Kate Stalter's  Instablog

Advisor Jesse Anderson explains his firm's strategy for identifying ETFs with efficient options markets, thereby capitalizing on inherent volatility. He discusses one of the firm's core ETF positions, and a sector ETF he likes right now.

Kate Stalter: Today, I'm on the phone with Jesse Anderson. He's the chief investment officer at Snider Advisors.

Jesse, I had heard some interesting, intriguing things about the Snider method, and I wanted to get in touch with you and hear a little bit more about that. Can you begin today by just setting the stage for us, and telling us what the Snider method is and what the history of that is?

Jesse Anderson: Sure, thanks Kate. The Snider method is a long-term investment strategy, and we use both stocks and a big piece of it is covered calls as well, kind of using cash management in order to generate income. And that's probably one of the things that sets the Snider method apart from a lot of other, let's say, stock market strategies, is our focus on cash flow and income generation.

We started out looking at ways to use your portfolio to replace income, specifically when you look at retirees, because we're all aware of the wave of baby boomers that are about to retire. And in the past they had pensions to go out and support their lifestyle once they retired, but these days that's kind of nonexistent. So they're having to rely on their 401(k)s, and that's where we have generated an investment strategy to really focus on that, and turn their 401(k)s and their portfolios into a monthly paycheck.

• Also read: http://www.moneyshow.com/video/VideoNetwork/100/8073/Earn-Safe-Steady-Income-from-Options/

Kate Stalter: And you use separately managed accounts?

Jesse Anderson: Yeah, when we manage accounts, we actually look at each account and allocate it specific to that account's perimeters, based off the size. So each account is individually handled. We won't look at two accounts and they'll be exactly alike.

That's really due to the kind of options that are involved in our strategy when we go out and trade an account for the first time. And then ongoing, we look at the market, and what's out there, and the volatility and the stocks or the positions that we're going to use. And that constantly changes throughout the day, and ongoing.

So really, you could look at all the accounts we manage, and it's very unlikely that any two are exactly alike.

Kate Stalter: So is there regular trading in these accounts, or is it a longer-term hold strategy, or maybe some kind of mix of both?

Jesse Anderson: I'd say it's a good mix of both. Any time we take a position we're really expecting to, or are confident in, taking kind of a long-term position in it.

But what does happen is-and we do, let's say, trade or rebalance these accounts on a monthly basis-because the use of our covered calls, we always use the front month. So they expire only 30 days out, and we really look to take advantage of the time decay; that is the highest in that time period.

So each month we go in, and we look at the positions out there. And we either kind of continue with the positions that we currently own, or go out and buy into some new or additional positions.

But it really is kind of a monthly trading process, but there are times where we'll hold a position over many years; other ones might just last, you know, one month. It really depends on how the position goes, but we're always, we look at it as it's a long term commitment.

Kate Stalter: When you're talking about rebalancing on some kind of monthly basis, that does sound like there is a technical or chart component to that. Would that be the case?

Jesse Anderson: No, I wouldn't say there's any technical-another factor that we really use is dollar-cost averaging. So we won't go out and commit all of our money into a position right away. We can look, see how the position works over the course of the month or long term and if we can add money to the position over the course of multiple months.

A big part of our accounts are in cash, and that's cash that is allocated to the positions open in the account. And we'll put it to work if necessary. But if we're able to generate that income with less equity involved, we'll do that. But we'll add to the position.

Definitely no technical factors-more dollar-cost averaging in new positions.

• Also read: http://www.moneyshow.com/trading/article/40/OptionsIdea-27611/2-Iron-Condors-But-One-Is-Safer/

Kate Stalter: Let's shift gears. We had been communicating by e-mail about some of your ETF strategy as that applies to your methodology. Tell us about that, Jesse.

Jesse Anderson: Yeah, it's something we just introduced. We're all very pleased with the strategy.

What we found is: People had a little bit of higher concern holding individual stocks. And with the evolution and the introduction of ETFs, what we are able to do these days is basically work our same kind of Snider Investment Method strategy on ETFs.

One of the big things we do is: Have one position, typically kind of a broader market index. One of the ones we're using these days is the Russell 2000 Index ETF (IWM), but we go out and use that as kind of a larger position. We place those same kind of covered calls on that position, and then beyond that we have some smaller ETFs, but they're a little more volatile.

