At IMCA event, the Schwab investments superstar is selling catastrophe-proofing at Dow 14,000 as well as he was at Dow 7,000

February 5, 2013 — 4:14 PM UTC by Dina Hampton


Stephen Cucchiaro, founder, chief investment officer and oracle-in-residence at Windhaven Investment Management, took to the stage Monday at the Grand Hyatt in Times Square to share his portfolio-hedging secrets at the 2013 New York Conference of the Investment Management Consultants Association.

Cucchiaro, who has a mathematics degree from the Massachusetts Institute of Technology, an MBA from the Wharton School of the University of Pennsylvania, and was a technology entrepreneur and Olympic-grade yacht racer, sent shock waves through the RIA business when he sold his ETF manager for the envy-provoking sum of $150 million in cash and stock. See: A look inside Schwab’s big deal with a small asset manager.

Since 2010 he has been deploying his talents on behalf of Charles Schwab & Co. Inc. when the San Francisco giant bought out Boston-based Windward Investment Management and renamed it Windhaven. See: Schwab closes the Windward Investment Management deal but relinquishes the brand.

It’s proved to be a wise, perhaps stellar, investment on Schwab’s part. Windhaven has been bringing in money by the bucketload with its assets growing from more than $4 billion in November 2010 to $14 billion as of Jan 31 — a near quadrupling. See: Schwab adds $2 billion of assets from Windhaven, with RIA help, and another $2 billion of assets from 41 new RIAs.

Imagine the (awful) possibilities

Cucchiaro’s winning strategy can be boiled down to good old diversification — but with an ETF twist and a sky-is-falling wrinkle or two. His key to keeping clients afloat in turbulent waters is to visualize a plethora of disastrous national and world scenarios coming down the pike, match them to the right asset strategies, and then make sure that clients get a little of each strategy in their portfolio.

“Go through history and then use your imagination and think of all the bad things that could happen in the future and relate them to the market cycle,” Cucchiaro told about an audience of about 200. “What is the perfect asset class? What will go up when everything goes down? Imagine 10 extreme scenarios and 10 asset strategies.”

When a scenario arises for which an asset class does not yet exist, Cucchiaro says he will create an ETF to fill that gap. See: Windhaven’s success draws attention to emerging ETF managers.

The last bond war

It’s important, he says, to ignore economic projections and macro-concepts and concentrate on past economic cycles when conjuring up concrete scenarios. Also ignore modern portfolio theory, which Cucchiaro calls “discredited.” See: Why the Yale endowment model has potentially calamitous pitfalls according to … Yale itself.

Clues to the future debacles, however, may be gleaned from studying past economic cycles. Evaluating the state of the bond market, for instance, Cucchiaro noted that the yield of the 10-year Treasury, which hit a 16% high in 1981, fell to a nearly two-century low of 1.5% and now is hovering around 2%.

“Clients don’t remember what it was like [in the ’80s.] It was painful. Ever since, the wind has been at their back.”

So much so that most clients may have a feeling of false security when it comes to bonds. “After all, in the last decade the best performer has been the bond market. Ten-year Treasuries have doubled. No wonder we’re fighting the last war.” See: What plunging equity prices say about bonds as a hedge for stocks.

Cucchiaro’s conclusion: “Don’t sell all your bonds because there could be another recession — but don’t think of them as no-risk. [There is more risk] than clients might realize.” See: Bond puts mutual fund assets in PowerShares’ ETF sights.

Gold standard

Stocks didn’t do as well as bonds in the last decade but did better than cash — at least on paper.

And paper, according to Cucchiaro, is about what that metric is worth, since the Federal Reserve and central banks the world over have been “printing money” for decades.

“Why are we using money as our yardstick?” he asks. “It’s manipulated. Don’t measure in dollars but in other measures not so easily manipulated.”

Gold, for instance, is a good frame of reference, and judged by the gold standard, Cucchiaro says, the United States has been in a bear market since March 2000.

“To protect from the possibility that economy will stay simulative, a little gold a good thing. We’ve been overweighting gold since the tech crash, and its been a good investment.” See: Should RIAs buy gold now as a hedge?.

Windhaven also cast a favorable eye on international real estate last year. “It was hit hard and now it has leverage, because [European and other] central banks are helping them,” Cucchiaro says.

Mentioned in this article:

Investment Management Consultants Association
Top Executive: Sean Walters

Share your thoughts and opinions with the author or other readers.


Jennifer said:

August 28, 2013 — 5:02 PM UTC

I agree with Andrew. I found this site because I’m trying to find news on Windhaven. I’m very disappointed with Windhaven. I choose it because it seemed like they were 'the big people’ in high finance and investing and should know how to invest. It would be nice to find analysis about Windhaven from a source other than Windhaven and Schwab. That’s what I’m looking for because at this point I’ll give it until Jan. 1, 2014 and then make a decision to stay or get out. So far, I haven’t been able to find any news or analysis like you can, for example, Pimco total return.


