Last September, Eddy Elfenbein made a remarkable transformation. He went from being a blogger over at his site Crossing Wall Street to being a real-life portfolio manager.
“I never even thought it was possible. I guess there were more people out there who felt betrayed by traditional Wall Street,” Elfenbein told me earlier this week.
I’ve known Eddy for almost a decade now, and I’ve always respected his long-term investing approach and down-to earth writing style. He’s always been an advocate for the little guy.
But what’s really interesting about his new exchange-traded fund, the AdvisorShares Focused Equity ETF (NYSEARCA:CWS), is how it looks to upend how Americans go about investing altogether.
For one, CWS uses an innovative “fulcrum fee.” So far, it’s the only ETF among several thousands that uses one. A fulcrum fee means that Elfenbein gets a bonus if CWS beats the S&P 500, but if he loses to the market, then the fund’s investors get a savings. “Wall Street really wants my scalp for that one,” Elfenbein laughs. “It breaks the unspoken rule, ‘you win or lose, we always win,’ that’s standard operating procedure on the Street.”
Elfenbein said he was influenced by Nassim Taleb’s concept of having “skin in the game.”
“I feel that people who invest in CWS are my partners, and they should be treated as such. If we do well, then we all do well,” he said.
That’s an idea long overdue.
As the “Focused Equity” name suggests, CWS is kept impressively lean, with a portfolio of just 25 stocks. CWS also has radical approach to trading—it doesn’t do any. The 25 stocks are bought at the start of each year, and they’re held for the next 12 months. Elfenbein explains, “unless there’s a merger, our rule is no trading. Period.”
The fund’s strategy is simple—buy and hold smaller, overlooked companies that have well-defined market niches. For example, CWS owns Heico Corp(NYSE:HEI), a small-cap firm that makes hard-to-find replacement parts for the aircraft industry. Elfenbein says, “HEICO has a great business. The FAA regs say you have to own some very particular part. Well, HEICO can probably make a cheaper version for you.”
Elfenbein has an enviable track record. Since he started blogging at Crossing Wall Street in 2005, his yearly Buy List has gained nearly 170%, well ahead of the S&P 500. The new ETF is designed to track the Buy List step for step. “So many people asked me how they could invest in the Buy List, so we thought, ‘hey, let’s build an ETF around it.’ ”
Elfenbein was one of the first to break onto the scene of stock blogging. Over the years, he’s built an impressive following on his blog and on Twitter (@EddyElfenbein). In fact, in what most certainly must be a Wall Street first, the fund’s sticker symbol (CWS) is based of the name of Elfenbein’s blog, Crossing Wall Street. “I never had to choose a ticker symbol before. Thankfully, the Chicago White Sox hadn’t beaten me to the punch.”
Baseball aside, what makes CWS truly revolutionary is that you can easily follow the portfolio manager’s thoughts on the market. Where hedge funds zealously keep their portfolio moves secret, Elfenbein’s are perfectly transparent. “You’re flying along next to me in the captain’s chair, and you can see exactly what’s going in.”
I have high hopes for Elfenbein’s fund, and expect to see more like it in the near future. My reasoning is simple. Since the financial crisis roiled the global economy, there’s been an erosion of investor confidence in Wall Street as an institution. The public is suspicious of both big banks and big government.
As a result, investors are taking back control. They’re demanding transparency. They’re demanding “skin in the game.” They’re demanding accountability. Funds like CWS fit the bill.
I asked Elfenbein if he has any reservations about going from a lowly blogger to an actual Wall Street portfolio manager. “Not really, but my dad told me that it’s a good thing I never blogged about MMA.”
To read more about the fund, visit the Advisor Shares website here.
To read more about Eddy, check out his web site Crossing Wall Street, or harass him on Twitter @EddyElfenbein. Unlike some of us who think social media is a cesspool, he is more than willing to take abuse from complete strangers on the platform and spends way too much of his free time on there.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.