Contrary to Popular Opinion
by Mark Pendergrast
Sailing against the tide has kept this firm in friendly seas
In 2004, following the sale of their employer’s business, Mike Huffman (right) and Todd Wulfson struck out on their own to form Rock Point Advisors in Burlington. Huffman is the founder, president, and portfolio manager; Wulfson is vice president and portfolio manager.
How does the team of financial analysts at Rock Point Advisors do it? Since its establishment in Burlington in 2004, the firm has regularly surpassed its investing benchmark, the Russell 3000 stock index. Even during the financial meltdown of 2008, the financial advisory firm’s portfolios outperformed by a significant margin. Yet Rock Point’s president, Mike Huffman, is acutely uncomfortable talking about the firm’s performance: “A good trader would rather talk about his losing trades,” he says.
Huffman’s attitude stems from his years of immersion in the trading pits at the Chicago Board Options Exchange. In 1981, with a newly minted MBA from Northwestern, the western New York native was hired by legendary adventurer Steve Fossett, who made his fortune in finance but spent much of his time sailing, swimming, mountain climbing, and solo ballooning his way around the world, before he was killed in a plane crash in 2007.
“It took a year in the pits before I had a clue what I was doing,” Huffman recalls, “but I really cut my teeth when Steve Fossett went off to swim the English Channel and I assumed responsibility for his complex positions.”
Huffman learned to make split-second decisions in the IBM stock options pit — at the time the largest in the world. “It was very intense. The pit was a microcosm of the investing world, where a herd of people reacted to news and other stimuli. I learned to read the emotions of fellow traders. I looked for peaks and valleys, for fear on faces, and that was often the time to buy.”
In other words, Huffman learned to be a contrarian, and the question for him became, “If the whole world wants to sell, how much are you willing to buy?” As he describes it, “Survival in the pits offered enough risk management lessons to last a lifetime.”
But life in the pit is a young person’s game, and by 1996 Huffman and his wife, Meg Singer, longed for a quieter life. They moved to Burlington, where Singer had grown up. Son Peter was 3, and Sam was on the way. (They now have three sons — George, 8, is the youngest.)
“I had no job; that was a tough summer,” Huffman recalls. In 1997 he landed a position with financial adviser Jim Fraser, another contrarian, whose Contrary Opinion Forum has met for years at the Basin Harbor Club.
Unfortunately, Fraser’s health deteriorated, and in May 2004, Fraser Management Associates was sold to an out-of-state firm. That prompted Huffman to strike out on his own, along with Todd Wulfson, who had joined Fraser in 1998. (Huffman and Wulfson are CFAs — Chartered Financial Analysts.)
“We spent 30 minutes brainstorming a name,” Huffman says. “I didn’t want to call it Mike’s Investment Service.” Searching a local area map for inspiration, they saw Rock Point, which sounded imposing and solid, so they named themselves Rock Point Advisors, though they are not associated with Rock Point School. (Huffman, however, now serves as a trustee for the Episcopal Diocese, which owns the property.)
They were able to attract many former clients, including individuals and five nonprofit organizations. Because of privacy issues, Rock Point does not divulge the names of individual clients. One of the nonprofits is in Yakima, Wash.: Perry Technical Institute, a large vocational school. “Their investment accounts have grown nicely since 2004,” Huffman observes, “and we take pride in the small part we have played in their success.”
Another long-term nonprofit client is the First Baptist Church on St. Paul Street in Burlington, just around the corner from Rock Point Advisors’ Lawson Lane offices. Board of trustees member Stu Burroughs, who served on the church’s investment committee for 12 years, can’t praise the firm highly enough.
“I think the world of those guys,” he says. “We have been delighted with Mike and his team. Their social conscience is a match for us, and they have been very responsive to our requests. They have overachieved for our church right from the beginning, and they did it without being overly aggressive or with too much fluctuation.”
Burroughs is referring to Rock Point’s socially responsible focus for its investment portfolios, which begins with the exclusion of companies that derive a significant portion of their revenues from weaponry, alcohol, tobacco, or gambling. But it goes beyond that to look for companies with outstanding environmental, social, and governance profiles. Although these criteria alone do not justify an investment decision, Rock Point looks favorably on companies that have a good environmental impact (e.g., renewable energy, water, sustainability), treat their workers well, and are well managed.
