Market Winner

Photography by Barbara Banks By Johannes Werner October 31, 2011

CHILL OUT: The world is not ending, says Cumberland’s David Kotok.Closely cropped hair, wire-rimmed glasses, dark suit, red tie on a neatly ironed white shirt, and a deliberate way of laying out his ideas—everything about David Kotok is in synch with his low-key financial world view.

“I’m not one who says the world’s about to end,”says Kotok, a frequent financial commentator in national media who handles almost $2 billion in investments at his boutique firm, Cumberland Advisors, now based in Sarasota.

Even so, his emphasis on continuity, combined with a cautiously optimistic outlook for the U.S. economy—a “terrified bull,” as he puts it—is putting him in the spotlight. CNBC, Forbes, Wall Street Journal, Bloomberg and other market-watching media seek out Kotok for his latest opinions. As banks in New York, London, Frankfurt and Paris are teetering on the edge, and at a time when Nouriel “Dr. Doom” Roubini has become the most-admired U.S. economist, Kotok delivers a soothing message to frayed investor nerves: The U.S. economy won’t enter a second recession, the derivatives mess is controllable, mass default is not imminent in U.S. municipal bonds, U.S. stock markets are poised to rise again, and—gasp—this is the right time to buy bank stocks (see “Terrified Bull,” below).

It’s not easy to be a calming force amid a stampede. But for four decades, Kotok, 68, has almost always made the right call. Cumberland made the right allocation shifts before the tech bubble burst in the late ’90s and before mortgages melted down in 2008. He’s recently steered his 700-plus investors’ $1.9 billion safely through the chaos. Every year since 2007, his firm has raked in back-to-back profits, avoided accumulating any debt, and set records for the number of clients, assets managed and people employed.

“We’ve been vindicated over the last three years,” he says. “It’s a fabulous time. I wish I was younger.”

This kind of performance propelled Cumberland to No. 24 in the Top 50 of U.S. registered investment advisory (RIA) firms this year, according to Registered Rep magazine.

Kotok says Cumberland adheres to fierce indepen-dence when it comes to research, abstaining from selling any product, and doing precisely what the client needs. Kotok systematically plows back profits into his business, investing in staffing and research (the 25-employee company uses a whopping four Bloomberg terminals).

“We don’t believe anyone,” Kotok says. “I’m using every possible tool, except séances. And if that works, I’ll do it too.”

Whether in Maine or Patagonia, above, David Kotok fishes for pleasure and business.Market-watching media call on Kotok in part because of his close relationships with central bankers, corporate economists and finance ministry officials in the United States and Europe—connections largely cultivated by his two other passions.

For one, as program chairman of the Philadelphia-based Global Interdependence Center (GIC)—a nonprofit with the published goal of expanding global dialogue and free trade to reduce international conflicts and improve global living standards—he organizes high-profile central banking panels all over the world and meets with central bankers in places as unlikely as Hanoi, Quito and Harare in Zimbabwe.

Kotok’s other inside track is a fishing weekend. His annual invitation-only outing in remote areas of Maine lures movers and shakers, such as Roubini, many a Fed employee and fund manager to find out what the top financial minds are thinking. Over the years, Kotok’s fishing outing has evolved into a fun mini-Davos for U.S. finance players. As one participant, economist Barry Ritholtz, summed it up in a blog: “The weekend was filled with good conversation, lots of wine, fine cigars, too much Scotch and outstanding fishing”—as well as discussions about housing prices, presidential candidates and interest rates.

Kotok does not seem to be married to any economic or political dogma. Asked what he thought about Warren Buffett’s “tax-me” attitude, he responds that the mega-investor struck a worldwide chord and that he is personally prepared to pay a higher tax. “But,” he adds, “what I’m not prepared for is to pay a higher tax and get no results. Congress is a rat hole. It’s not just the House; it’s the Senate, too. The political system has failed the nation. It protects the incumbent against as much challenge as possible. We need political reform, and we’ll get that when the citizens are enraged enough about the incumbent, no matter what party.”

He displays a self-effacing kind of humor when it comes to admitting errors. Asked about a book he recently co-authored, he rolls his eyes and calls it “a disaster.” Invest in Europe Now! was published after two years of research and writing, and appeared two months before the European debt problems began to spin out of control. “The first five chapters are still worthwhile, but forget the last part,” he says. “The position I took on the European Central Bank is totally wrong. Amazon quickly cut the book’s price in half,” he adds with a laugh.

