An 87-year-old wealth manager started as an inventor, then managed investments.

    Some people love a perplexing problem. Then there is James Kalil, who takes such delight in solving a good head-scratcher that he makes careers out of them.
    During World War II, for example, U.S. convoys traveling across the Atlantic were menaced by German magnetized mines. Kalil was part of a U.S. Navy engineering unit that tackled the problem by demagnetizing naval ships. After the war, he was a member of a research team at Los Alamos, N.M., that was responsible for designing a smaller atomic bomb.
    A few years later, after completing his doctorate degree in chemical engineering, he embarked on a career with DuPont. He worked in the company's labs for 28 years, developing new formulas and manufacturing methods related to the synthesis of rubbers and other materials.
    In 1980, Kalil took an early retirement. But it wasn't for a life of golfing and fishing. Instead, he was ready to embark on a new career as an investment manager-an area that he felt dovetailed perfectly with engineering research. "All I wanted was something interesting to do. Making a lot of money was not my objective," says Kalil, who recently celebrated his 87th birthday.
    "I did it almost like my inventions at DuPont. Instead of doing research in the lab, I was doing research on investments," he continues. "It all involves numbers. You are doing analysis in both cases and coming to conclusions."
    His career as an investor, it turns out, has lasted nearly as long as his lab days at DuPont. Kalil is the co-founder of Affinity Wealth Management in Wilmington, Del., which was formerly known as Compu-Val Investment Inc. The firm-whose day-to-day operations are now run by Kalil's son, Donald-has about 650 clients and $240 million under management, with a healthy core of long-time clients who have stuck with Kalil since the firm's beginning.
    For these clients, the long association with Kalil has taken them on a journey that is some respects extraordinary. Many of them entrusted their life savings with Kalil at a time when he was transforming himself from a chemical engineer into a professional investment manager. He actually began investing as a sideline in the early 1970s, mostly for friends and family. Kalil embraced value investing in those early years, becoming a devoted disciple of investment guru Benjamin Graham. Each day, Kalil would spend hours pouring through the pages of Value Line, carefully picking out solid but undervalued companies.
    Kalil, who worked with a partner at the time, lost 30% in his first five months-a showing that prompted even Kalil's brother to pull his money out of the firm. But things quickly started to click. Using the analytical skills that he put to use in DuPont's labs, Kalil was netting gains of 30% a year in his first ten years of business. Local brokers soon took notice of Kalil's performance and began steering clients his way. The national spotlight came next, with feature stories in Money magazine and other publications.
    The firm's standout performance continued into the late 1980s and early '90s, as did the inflow of new cash and accounts. By 1989, Kalil was treating his entire office to a Caribbean cruise in celebration of the firm's assets under management passing the $100 million mark. "The word spread fast," Kalil recalls.
    But just as it did for virtually all value investors, Kalil's investment view underwent a drastic change in the latter part of the 1990s. The technology craze, mania, irrational exuberance-whatever tag you put on it, the Wall Street of 1999 was one that left Kalil and other value investors searching for answers. Valuations were going through the roof. Kalil found bargains harder to come by and he refused to dabble in technology, which he saw as highly speculative and risky. The firm still performed well, but not nearly as well as the "hot" investments, nor as well as it had done in the past. So once again, the firm lost some clients.
    It was as if he was working in his DuPont laboratory one day and the laws of physics suddenly changed. "You had to really push hard to buy a stock because they were all fully valued," he says. "It was pretty close to full valuation."
    Presented with a problem, Kalil once again approached it like a scientist-by changing the formula. It was the type of change rarely seen in the investment world. Kalil, a devotee of value investing for more than 25 years, completely remade himself and his firm in 2000. He scrapped value investing completely and transitioned to an asset allocation philosophy devoted to downside protection and steady, consistent performance with less risk. Kalil even got rid of the company name, which was derived from "computing value," and renamed it Affinity Wealth Management, which reflected the firm's emphasis on full-service wealth management.
    Instead of being a stock picker, Kalil became an asset allocator and a wealth manager. Instead of building portfolios with a basket of 25 to 35 individual stocks, he was using a universe of more than 2,000 stocks. Ground-up equity analysis went out the window, replaced by a macro view that left only marginal room for active management of individual securities. He put his client's money in low-cost mutual funds-most of them index funds-and ETFs, with a momentum-based allocation model designed to limit loss and maintain steady annual gains.
    Three years ago Kalil added another layer to the strategy, tying allocations to whether or not the market is in a bear or bull market environment. Instead of looking forward, Kalil was now predicating his entire investment scheme on looking backward. "We shifted the emphasis to beating the market, but not by extravagant margins," he says. "What we're doing is investing in an entire market. We're not trying to make a killing. Our objectives have changed."

