May 12, 2008 - GreenLightAdvisor.com recently interviewed [Part 2] Derek Webb, Portfolio Manager, Webb Asset Management. Here are some excerpts from Part II, in which Mr. Webb shares his strategy for earning superior investment income in volatile and range bound markets while minimizing downside risk. Here are some excerpts:On the investment income dilemmaâŚ
When you look at Canadians, they love their income; but where is the income coming from? Most funds are getting around this now by paying you back your own capital, so there it is. They offer 6-8%; the reality is nothing out there yields more than 5% and it costs 2% to run a fund plus an advisor gets 1%. The math just doesnât add up. On top of that we have inflation. You donât want that in a fund â where people are just paying you back your own money. To me itâs like investing in a utility where they have to sell a power plant each year to pay you your distribution. You would never invest in that company because long term the price of the stock is coming down.
How do we get around this? How do we do it? We spent a lot of time looking at this and the solution that we came up with is the following: Objective:
- Produce some decent high yields â we divided our strategy into 4 silos or buckets.
- Structure it so that it is tax efficient
Portfolio Strategy - For the full explanation, please read the complete interview:
Bucket #1 â Income Trusts
Income trusts have gotten a bad rap, but they are not bad especially ifâŚ
Bucket #2 â Earnings Driven Stock Buy Writes
We are buying the earnings driven stocks that we own in our hedge fund. How do we get income out of these stocks?
Bucket #3 â Value Stock Buy Writes
Bucket #3 is comprised of stocks that are not earnings related, but rather are washed out names, like banks. Letâs say banks trade sideways for the next 3 yearsâŚ
Bucket #4 â Writing put options against short positions
Legally in Canada, we are allowed to be 20% short in a mutual fund and we are always 20% short because we have a very good short model. Itâs very predictive, meaning simply,âŚ
DW: Itâs definitely lower than owning the stocks outright, and lower than a dividend fund.
Its lower risk than if you own a bank stock straight out vs. writing the call options on the same bank stock. Letâs say you own the bank at 100 and you write calls at 105âŚ
GLA: Would you consider this suitable for a retired investor?
DW:Â Yes, certainly. Personally I think this is great for anybody, universally. Itâs great for somebody who wants to grow capital, and it is great for somebody who wants a tax preferred income in retirement.
Download: Part II: Derek Webb Interview PDF File, May 2008, GreenLightAdvisor.com.
Visit Webb Asset Management for more information.