And you know, in our case, in covered call terminology, when you have volatile, that means more income for us. And so we go in and again, use the same strategy to some of these smaller positions. But typically, we hold one big position in more of a broad market index. They will generate a piece of our income, and kind of manage the bulk of our exposure to the market.

Kate Stalter: I want to follow up on that. It's interesting that you're using the Russell 2000 ETF as a core. Because what I hear a lot is, advisors being conservative, staying in maybe ETFs that are indexed to some of the larger caps. Talk a little bit about that-why you're using the IWM. That's intriguing.

Jesse Anderson: Ultimately it comes down to that ability to generate income, and we do need some volatility in there. Right now, I'd say that we're able to get that in the IWM position.

I don't think we're ultimately tied to that for the long run. I think we see different indexes have different amounts of volatility, even over course of the last couple of years, when we look at it.

But for us, it's really just kind of gaining exposure to the broad market. And with that index, we quickly have access or exposure to nearly 2,000 companies. That's plenty of diversification, and we're happy with that level of exposure.

Kate Stalter: How about any sector ETFs? Is that an area that you're using?

Jesse Anderson: Outside of the broad market, we do use what we call satellite positions. They tend to represent asset classes or different regions.

These days, one of our satellite positions is the SPDR S&P Oil & Gas Exploration & Production ETF(XOP). And again, it comes in there, and not something you'd want to have a significant portion of your portfolio exposed to, but you definitely have a portion of it exposed to that.

And for us, we can allocate it, a piece of our portfolio, and then earn pretty good option premiums off of that because of the volatility that's involved. But again, ultimately, for the long run we're willing to kind of hold that position, and be in it for a long period of time.

Kate Stalter: How do you determine which sectors or regions or market caps that would be some of the satellite positions?

Jesse Anderson: The biggest thing is that volatility, and the amount that these ETFs are paying. And when we look at paying, we look at the covered call premium we're able to earn.

We also look at the one strike out of the money when we're looking to buy into a position. It's about where that premium is, because with our focus on income, our focus on generating that income cash flow month after month, volatility and the amount that that is paying is pretty critical for us.

So we'll, we have our list of ETFs-there's thousands of them out there these days, but we can kind of narrow it down and make sure that we've got ones with good, liquid option markets. That's something that has just evolved, that allowed us to introduce this portfolio.

But once we have our list of ETFs, ones with good efficient option markets, then it's just about looking at it and saying, "OK, where can we earn some premium?" And going in and allocating from that point.

Kate Stalter: To kind of sum this up: It's not about just going into an ETF. Really, the option market for a given ETF-that sounds like that's central to your decision to take a position.

Jesse Anderson: It's definitely essential. We have a bunch of different ETF providers out there, but for us it really comes down to which ETFs have options on them. Because you know that's a critical, crucial part to our strategy.

Then, which ones are liquid. You could consider the same ETF by one of the bigger three providers, and only one will have a good option market. So that's a pretty critical piece for us to go in and allocate to these positions.

• Also read: http://www.moneyshow.com/trading/article/40/OptionsIdea-27452/One-Is-Best:-Naked-Puts-or-Covered-Calls/

Energy master limited partnerships have become popular for their high dividend yields. But, says fund manager Quinn Kiley, investing in them as standalone vehicles can create complicated tax situations. He explains how his fund delivers yield, but avoids some of the burdensome tax issues.

Kate Stalter: Today our guest on the Daily Guru is Quinn Kiley, co-manager of the Famco MLP and Energy Income Fund (INFIX).

Quinn, as I understand it, your main focus is on pipelines and delivery, rather than exploration and production. So can you tell us a little bit about the fund's objective and your investing methodology?

Quinn Kiley: Sure. As you said, we're focused on energy infrastructure, primarily through what are called master limited partnerships, which is a niche of the energy world. They're publicly traded partnerships, and they're a great investment vehicle.

However, there are some tax complications associated with MLPs. This fund that we've launched a couple years ago is focused on more returns through the MLP asset class, but do it without the tax complications.

We're trying to get a relatively high-yield growth component in the returns, a low correlation to other asset classes-it's a great diversifier-and trying to do it with lower volatility. All through a publicly traded fund that provides a 1099 and solves some of the tax complexities of owning MLPs directly.

Kate Stalter: As you mentioned, this is a fairly new fund, formed back in 2010. What was the reason to form a new fund in the energy space at that time?

