SCOTT REED: Managed futures are viable tools in portfolio

By Scott Reed

I have been writing a financial column for a long time, around 17 years or so. It’s not unusual for people to ask me what I think about other financial columnists. I must admit that I don’t read most of their columns and am acquainted with a very small number of my compatriots in the investment publishing world.
Probably the most questions I receive about other financial columnists are about Dave Ramsey. He is a no-nonsense guy who gives you advice you can understand. He has gained credibility having gone through bankruptcy and achieving wealth that most Americans only dream of. He is well-liked by many and revered by his flock.
I have read Dave’s biography. Although he built a portfolio of real estate in his 20s and was licensed to sell insurance, there is very little that would indicate that his investment expertise was anything other than self-taught. That may be why his reaction to certain investments appears to be rude and a bit uninformed.
On April 10, Dave answered a question in his column from a reader who wanted to know more about a managed futures fund that was recommended by her broker. Instead of attempting to inform the reader, he decided to bash the entire asset class. He said the broker had “jumped off a cliff and became a roulette dealer.” He called her recommendation a “stunt” and a “joke”. He also called the broker “dumb” and indicated that she was untrustworthy.
All of the comments he made were about one of the most intriguing asset classes available. People such as I, who make our living constructing appropriate asset allocation models, have been looking at managed futures with interest for quite some time. The asset class has been around for more than 30 years and there is good, credible research on how managed futures fit into a portfolio of investments.
In the asset allocation world, the Holy Grail is an asset class that will provide decent returns over a long period of time but will get those returns in a different way than other assets in the portfolio. When we plot portfolios on a graph we want to add assets that will take the portfolio up and to the left. On a map of the U.S, we would want to be living in the Pacific Northwest.

Better return, less risk
Adding managed futures to a portfolio will almost always move your portfolio up and to the left. Up means more return and left means less volatility. Less volatility in our world means less risk. So, adding managed futures to a portfolio will almost always result in a portfolio that over the long run will have better returns and less risk. I would like to jump off of that kind of cliff as much as possible. Maybe Dave meant the kind of cliff like the Falls at Pickwick Lake, where people jump off on a sunny summer day into the cool water. Maybe that’s the kind of cliff he meant.
We have used managed futures in our portfolios for a while and so far they have done exactly what we have expected. You may not have that kind of performance, depending on who you use to manage your managed futures. And the fact is that I don’t know anything about the broker that made the recommendation of managed futures that Dave mentions in his column. She could be everything he said about her, but not simply because she recommended managed futures. I would never venture to say that any asset class was appropriate or inappropriate for a certain individual without knowing a lot about the individual.
Investment options are like bullets in a gun. They have no effect at all until put into the hands of someone who can pull the trigger and then their effect has a lot to do with who pulls the trigger. Bullets are neither good nor bad until they are used. Treasury Bonds can be misused so badly that they could trigger a lawsuit, and they are considered by most to be the safest investment in the world. It’s all in how you use them and how you pick them. The same is true for managed futures.
Don’t trust everything you read in the paper. Except, of course, my column.

Scott Reed, CIMA, AIFA, is CEO of Hardy Reed Capital Advisors in Tupelo.

Click video to hear audio