Brooke Southall said:

August 21, 2013 — 9:07 PM UTC

Hi Marshall,

My job is always to play devil’s advocate. The long, long term results look okay but any recent returns would seem to less than a slam dunk.

(Is it just my computer, browser (Chrome) or are all the return figures blurred beyond reading on the Windhaven site?)

I’m still not clear on what Windhaven does that differs from most broadly diversified portfolios. I presume that Stephen does the work to diversify intelligently but I think myself and others could use a little more sense of just what that means.

thanks for taking your stand,



Marshall Donovan said:

August 21, 2013 — 8:52 PM UTC

The aforementioned comments made by “Sammy”, “wes”, and “Andrew Gliniak” are neither supported by any reasonable argument nor have any basis in reality: Schwab “bought into this” because it works. Please go to the Windhaven website and examine his track record. And as for investing small amounts of money with Windhaven and trying to make a quick large sum of money — that is not the purpose of Windhaven. The purpose of Windhaven, as put eloquently by Brooke Southall, is for (in most cases) high net-worth individuals, pensions, large entities etc., to be provided not only very favorable returns but very relatively favorable returns in all possible conditions of the market.

Except for Mr. Southall, you three need to do some serious research and educate yourselves about Windhaven and what this extremely sophisticated man has built before you dismiss it as “bullocks” and deem it ineffective. If not, then kindly keep your half-baked thoughts, which have no basis in objective reality, to yourselves. Thank you.

Marshall Donovan


Brooke Southall said:

August 16, 2013 — 9:44 PM UTC

Yes, somebody better steeped in portfolio management would have to explain what basis there is for the returns falling so far short of benchmarks and what it is about Windhaven funds that makes significant cushioning likely in the event of a major downswoop to compensate.

If Schwab offers an explanation, please share it here.




Andrew Gliniak said:

August 16, 2013 — 8:54 PM UTC

I might be willing to sacrifice a some performance If I thought I would be getting SIGNIFICANT protection against a sever market crash. That was a major selling point of Windhaven. I get it, but the performance has been just too poor. The securities they pick, just too volatile, even now. In the recent market, almost any picks should be doing well. It has eroded my confidence just too much. I certainly don’t expect any index fund to protect me, that’s not where I am. I’m picking stocks where I see that they weathered the dive of 2008-2009 well. And I’m also making money on them now. I bet I don’t do 1/100 the research that Windhaven or Schwabs. I think the safety argument is valid but no where near sufficient. Why are they doing so poorly?


Brooke Southall said:

August 16, 2013 — 7:31 PM UTC


Thank you for weighing in thoughtfully. It’s particularly good to hear from real investors.

My experience suggests you may not hear from Charles.

If I were to play his advocate (for furthering this discussion), I’d say, and you alluded to in your comment, that Windhaven errs on the side of underperforming in a hot market and we are in a pretty hot market. It errs that way so that if the market dips 30% that you can sleep at night knowing that you have a carefully crafted asset allocation and diversification to blunt the blow.

But I think what I hear you saying is that Windhaven is an expensive way to get broad diversification?

Maybe somebody can weigh in on where Windhaven has an edge or not that goes beyond holding a series of index funds.

And maybe you can say what attracted you to Windhaven in the first place?




Andrew Gliniak said:

August 16, 2013 — 7:09 PM UTC

Windhaven. This is the last time I ever get sold on a managed account. Everytime I have I have regretted it. I have done better with $10,000 in one stock over two months than the expert, rich cats at Windhaven have done in two years with over $100,000 of my money. And multiply that by have a dozen more of my stocks over two years.

What’s up with that Charles? Heads ought to be rolling. But I guess that doesn’t have in the upper investment circles. I don’t know much about investing, just basics, yet I can do 3-4 times as better than these big shots. Your clients would do better to listen to me. I’ll work for a lot cheaper. You could make a graphic that shows how much better Andy can do for your clients than the various managed funds.

I’m really disappointed. I think Charles really owes a lot of clients for this. No excuses. But he has people coming up with contrived graphics to deceive people even more. It’s simple, let’s not look at 10 years history, lets not look at graphs where the selection criteria for securities produce favorable numbers, let’s not talk about long term. Lets just compare how much of my money you have had over the last year or two and how much money you have made.

If a managed fund can’t make more than the index then you don’t need it.


wes said:

August 11, 2013 — 8:14 PM UTC

looks like a paid advertisement of failed fund. Schwab should be ashamed for buying into this crap


Sammy said:

February 6, 2013 — 1:36 AM UTC

What a load of bollocks.

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