Quinn Kiley: Like I said, there are some complications with owning MLPs directly.

And although we have a large business focused on that strategy, we've noticed that there's a whole series of new exchange traded products and new funds that have come out, trying to address the tax complexity of MLPs. Because there's great investor demand to own them, but there are some hurdles to owning them. And in our view, a lot of these funds were flawed in structure.

So we wanted to develop a product that gave people the investor experience of owning the characteristics and attributes of MLPs, would replicate MLP performance over a cycle, but do it in an efficient manner. And this fund does it in a tax-efficient manner, unlike the other open-ended funds that are 100% MLPs.

And we're also trying to broaden the opportunity set here. We're investing across MLPs, similar energy infrastructure companies, and we're doing that across their capital structure. So not just equity; we're also looking to buy some of the bonds, which provide some of that lower volatility that I mentioned earlier.

Kate Stalter: Before we began recording today, we were chatting briefly, and you had mentioned that this particular fund really is something that could be appropriate for a wide range of retail investors?

Quinn Kiley: It's generally available on many of the broker-dealer systems that many retail investors have their accounts on, so it's easily accessible. It's a very affordable share price. You can buy as little as one share and there are no tax complexities associated with it, like there would be if you owned MLPs directly.

And those complexities, I keep generalizing them, but they're getting a K-1 instead of a 1099, having the obligation of potentially filing your tax returns in multiple states. And those complexities don't come along with this fund.

Additionally, a lot of investors do a majority their investing through retirement accounts, with tax-exempt accounts. This fund is appropriate for those types of accounts as well.

Kate Stalter: I wanted to talk a little bit about some of the holdings in this fund. Maybe just name two or three, and tell us why you like these?

Quinn Kiley: Sure. One name that we found interesting that we've owned for the majority of the life of the fund is Williams Companies (WMB).

And when we bought it early on in the fund, the theme was several fold: One, they're exposed across the energy value chain to the growth that's going on domestically in energy, as we're developing these shale reserves for both oil and gas around the country.

And Williams had exposure on the oil and gas side, the producing side, as well as, and primarily, on the infrastructure side-the pipelines that carry these products around the country.

And our view was that they were going to realize great growth and great value through those business lines. But also, they were the general partner in an underlying master limited partnership. We thought that the value there was not properly recognized by the market, and that there was an opportunity for a separation or reorganization of this business through separating the E&P business, and also a realization of the value of the general partner.

That came to fruition last year when Williams spun off its E&P business to its shareholders. And since then, we've had just great performance and a realization of value there. So that's one example of a theme that we've been exposed to throughout.

Actually, I should say it's two examples of themes that we're exposed to. We really like the idea of the restructuring theme, where there's huge growth and a need for capital in the energy space. You need to realize that capital in the most efficient form, and that can lead to restructuring.

And then secondly, the growth story that underlies all this is the development of shale domestically in this country. It's really a game changer for the energy spectrum across the board, and specifically to oil and gas companies.

Kate Stalter: I'm looking at a chart of this as you're speaking, Quinn. In addition to the dividend yield, you've got some nice price appreciation on this one in the past several months. Are you looking for these total return plays?

Quinn Kiley: I think that's fair. There are really two components to it. We think that yield is a significant portion of the return expectation inside the portfolio. We think it's an important expectation of the investors in the fund, so we want our own securities that generate that yield.

In the energy infrastructure world, you tend to have very stable cash flows. And that's because these are essential assets that are required for energy to be delivered around the country, which I like to think about as job one in the economy. If MLPs and energy infrastructure companies don't do that job, nothing else works. And that means that they have stable, visible cash flows.

The stable, visible cash flows can then be paid out of the stable dividend, and because they're associated with growth, and the growth of energy domestically, there's going to be a growth component as well. So that combination is a good total return story, but it's really anchored by the yield and the income produced by the assets.

Kate Stalter: Do you have maybe another name, or even two, that you can mention to us today?

Quinn Kiley: Sure, there a large MLP that is widely held, Enterprise Products Partners (EPD). It's a decent position in the fund, and it is exposed to natural gas and natural gas liquids, as well as crude oil and refined products all across the country.

It's the largest MLP by market cap and the most liquid by market cap, ad by daily liquidity, as well. And it's a great way for people to have exposure to MLPs in a single holding.