A Philosophical Shift
    The transformation of Affinity Wealth Management wasn't painless. Donald Kalil says clients and assets were lost during the process. Ultimately, however, the firm reshaped its client base in the same way it remade itself. The reward has been outperforming the S&P 500 over a six-year period.
    "We're more focused now on people approaching or near retirement," Donald Kalil says. "These aren't the people looking for home runs."
    Yum Kim and her late husband were among the people who were with Kalil at the beginning. They gave him $50,000-all the money they had-25 years ago. Her husband worked at a company affiliated with DuPont at the time, and they met Kalil at one of the company's country clubs.
    They heard about him and his investing acumen through the company grapevine. One day they drove to his house, knocked on his door and asked if he could handle their investments.
    And that's where their funds have stayed. Kim left her money with Kalil after her husband died seven years ago. She also stuck with Kalil when her three adult children, caught up in the boom seven years ago, were begging her to invest elsewhere.
    "They ask me, mom, why don't you take out money and put it in some high tech stock," she recalls. "I said, no, daddy made this arrangement and I'm going to keep it there."
    Getting a full grasp of the investment mechanics Kalil has used for clients such as Kim isn't easy. His investment formula, expressed mathematically on a chalkboard, resembles something one might see at a lecture on general relativity or quantum mechanics. In layman's terms, Kalil says the method is predicated on asset allocation, with a touch of momentum-based asset allocation adjustments.
    It also depends heavily on keeping funds low cost, maximizing tax efficiency and limiting volatility. "You reduce the risk, reduce the costs and increase the tax advantage," he says.
    Portfolios are structured from a basket of about two dozen funds, the large majority of them index funds. The percentage of portfolios devoted to equities is solely dependent on a client's risk tolerance and can range anywhere from 100% to 30%.
    In each case, however, portfolios are built to be representative of the market and global market segments. Each quarter, Kalil says, the relative amounts of allocation in each market segment is rebalanced, based on the previous three months' performance.
    "We want to invest in as wide a footprint as possible and keep your risks down," Kalil says. The strategy has been most successful in protecting clients during bad times, he adds.
    Illustrating the point, the firm's three-year annualized returns for the period 2003 to 2005 has ranged from 16.5% for aggressive portfolios (100% equities) to 7.9% for ultraconservative portfolios (70% bonds). That beats a range of 14.4% to 7.5% respectively for S&P 500/bond benchmark portfolios.
    When the bear market years of 2001 and 2002 are factored in, the picture changes. In the 2001 to 2005 period, the five-year annualized returns range from 3.8% for aggressive portfolios to 4.9% for ultraconservative portfolios. That compares to a range of 0.5% to 4.5% for benchmark portfolios.
    Kalil added another layer to his strategy three years ago, when he began to delve into the question of what defines a bull or bear market. The answer he came up with, after trial and error, was that a bear market exists when the S&P 500 index was at negative 3% or lower for at least six months.
    In his private investments, Kalil found that if he cut his equity investments in half-replacing 50% of the securities with bonds-upon the appearance of a bear market, and rebalanced both asset allocations and equity ratios every three months, that he could achieve greater returns. Portfolios are returned to their normal allocations once the six-month performance of the S&P 500 goes above negative 3%.
    "An unexpected bonus is it cuts the risk down tremendously," he says. "The standard deviation was cut in half."
    A back-testing of the bull-and-bear strategy found that portfolios would have been in bear-market mode between the fourth quarter of 2000 and the first quarter of 2003. The testing also showed that in 2001, portfolios using the strategy would have gained 19%, compared to an 11.9% loss in the S&P 500. In 2002, the gains would have been 8.8%, compared to a 22.1% loss in the S&P 500.
    "There's nothing magic about it," he says. "If you get the volatility down you get the return up because you tend not to lose all the money you made in the bull market."

Learning Never Ends
    Finishing the task of putting Affinity Wealth on a drastically new course hasn't slowed down Kalil. He continues to drink up books, usually taking three or more courses per semester at the University of Delaware Academy of Lifelong Learning. Among the subjects he's studied recently include philosophy, the Crusades and the history of the Near East.
    "I just get a kick out of learning," he says.
    Among the other projects he has lined up is writing a book about growing up in Brooklyn and Buffalo, N.Y., including his days as a shoeshine boy in downtown Brooklyn during the Great Depression. Kalil, bringing the precision of an engineer to the task, says he has 47 tales to tell, including the time he and his brother got into an argument over a sailboat they had bought together. His brother, it turned out, forgot to put a rudder on the boat and they were forced to row it back to shore.
    "The next morning, I get up and I hear sawing out there," Kalil says. "I looked out the window and saw that he sawed the boat in half."