The Long Road: No Mirage In Phoenix

June 20, 2008

The weather's not the only part of this growing community that's hot right now. So is the local interest in ETFs and index investing.


When hotbeds of activity for exchange-traded funds are considered, the Valley of the Sun probably doesn't pop up on too many 'Top 10' lists.

But that's an oversight. The hyper-growth of ETFs is finding a lot of support among financial advisors in the fast-growing economy of Phoenix, Ariz.

A good example is David Fernandez. Five years ago, he left fund giant Vanguard to start his own firm, Wealth Engineering, in Scottsdale, Ariz.

A native of the Phoenix area, Fernandez focuses on high net worth individuals on a fee-only, no-commission basis. "We work with a few low-cost active funds, mainly from Vanguard," he says. "But we're 95% passively based in our portfolio construction."

Early in 2007, Fernandez started dropping his clients' long-term stock allocations by anywhere from 10%-20%. "We're overweighting fixed income at this point," he says. "And that's just not in the U.S. We're using a truly global strategy in both our equity and bond portfolios."

He doesn't like to churn holdings, though. Fernandez believes in tactical allocations but only in small doses and when major shifts in valuations among broad asset classes show up. In fact, last year's call was the first major shift between stock and bond allocations for his firm.

"The credit bubble is still unwinding. It's going to take a while to get all of the excess credit out of the system. We might see some minor rebounds, but this is going to be a slow, drawn-out process that might take another two to three years," Fernandez says.

He's preparing to add the Vanguard High-Yield Bond Index Fund (VWEHX) to his client portfolios. "Yields have become very attractive lately. So you're starting to get compensated better now for taking on more risk," Fernandez says.

Disciplined Rebalancing Is Key

Another Phoenix investment shop devoted to modern portfolio theory and using ETFs is Perspective Financial Services.

Every quarter, the firm's advisors meet with an investment committee that provides guidance and ideas for portfolio construction. Besides ETFs, they'll use both passively and actively managed mutual funds, with an emphasis on low-cost options in the latter category.

At the end of last year, such an approach of using a centralized investment committee helped steer Perspective's clients away from a huge Schwab ultra short-term bond fund that wound up tanking as a result of the mortgage meltdown.

Now, advisors at the firm such as Patrick Eng say they're still calming clients who are jittery about market conditions. "I'm trying to help my clients look at this current market environment as a buying opportunity rather than a dooms-day scenario," Eng says.

A big problem is that many investors confuse trading with investing, he points out. "The two aren't the same, and we keep in touch with our clients a lot about educating themselves on the differences between the two," Eng says. "We're trying to help people understand that although we've seen positive returns in stocks since 2003, it's natural to also see corrections."

When he makes changes, it's typically a result of a very systematic approach, he adds. "When we make a change, it's part of a very disciplined rebalancing strategy," Eng says.

Lately, that has been translating into putting new money into real estate investment trusts, small-caps and international stocks. Some of Eng's favorites in those asset classes are iShares Cohen & Steers Realty Majors (NYSE Arca: ICF) and iShares Russell 2000 Index (NYSE Arca: IWM).

For overseas stock exposure, Eng likes to use mutual funds by Dimensional Fund Advisors. Those include DFA International Value (DFIVX) and DFA International Small Cap Value (DISVX).

Taking A Macro View Of Markets

A name familiar to many IndexUniverse readers is longtime Arizona resident Roger Nusbaum. He's well-known nationally and one of those whiz-kid types who started following stocks at age 11. As an adult, he'd come home after work and read financial books until falling asleep.

That was before personal computers became cheap and easy to use. "Computers have just made doing research that much easier," the 42-year-old Nusbaum says.

After college, he went to work for Lehman Brothers as a broker. "But I was a pretty rotten salesman," Nusbaum says.

So he went to Schwab and worked as an institutional trader through most of the 1990s. In 2003, he decided to follow his dream of managing separate accounts by opening his own business. Within a year, he was being quoted by leading national investing publications such as Barron's. That led to an offer from Your Source Financial in Phoenix to head up its portfolio management operations.

As a result, Nusbaum builds and manages portfolios for the firm's private clients, who are serviced directly by financial advisors. "It's an ideal situation for our clients because my only responsibility is research and design of portfolios," he says. "That's the only hat I wear."

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