Now again, the tax complexities aside, it's a great single name to own. And it gives you exposure to all the good things that are happening domestically in the US right now, with significantly less commodity price exposure than you would if you were to buy an Exxon Mobil (XOM) or something like that.

And also it is entirely focused domestically, which we think is great, because there's a lot of geopolitical uncertainty. There are some issues going around in Europe, or whether it be the Middle East, that might lead to uncertainty in operations, as well as prices of commodities. So if you can curtail that risk exposure to the US, I think it's a good place to be.

Another name that we really like is Energy Transfer Equity (ETE). That name has been in the news recently because of two large M&A deals that they've done in the past year.

One, they have announced and then closed, which was the acquisition of Southern Union Gas, which was an MLP buying a corporation. We hadn't really seen deals like that in the past. And then just recently, they announced that they were going to acquire Sunoco (SUN), the large refiner and oil and refined-product pipeline company.

So you're starting to see these MLPs, which historically were a small niche area of the energy world, step up and grow. And because of that growth and because of the quality of their long-term growth plan, they are able to access the capital needed to do larger acquisitions.

So Energy Transfer is a great example of a mid-cap growing to a large cap, and Enterprise Products Partners, a great example of a large-cap MLP that is executing across the country.

Kate Stalter: Last question for you today, based on something you just said: Do you anticipate that the MLP area will be ripe for further M&A activity in the next few years?

Quinn Kiley: I do. I wouldn't go so far as to call for MLPs to continue to acquire large energy companies. It might happen on a one-off basis.

What I think you're going to see is that MLPs are going to continue to build and buy energy infrastructure across the country, and that's going to be a significant growth platform.

Historically, it's always been focused on buying assets-less so than companies. Today, you're starting to see them step out and buy more companies, so I think the larger MLPs have access to capital that will allow them to do big acquisitions.

But all MLPs have access to enough capital to do smaller acquisitions, and this has been to build out on top of their geographic footprint, so that's really the growth. Whether it's new asset by acquisition or new asset by building, that's the growth story of the MLPs.

Related Reading:

http://www.moneyshow.com/investing/article/44/DailyGuru-27817/Get-into-MLPs-Through-an-ETF/

http://www.moneyshow.com/investing/article/43/VideoTrans-27799/Good-Payoff-for-Disciplined-MLP-Investors/

http://www.moneyshow.com/investing/article/1/regBook-27661/Why-I-Like-MLPs/

The Aston/Herndon Large Cap Value Fund (AHRNX) focuses on Russell 1000 stocks trading at a discount relative to their fundamentals. Manager Randy Cain tells MoneyShow about his methodology, and why he believes the fund makes sense for investors seeking dynamic large-cap exposure.

Kate Stalter: Today's guest is Randy Cain, manager of the Aston/Herndon Large Cap Value Fund. Randy, can you begin today by describing for us what the fund's investment philosophy and objectives are?

Randy Cain: Absolutely. This fund is a large-cap value strategy, utilizing the Russell 1000 as the investment universe. Our focus is on making sure the portfolio is populated with what we call "value-creating opportunities."

Each one of those words is very instructive on what we are actually trying to accomplish for our clients. The first word, "value," means that we are looking for stocks to have a minimum of 30% or more upside, according to our own proprietary way of looking at valuation.

• Also read: http://www.moneyshow.com/investing/article/1/tptp022312-26685/4-Stocks-that-Fit-a-Value-Mantra/

The second aspect, in terms of "creating," is that we are not looking for companies on a basis of break-up value. We basically focus on companies that have operating ongoing concerns, are already functioning in a fashion that we would deem to be acceptable, but that the market is not recognizing how productive the companies actually are.

Then the last word, "opportunities," really helps to highlight the fact the three things we cannot control or do, and that is predict or manage the timing, duration, or magnitude of our performance. All that we can do is position ourselves to achieve it, recognizing that in the short term, the market is going to go up and down, based off of its reaction to short-term information, but longer term our expectation is the fundamentals juxtaposed against evaluation should win out.

Kate Stalter: Before we began recording today, I mentioned that I have spoken previously with a couple of the managers over at Aston. Can you talk a little bit about the sub-advisory model, and how your funds fit into that?

Randy Cain: Herndon Capital Management is an institutional money management firm that really does not have the marketing and distribution infrastructure in place to support a more retail-oriented type of relationship.