Kotok has a reason to view life with equanimity. On the morning of Sept. 11, 2001, he was participating in an economists’ conference on the ground floor of the World Trade Center’s South Tower when the first plane struck the north tower. He escaped, but he watched the towers implode. “I’m lucky to be alive,” he says. “I saw others jump to their death. Why me? Why not them? What purpose was served by this madness? These questions beg for answers and there are none.”

Kotok received the 2010 GIC’s Global Citizens Award. Helping him celebrate, from left, Bill Dunkelberg, chair of the Global Interdependence Center; Bill Poole, the former president of the Federal Reserve Bank of St. Louis; and Michael Heavener, the former head of Global Financial Institutions for Wells Fargo.This year, Kotok moved his firm’s head office from Vineland, N.J., to downtown Sarasota’s One Sarasota Tower on Palm Avenue, overlooking the bay.

Florida had been on his radar for awhile. He had Florida clients, and he and his employees were flying to Florida’s east coast weekly. But a large group of Cumberland’s high-net-worth clients (wealthy individuals make up two-thirds of Cumberland’s business) cluster between Naples and Tampa.

Sarasota was a business and lifestyle decision, he says. As of September, nine of Cumberland’s 25 employees were based in Southwest Florida, with No. 10 expected to join soon.

“We’re hiring people in Sarasota—if we can find them,” he says. Cumberland needs to add employees to service clients, but he adds it’s too early to tell whether the new location is a disadvantage in attracting talented advisers. However, Cumberland’s relocation is putting Sarasota on the map of financial VIPs. Kotok is bringing in 30 national economists for an annual meeting of the National Business Economic Issues Council at The Ritz-Carlton, Sarasota this February.

And Cumberland has quickly made another connection here: New College of Florida. He’s impressed by the school and its students and has already given a presentation on economics to students. He’s the Nov. 15 speaker for the college’s New Topics series and is planning two GIC events involving top economists. On Feb. 14, Kotok is bringing in Dennis Lockhart with the Federal Reserve Bank of Atlanta to give a talk at the college.

And on April 18, a GIC panel on the housing markets will feature the chief economists of PMI and Wells Fargo, as well as a Wall Street Journal editor.



A Terrified Bull Looks Ahead*

The bear market reached its bottom on April 29, says Kotok. However, there are unresolved issues in Europe, and the effect on the United States is unclear. Although Kotok doesn’t believe the U.S. economy will fall into a double-dip recession, he also doesn’t believe there will be a robust, feel-good recovery. U.S. growth, according to Kotok, will be ranging from 1 to 2 percent over the next few years. Unemployment won’t worsen, and it will take several more years for the market to absorb 5 million vacant housing units, thus stabilizing housing prices and the banking system.

If we get this slow-growth scenario, stocks will rise. And that includes the much-maligned financial stocks, he believes. After four years of shakeout and re-regulation, the financial statements of banks have become more credible. And the emerging picture shows that the shares of the six largest U.S. banks are now selling under book value. In other words: Now is a good moment to buy financial stocks.

*Kotok disclaimer: “This forecast was made in early October, amid turmoil that could send trends either way.”


The more it changes…

Despite the stellar rise of China, Brazil, Russia and India, David Kotok insists the cornerstones of the financial world still are the four central banks that manage the globe’s largest currencies. Eighty-five percent of the world’s currencies are made up of the dollar, euro, yen and British pound. That means, you’ve got to follow what the central bankers in Washington, Frankfurt, Tokyo and London are doing. Says Kotok: “The rest are delightful places to visit.”


What Cumberland Does

Cumberland Advisors, founded in 1973, has $1.9 billion in assets under management from some 700 clients. About three-fourths of the firm’s clientele is made up of high-net worth individuals; the remainder is institutional investors.

Cumberland takes a conservative approach, seeking to preserve clients’ capital, in addition to achieving reasonable growth. The company, which uses separately managed accounts and does not manage any pooled investment funds, does not sell any product.

Historically, the firm has invested in bonds. Some $1.5 billion of the assets managed by Cumberland is invested in fixed-income securities, which include both tax-free and taxable bonds. Cumberland actively positions the bond portfolios to take advantage of yield-curve opportunities and to protect them against interest-rate risk.

Twelve years ago the firm began to expand into equities. Some $400 million are now invested in exchange-traded funds (ETFs), both in U.S. and global securities.

Kotok believes investing in these vehicles is equally advantageous on the upside and less risky on the downside than individual stocks. The ETF investments follow Kotok’s and the other advisers’ macroeconomic and market views.

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