One of the best parts about covering closed-end funds is that I get an opportunity to meet and talk to some of the brightest minds on Wall Street: the fund managers who steward the wealth of their funds’ investors and constantly look to beat the market and find new money making—and income producing—opportunities.
I recently got to talk with a Wall Street veteran who is helping to expand Harvest Volatility Management’s fund offerings: Garrett Paolella, Managing Director at Harvest, which manages over $12 billion across a number of different strategies. I asked him his thoughts on the future of active asset management, changes in the closed-end fund world, and their expectations for the markets.
- Tell me a bit about Harvest. What is the firm’s vision for the future?Harvest is one of the world’s leading derivative asset management firms. From our start in 2008, our co-founders Rick Selvala and Curt Brockelman focused on building an expert team with many decades of experience advising, structuring and managing option related strategies. Our vision is to provide a diverse product offering that seeks superior risk-adjusted returns for the ever evolving needs of our clients. As investors in our own strategies, we focus on making them cost-effective, transparent and easy to access. Following that philosophy, our vision is to continue building strategies that innovate and solve for our client’s needs. As we take it a step further, having the flexibility to increase our suite of 40 Act products goes the extra step to ensure investors both big and small have the ability to incorporate our strategies into their portfolios.
- You have focused mostly on ETFs in the past. Are there any plans to pivot or explore to other fund types, like UCITs, managed accounts, or CEFs? Why/why not?Although our core offering was ETFs, we managed a number of CEFs and SMAs. At Harvest, we look to be a solutions firm, which allows us to provide our clients with unmatched flexibility and access to our strategies and seasoned team of derivative experts. We currently offer a suite of managed accounts, along with mutual funds, CITs, and private funds. As we continue to work with our current and future clients, we’re looking into many other funds types that can match their needs, such as UCITs, CEFs, ETFs, and additional Mutual Funds.
- On CEFs: we’ve seen increasing volatility in some asset classes (MLP funds, commodity funds), and many equity funds underperform. But several CEFs in other asset classes actually outperform their indices–particularly when it comes to high-yield bonds, preferred stocks, and municipal bonds. What are your thoughts on that trend?CEFs can be a great vehicle for investors to gain access to specific strategies and active management that wouldn’t be achievable through other fund structures. However, not all CEFs are created equal, and certainly not all strategies within them are managed equally. When investing in a CEF, it’s important to do your research and understand the strategy, portfolio management team, and fund structure (i.e permanent or term structure) to ensure its achieving your goals.Although “equity” funds have underperformed in aggregate, there are many that stand out. For example, QQQX which is a Nuveen Nasdaq 100 BuyWrite strategy has been trading at a premium to its NAV for all of 2018 and a significant percentage of its history (as high as +13.68% in 6/18). I mention this because there is clearly demand from investors looking to take advantage of volatility in the market as a means of additional income or risk mitigation to their portfolio. At Harvest, we run similar strategies that give clients the ability to customize their levels of yield enhancement or volatility reduction but without the expense and costs of purchasing a fund above its NAV.
Lastly, I think the CEF market has been evolving based on market demands and the transparency that has been brought to light with ETFs. Historically, CEFs came with large underwriting fees and expenses born by the end-client and permanent capital structures that only allowed an investor to exit the investment if there was enough secondary liquidity (usually at a discount to NAV). Now, you’re starting to see a shift to term trusts that give a definitive liquidation event along with lower fees by both the issuers and underwriter, which if continued, should attract investors looking to gain access to specific strategies in a better fund structure.
- One of the hardest challenges for retirees in a low interest-rate world is managing cash flows and avoiding withdrawing during drawdown periods. How can retirees avoid this trap?This is a great question, and I think one that almost every financial advisor is being asked this by their clients. Currently there are 10,000 baby boomers a day maturing into retirement which is expected to last till 2030. Many of them are being forced to take distributions from their accounts with little comfort that they can reinvest the proceeds to reach the cash flows they need in a diversified way. At Harvest, we focus on a number of yield enhancement strategies that offer clients a source of additional tax-efficient income to meet those cash flow demands. We feel that options can be a great source of income for clients that are looking to diversify their equity and fixed income risks, while at the same time offering daily liquidly and transparency. Additionally, options and our strategies specifically seek to have little correlations to both equity and fixed income markets. This allows investors the ability to diversify their income streams and help avoid those drawdown periods.
- Interest rates are rising, but no one knows for how long or at what rates the U.S. economy will buckle. Do you have any thoughts on when long-term Treasury yields will reach their apex, and what may be the catalyst to that event?This is another great question, and one that I think any investor wishes they could answer with confidence. Unfortunately, there are many factors that play into our current rate environment and some that are not easily forecasted. Overall, I believe clients need to focus on their personal goals and financial plans. In order to achieve those goals, typically a well-diversified portfolio should help prepare them for any risk that we could (or couldn’t) see in Treasury yields and buffer against any increase in volatility in the meantime. When talking with our clients, we often explain that as market volatility increases so does the level of premium (income) received by our strategies. So, a great way to help diversify your portfolio and be prepare for unknown shifts in rates or equity markets is to overlay our strategies as a portfolio enhancer.
- In the next 1-2 years, what asset classes, investment strategies, and sectors do you find most and least favorable, and why?Again, I think this is a question best answered by what an individual’s goals and risk profile is. A well-diversified portfolio that exploits the advantages in each asset class should be reviewed and implemented on a case-by-case basis. However, our products and strategies are great way to take advantage of options as an asset class, that can deliver enhancements to a client’s overall goals. Depending what a client’s individuals goals or needs are – income or total return enhancement, volatility or risk reduction options can be a great tool to aid in the asset allocation process.