Page 33 - Investment Advisor July/August 2022
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Liquid Alternatives Manager of the Year

                 Capital Wealth Planning
                 Capital Wealth Enhanced Dividend Income Portfolio



                     iquid Alts covers a lot of territory,
                 L but for Capital Wealth Planning,
                 which won the category in the 2022
                 Envestnet/Investment  Advisor  Asset
                 Manager of the Year award, it was
                 its covered call writing that brought
                 it home.
                   Keep in mind that the equity port-
                 folio is an enhanced dividend income
                 strategy that also has covered calls
                 in its quiver, said portfolio manager
                 Kevin Simpson. “We endeavor to cap-
                 ture 80% to 90% of a rising market,”
                 he said. “We know we’re not going to
                 capture or outperform it more times
                 than not, but if we can capture most of
                 it, that’s the objective.”
                   In 2021, the fund returned 21%. As
                 Envestnet analysts noted in their report   Kevin Simpson
                 that Capital Wealth did “an excellent                               at $235, and the stock continued to go
                 job in delivering strong and consistent   Title: Manager            higher.  Ultimately, CAT peaked out  at
                 performance, balancing total return   Years with firm: 17           $245 before rolling over and trading
                 and income generation, and conducting                               down to $200 again, so we were able to
                 active option overlay.”             Years in financial services: 30   reenter our position.”
                   The covered call strategy isn’t similar                             He said, though, they rarely buy an
                 to many that buy and hold. Simpson said   Investment/Asset Class Focus:   option at the time they buy the stock.
                 they “have a tactical approach to cov-  Liquid Alternatives         “If we’re investing in a stock, we like the
                 ered call writing, which tends to harvest                           prospects that it might go higher,” he
                 volatility so our process will engage in   Asset management firm:    said. “We would tend to exercise some
                 more covered call writing when volatil-  Capital Wealth Planning    patience before layering a covered call
                 ity  is higher  and we’ll  dial  back when   Year firm founded: 2005   over the top of it. Our process is very
                 volatility is lower.”               Number of employees: 25         simple. We look for opportunities every
                   Further, as the analysts pointed out,                             day on all the positions that we own. We
                 Capital Wealth “manages its options   AUM as of March 31, 2022:     tend to look for one month out out-of-
                 positions, including closing out or roll-  $5.5 billion             the-money covered calls. That’s kind of
                 ing forward  before their  expiration,  to                          our spot.”
                 potentially enhance performance. In contrast, many covered   When the premium is attractive and risk-reward is good,
                 call strategies adopt a passive approach in option overlay such   they make the play. “What’s our risk? It is we could forfeit the
                 as ‘write-and-done.’”                              stock. We want to make sure there’s enough premium there to
                   Typically, said Simpson, covered calls are written on 30% to   allow us to capture some upside and [we’re willing] to take that
                 60% of stocks in the portfolio.                    risk,” Simpson explained.
                   To illustrate how effective covered calls can be, Simpson   He noted that 2021 was relatively easy for them as stocks
                 explained that “active management is the thesis behind what   were mainly higher. The hardest part from the option side “was
                 we do and covered calls sometimes make it even better,” he   the absence of volatility … it made it difficult to generate premi-
                 said. One example is a position in which they wrote a covered   um.” This isn’t necessarily the case in 2022, where the market is
                 call on Caterpillar. “We had the covered calls written about   giving it back. And although they have to work harder, a volatile
                 $235, after acquiring the stock at $200. We got called away   market is when their strategy really pans out, he said. — GS



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