Editor’s Note: In a Family Wealth Report Q&A, Maury Fertig, chief investment officer at Relative Value Partners, discusses his firm’s investment philosophy and performance since inception.

Q: What services does Relative Value Partners offer? What is the strategy behind it?    

A: Relative Value Partners is a registered investment advisor specializing in managing portfolios using ETFs and closed-end funds. The firm began operations in 2004 and currently manages $700 million in assets. 

We offer five principal strategies: Absolute Return, Balanced, Global, Equity and Fixed Income. Our investment discipline is focused around mean reversion; we seek asset classes and their related funds that appear to be mispriced because of reasons such as investor sentiment, seasonal trends or headline risk.

This investment philosophy has been able to add significant alpha to our portfolios by taking advantage of the inefficiencies found in the closed-end fund market.

Q: How do you fit in the marketplace; who are your clients?     

A: We manage assets for high net worth individuals, small institutions and wealth managers. The typical individual client minimum relationship is $1 million and our average client has nearly $3 million with Relative Value Partners.

Many of our clients seek a more personal relationship than is typical of a traditional broker-dealer or advisor. Additionally, many of our clients care deeply about long-term performance, and they are open to unique investment ideas and enjoy interacting directly with the investment managers.  

A significant portion of our clients come from the financial industry.

Q: Can you summarize, briefly, your philosophy about investing?   

A: As mentioned above, we believe in longer term mean reversion of assets.

For example, if Senior Loans and their associated funds are trading very cheap when compared to its historical relationship to high yield or investment grade credit, this will draw our interest.

When purchasing closed-end funds, we essentially take advantage of retail investor sentiment. Retail closed-end fund investors tend to oversell in times of market stress, regardless of valuation, which can create ideal investment opportunities by creating discounts to net asset value.

A similar methodology is applied to the equity sectors, and we tend to overweight sectors when they are out of favor. We recently added MLPs based on the attractive valuation.

Q: Do you have any results to back up your strategy?

Absolutely. Unlike most RIAs, we have a GIPS-compliant verified performance record. When compared to Lipper Mutual Fund peer groups, four of our strategies rank within the top 7 per cent versus the peer group since inception (net of all fees and expenses). Our fixed income strategy ranks in the top 13 per cent.

Our investment performance is also made publicly available on our website.

Q: What’s the argument today for using your strategy, as it relates to the political/economic environment?  

A: Our Absolute Return Strategy seeks to take advantage of opportunities in the closed-end fund market, while taking little equity market risk. 

This is executed by buying closed-end funds at a discounted valuations (for example a 15 per cent discount to net assets value), and we seek to achieve the full net asset value, over time. There are many catalysts that can allow us to realize NAV including a corporate action, an activist investor, an increase in dividend policy or a change in market sentiment, to name a few. 

Because a majority of the portfolio is hedged against the stock market, we are indifferent if the market goes up or down. We began this product in June 2006 and have provided an annualized net return of 8.23 per cent since its inception.

The RVP Absolute Return Strategy is not structured as a hedge fund; it has a flat fee and it is structured as a separately managed account. Relative Value Partners charges no performance fee and offers daily liquidity.

Q: What is the biggest challenge for you in running this business?

A: Making sound investment choices for the long term and trying to filter out the short-term distractions and impulses.    

What do you see as your biggest opportunity/ what trends are creating demand for you?   

A: The fact that there has been more than $10 billion of CEF issuance in 2012 creates an opportunity to capitalize on discounts in the future when those assets are sold indiscriminately by retail investors.  The Federal Reserve’s zero interest rate policy has also brought down investor expectations and increased demand for low volatility products like our Absolute Return Strategy.

Q: Do you have any measures which demonstrate how you have grown so far?

A: We are pleased that since the market peaked in October 2007, we have grown our assets under management by more than 100 per cent in a challenging environment.  

Q: Any targets for future growth?

A: We hope to reach $1 billion in AuM in 2014.