“Governance includes how a company treats its shareholders,” Huffman says. “Are they transparent? Do they offer exorbitant pay packages to their CEOs?”
He makes the case that these socially responsible filters are not just ethical but ultimately lead to better investment returns. “If you excluded Walmart, Exxon, and General Electric from your portfolio over the last 10 years,” he says, “you would be ahead of the game.”
On the other hand, one who had invested in Green Mountain Coffee Roasters over the last few years (as Rock Point Advisors has done in many of its portfolios) would have seen the investment grow almost exponentially. GMCR is noted for its focus on fair trade, organic coffees and socially responsible programs, although it is still struggling with non-biodegradable packaging. “They are working on that problem,” Huffman says.
Rock Point offers three general portfolio types that feature individual stocks and bonds rather than mutual funds. “Equity Focus–Appreciation” pursues long-term appreciation through undervalued shares; “Equity Focus–Yield” slants its holdings a bit more toward stocks that offer attractive dividends. Finally, the “Balanced–Strategic” portfolio pursues long-term growth with lower volatility than an equity-only account by including up to 40 percent in bonds.
Huffman describes his stock-picking strategy as a “simple straightforward approach,” but it is a bit complicated to explain. Many investors focus on the P/E ratio, which is the share price divided by the earnings per share. “But that earnings figure is an easily manipulated number,” Huffman points out. He and his team — including Todd Wulfson and Matt Wootten — look at income statements, cash flow, and the balance sheet to determine the earnings before interest and taxes (EBIT). They compare it to the enterprise value (EV) of the entire company, which includes debt and basically amounts to what it would cost to buy the entire business. Dividing EBIT by EV gives an estimated rate of return. They look for high-return businesses that offer opportunities for further earnings growth.
Stock-picking is not all number-crunching, though. Rock Point team members look at the big picture. By the time the crash occurred in 2008, they were already avoiding housing and financial stocks. “We sold our only bank stock in August 2007,” Huffman says. But the firm did own a large cement company and another company that made green building products — “They got crushed,” he laments.
Because of recent market conditions, Rock Point has raised its cash holdings to an average 13 percent. This gives the team the ability to invest quickly in attractive bargains. “I think of stock-picking as like waiting for a streetcar,” Huffman says. “Streetcars are always going past. You wait for the one that’s right for you.”
The right mix of vehicles must include proper diversification — small, medium, and large cap as well as a good international mix. “About 20 percent of our holdings are foreign-focused,” Wulfson says. He points out that the typical U.S. large cap firm now makes 40 percent of its profit overseas.
The Rock Point team seems to be making its clients happy. They have some 180 client relationships and try to hold each to a minimum investment of $500,000. Just as Rock Point prides itself on low stock turnover in its portfolios, the firm is pleased that very few clients have taken their money elsewhere.
Rock Point charges a fee of 1.2 percent of the first $500,000, 0.6 percent for the second half-million, and 0.5 percent for everything over $1 million. One way it keeps clients happy is to listen and communicate with them.
Through initial conferences, the client’s holdings, situation, and goals are examined. Many clients are in their early 60s and planning retirement, which is a particularly nerve-racking time. “Our job is to know them well enough to invest appropriately,” Huffman says. “We have clients we speak to only once a year for a short conversation, because they like it that way. Others want weekly contact.”
In the last two years, the firm has begun to draw some intermediary business, where other account managers and brokers who are attracted by Rock Point’s track record use the firm as a manager of their clients’ funds. Such intermediary business now accounts for 5 percent of the firm’s revenue.
Rock Point helps families, which constitute 80 percent of its client base, and it prides itself on a family-friendly environment within the firm as well. “We focus on keeping things sane and making time for our families,” Wulfson emphasizes. “At times we chose to grow more moderately than we could have.”
There is certainly a relaxed feel around the office, where Flatbread Fridays feature take-out from American Flatbread around the corner.
Breaking that flatbread together, in addition to Wulfson and Wootten, are the crew Huffman is so proud of: Mary Johnson, customer service specialist; Evan Pemberton, chief compliance officer and operations manager; and Matt Michaud, trader. Together, they comprise a financial advising team that has managed to beat the odds and help clients fund their dreams. •