So when we had the opportunity to partner with Aston, it really fit perfectly with the model that we have in place, which is that we focus on producing institutional investment products, but we will partner and allow our product to be distributed in channels in a wide variety of ways.

So Aston, through a nationwide coverage of wholesalers, gives the opportunity to reach out to the retail marketplace in the fashion that we could not do on our own, and so it really is somewhat of a perfect marriage between what Aston already has from a marketing infrastructure, and what we are doing from an investment product management standpoint.

Kate Stalter: Let me turn to the investment in the funds then itself, Randy. How do you balance dividends and price appreciation when it comes to the total return that you're seeking?

Randy Cain: When you look at our fund, one of the things that you will see right now is that characteristic, that we have a dividend yield that is in excess of that of the Russell 1000 value.

But dividend as a focus is not really a concentrated effort, or main part of our portfolio approach. Instead, it tends to be more of a part of the process. So the actual yield, payout ratios, and what have you, are not something that we are really that focused upon.

Instead, capital appreciation first is our main mantra. But we do consider dividends, but it's not something that would keep a stock from being a part of the portfolio, if a dividend was absent.

Kate Stalter: I was also looking at some of the holdings on Morningstar, where they had some of your top holdings listed as of the last quarter. One I noticed was the airline Copa (CPA), which falls more in the mid-cap range. And that got me curious about your asset allocation when it comes to market cap, given that it is a large-cap value fund.

• Also read: http://www.moneyshow.com/trading/article/32/DAYTRADERS-24607/5-Undervalued-Airline-Stocks/

Randy Cain: Absolutely. Well that is something that actually raises the interest level of many potential investors and their strategy at the institutional level, as well as the individual level.

We utilize the Russell 1000 as our investment universe, and that goes from companies of the mega-cap group, which you would also see in the portfolio-such as ExxonMobil (XOM), Apple (AAPL), and Microsoft (MSFT) and IBM (IBM)-all the way down to companies with market capitalizations in the $1 billion or so range.

We utilize that whole universe as we consider opportunities, not segmenting the amount on the basis of whether we think they are large caps or mid cap. If there wasn't a Russell 1000, these are companies that we would actually consider. Copa actually fits in that focus, because it is within the Russell 1000.

But also, although the bulk of the operations are in Latin America, it still is not an ADR-considered company; it is a Russell 1000 company. So unlike many of the airlines that have challenges as far as capacity and growth, they happen to be a growing market.

In our opinion, the fundamentals are far superior to what the current price reflects in terms of valuation, and so for us, it meant a value-creating opportunity. After doing the fundamental analysis on it, it made its way into the portfolio.

Kate Stalter: You just went through, in quickly listing there while you were talking about Copa, some of the other holdings. And you did indicate that these are based on the Russell 1000 index. Given that, how often do you make new buy or sell decisions? How often do you trade in and out of the fund?

Randy Cain: Well, I think that what is much more relevant in looking at that, and not to be evasive of your question, but the activity that actually takes place is a result of managing the portfolio. And it's actively managed, and we actually revisit the portfolio on a weekly basis.

The visiting of the portfolio on a weekly basis may or may not result in an actual trade taking place. But the process of looking at it to see if we need to add, say, to a particular sector, take something away, if a particular holding has gotten to a size where it needs to be trimmed, or got to a valuation level where it may not need to be a part of the portfolio any longer-all of those things are considered.

The turnover since inception has been about 65% within the portfolio. So on average, you are looking at us holding stocks about a year and a half or so.

Kate Stalter: Let me just wrap up today by asking you: Where do you believe that this fund fits in with an investor's overall portfolio, given that they might be looking at growth, fixed income, managed futures-all of these various other asset classes...how would this fund fit?

Randy Cain: Well, our approach, as it is categorized by many, is considered to be relative value. With that said, that means that we are going to be looking at companies across a whole spectrum of opportunities, regardless of market capitalization, sector, or industry, as long as it's within the Russell 1000.

So I think that we tend to be a bit more broad-minded in how we categorize value. But it is very much a value approach, in that we're purchasing companies at a discount to what their fundamentals should actually bear.

So, in my opinion, for investors who are looking for large-cap exposure, that is going to be flexible and dynamic and take advantage of the opportunities as they change in the market, I think that our fund actually is one that they should look at, because I think it could be attractive and value-added.

• Also read: http://www.moneyshow.com/investing/article/44/DailyGuru-27018/How-New-Funds-Reach-the-Marketplace/