Love him or hate him, it is hard to argue that Mitt Romney has been an incredible investor over the years. So for investors who are able to put aside politics, taking a closer look at some of Mitt's investment philosophies could be a great idea.
This article was originally published by Zacks.com.
Love him or hate him, it is hard to argue that Mitt Romney has been an incredible investor over the years. With the $1 billion that was raised in the heart of Romney’s reign (in five funds from 1984 to 1995), Bain Capital realized gains of roughly $4.17 billion, an impressive track record for the high-risk, high-reward private equity space.
In fact, according to a piece in the Wall Street Journal, Bain’s first five private equity funds have returned a whopping 88% per year from 1984 to 1999. This performance even crushed Buffett’s Berkshire Hathaway in the same time frame, as the Oracle’s stock “only” added about 30% per year on average during that period.
While a contrast between the behemoth of Berkshire and the relatively nimble Bain funds may not be the best way to compare the two performers, it does show that at least during this relatively long time period, Romney was able to guide his firm to a performance that thoroughly crushed who many people consider to be the greatest investor of all-time.
So for investors who are able to put aside politics, taking a closer look at some of Mitt’s investment philosophies could be a great idea.
Unfortunately, many of these strategies aren’t exactly accessible by the average investor. Some require large investing minimums, while most require capital lock-up periods or have high fees that are likely to put off many who are not in the multi-millionaire category.
Thanks to this, an ETF approach could be an interesting way to tap into some of Romney’s strategies but in a cheaper, and more average investor-friendly way. After all, ETFs do not possess minimum investment levels, are easy to trade throughout the day without lockup issues, and fees for ETFs often put mutual funds, and especially private equity pools, to shame.
With this in mind, we have highlighted below three funds to invest like Mitt Romney. While these three ETFs will probably not put up the returns that investors saw with Bain, they arguably allow investors to tap into similar strategies in a low cost, and well diversified way that is easily accessible to the average investor looking to invest like Mitt Romney:
PowerShares Listed Private Equity ETF (PSP)
Many of Bain’s (and Romney’s) investments during the mid ’80s and ’90s centered around ‘private equity’. These investments generally consisted of buying large stakes in private companies or buying out public firms and taking them private. Much of Romney’s returns stemmed from solid picks via this route, suggesting it can be a source of incredible gains for many companies.
For ETF investors, PSP can be a way to play the sector via publicly traded companies in the space. These firms use capital to invest in private firms or take public ones private, but they also trade on major exchanges, allowing investors to gain exposure to their techniques quite easily.
This is done by following the Red Rocks Global Listed Private Equity Index, which is a global benchmark of private equity firms that are publically traded. The index consists of between 40 and 75 firms, and the fund is rebalanced and reconstituted on a quarterly basis.
In terms of national exposure, the U.S. takes the top spot with about 40% of assets. However, from a regional perspective, Europe makes up half the portfolio, including top five weightings to the U.K., Sweden, France and Switzerland.
While many of the names on the top holdings list are unknowns, there are a couple firms that U.S. investors may be familiar with. These include a 3.8% allocation to Leucadia National (LUK - Analyst Report), and similar holdings in Blackstone (BX - Snapshot Report), and KKR & Co (KKR - Snapshot Report).
Unfortunately, the fund is somewhat expensive, at least when compared to other ETFs. Net expenses come in at 2.55% thanks to 1.85% in acquired fund fees; however, this isn’t much compared to Bain, as the company’s new products look to have fees around 1% but also 30% of investment profits (other options include 1.5% fees and 20% in investment profits), a level that could greatly cut into total returns.
iShares MSCI EAFE Index Fund ETF (EFA)
According to a PDF from Opensecrets.org, Romney’s blind trust has at least one million dollars, but not more than five million dollars, in iShares’ EFA. While this is by no means a large position in Romney’s portfolio, it is one of the few ETFs that are disclosed in the investment document, suggesting that it is one of the only “pure plays” that you can make via exchange-traded funds on Romney’s investments.
The holding is also a nice compliment to what is probably a very U.S.-centric portfolio, giving Romney’s trust broad exposure to a number of nations outside of America. However, it should also be noted that the trust has a sizable allocation to SPY as well, suggesting that Romney has at least a small handful of ETFs in the Trust’s portfolio.
For investors seeking to make a play on EFA too, it should be noted that the product tracks the MSCI EAFE Index. This gives broad exposure to developed markets around the world outside of the U.S. and Canada, but specifically in Europe, Australiasia and the Far East.
This produces an impressive fund that has just over 900 stocks in its portfolio, and one that does not put more than 2% in any one stock. This spread out nature is also reflected in the fund’s sector makeup, as the product has six sectors that make up at least 9% of assets.
From a country perspective, Japan takes the top spot at 20% of assets, just edging out the U.K. However, much like in PSP, this fund tilts towards Europe overall, as close to two-thirds of the basket goes to the European continent.
Fees are much lower in this product — allowing investors like Romney’s trust to keep more on a yearly basis — coming in at just 34 basis points a year. Meanwhile, volume is quite robust as is total AUM for the fund, suggesting very tight bid ask spreads and low total costs for the fund as well.
UBS E-TRACS Wells Fargo Business Development Company ETN (BDCS)
For another play on the private equity side of the Romney investing style, investors have BDCS. This product targets Business Development Companies, which, much like private equity, invest in illiquid or non-public firms.
However, BDCs are usually taxed as regulated investment companies, which means that they generally qualify for a pass-through tax structure, so long as they pay out at least 90% of their taxable income as dividends. Thanks to this difference, BDCs are often among the highest yielders in the investment world. Furthermore, they are usually more “open” products than their private equity or venture capital cousins, meaning that everyday investors can easily buy these firms on the open market.
Investors should also note that BDCs are structured as an exchange-traded note, which means that it has the credit risk of UBS but does not suffer from tracking error or complicated tax treatments either. Instead, you should think of BDCs as a debt security that promises to pay out a return that is equal to the underlying index, the Wells Fargo Business Development Company Index.
This benchmark consists of about 25 companies in total, all of which have a focus on the U.S. market. The note also focuses in on pint-sized companies although it is somewhat concentrated as the top three holdings — American Capital (ACAS - Analyst Report), Ares Capital (ARCC - Snapshot Report), and Solar Senior Capital (SUNS - Snapshot Report) — combine to make up about 30% of the total assets.
Expenses are in the middle as the cost comes in at about 85 basis points a year while volume is pretty light, suggesting modest bid ask spreads. However, the product does have a truly impressive yield of about 7.2%, which should help mitigate the cost issues.
This should also allow investors to earn a substantial sum at favorable tax rates, something that has also helped propel Bain’s team — and especially Romney — into investing lore, making this fund, along with EFA and PSP, solid picks for those who are looking to invest like Mitt Romney in the near future.
Eric Dutram is the ETF Strategist for Zacks Investment Research.