of money, just so he could retire here."

The combination works. When one talks, the other tends to nod in unison. They occasionally finish each other's thoughts when speaking about investing.

And they each share a passion for investing in ETFs.

Timing the market

The firm picks up clients mostly through word-of-mouth referrals. They have customers in about 15 states, from high-wealth professionals to retirees to managed trusts.

From that client list, Sarasota Capital has about $60 million in assets, a number its been doubling every year since it started, Welch says. They are hoping to continue that growth and have more than $100 million in assets to invest in the next 18 months. Welch says the firm has the capacity to invest about $1 billion without having to add any more staff. So far, it's just Welch, Naismith and Joe Garbade, the compliance officer.

The firm has regularly outgained the benchmark S&P 500 index, although Naismith cautions that each client has individual needs and their accounts might be catered differently. Over the past 12 months, Sarasota Capital's 100% ETF portfolio was up 20.88%, while the S&P 500 gained 8.98% over the same period.

Naismith and Welch say their strategy is to attempt to time the market, to buy and sell the funds at the best times. They base that partially on a fundamental analysis, where they chart past histories to predict trends. Welch says using stop orders is an integral part of the process, too.

Having multiple stocks that are not tied into a mutual fund works to Sarasota Capital's advantage, Welch says. First, the firm isn't dependent on one company beating earnings or getting so-called good news to bump up shares. Also, by selling funds and not individual stocks, the managers eliminate the problem of clients getting upset over individual companies being sold.

Welch and Naismith encountered the latter issue regularly in their pre-ETF days. For example, Welch recalls dozens of angry phone calls after he sold Cisco shares in 2000 as signs of the pending tech-market collapse were looming. Clients were upset at the idea of shedding a moneymaker in their portfolio. "We have yet to have one client to have an emotional attachment to one of the funds," Welch says.

Welch and Naismith plan to continue using ETFs exclusively as the firm grows. They plan to move the firm into a bigger office currently under construction near the Osprey Wal-Mart Supercenter and they are also working to create a subscription-based Web site for information about ETFs.

And even though they continue to keep CNBC on in the office, the stock ticker no longer mesmerizes them.

"We couldn't care less what individual stock goes up or down," Welch says. "It's a lot less stressful this way."

INFORMATION

The ABCs of ETFs

Nationwide, investor assets in ETFs have gone up along with their popularity over the past three years: There was a little more than $100 billion invested in ETFs in 2003; that number climbed to $161 billion in 2004 and $228 billion last year, according to the Investment Company Institute, an industry trade group. There are about 225 active ETFs, a number that has also been growing rapidly.

ETFs work similar to mutual funds in that both contain a batch of common stocks that tracks an underlying index. ETFs cover a variety of stocks and indexes, such as homebuilders, gold or utilities.

ETFs normally have lower fees than mutual funds, although individual investors will pay a commission when they buy or sell ETFs, as they do with stocks. ETFs are lighter on the wallet come tax time, too, because in most cases, there are no capital gains to pay because ETF shares aren't sold piecemeal.

Another significant difference between the two is that mutual funds can only be traded once a day at a set price determined at the closing of the market. ETFs can be traded throughout the day. The price moves up and down, just like individual stocks.

Ian Naismith and Tony Welch of Sarasota Capital Strategies say when they look into ETFs, they rarely put more than 10% in any sector, to diversify their holdings. They also look at funds outside the mainstream large, mid- and small-cap indexes.

Welch says a key thing for investors buying ETFs on their own to do is to make sure they have stop orders in place – and that their broker uses them. Otherwise, you won't be able to limit losses.

While Welch and Naismith's opinions can shift based on market happenings, a glimpse of ETFs they recently held include:

• PowerShares WilderHill Clean Energy (Symbol: PBW; recent price: 20.33 a share);

• PowerShares Dynamic Biotech & Genome. (Symbol: PBE; recent price: 16.27);

• SPDR Homebuilders. (Symbol: XHB; recent price: $34.48).