ReSolve Riffs with Bradley Barrie on Embracing Alts and Adapting to a New Market Regime

Our guest this week was Bradley Barrie, president and CEO of Dynamic Alpha Solution, a firm that is reshaping the way US advisors think about asset allocation through their multi-dimensional framework. Our conversation covered:

  • His early career and almost becoming a math teacher
  • Embracing difference and uniqueness from the very beginning
  • The barren landscape for alternative strategies in the 1990s
  • Style drift and closet indexers
  • False diversification
  • Defining Multi-Dimensional Asset Allocation
  • Structural diversification and pairing complimentary styles
  • Outsourced CIO tailored for financial advisors
  • Recognizing the importance of investor psychology
  • Smoothing out the path for portfolios as the ultimate objective
  • The three Ps of qualitative analysis
  • Sharpe vs Sortino
  • And much more

This is “ReSolve Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management Inc.

Listen on

Apple Podcasts

Listen on

Spotify

Subscribe On

Captivate

Bradley Barrie, CFP, ChFC
President and CEO of Dynamic Alpha Solution

As a financial advisor from 1998 to 2017, Brad focused on helping clients with advice on simplifying wealth management, offering comprehensive financial planning, and providing a very diverse mix of products & solutions.

Brad’s goal was to educate his clients, help them feel more comfortable with their finances, and guide them through complex financial issues. As a result, many clients would say, “I feel better” after meeting to review their goals and investments. 

After transitioning his financial services practice to his partners, Brad consulted with other financial advisors, guiding them in various aspects of wealth management. Recently, that consulting has focused on asset allocation and investment guidance, which has created Dynamic Alpha Solutions. Through a unique yet proven system, that Brad has implemented over his career, Dynamic Alpha Solutions is helping advisors provide added value to their clients. 

Brad has received numerous awards and designations, including the Certified Financial Planner (CFP) and Chartered Financial Consultant (ChFC) designations and multiple Five Star Wealth Manager awards. In addition, Brad has consistently been active philanthropically, receiving the Philanthropist of the Year award in 2017 from Amita Health Foundation and serving on several non-profit boards. Brad took this experience and created The Alliance Foundation (www.alliancecharity.org); a public 501c3 focused on helping people build a path to prosperity through programs focused on food, shelter & emotional support.

TRANSCRIPT

Richard:00:01:44All right.

Mike:00:01:44Welcome. Pitter-patter…

Brad:00:01:47How are we doing?

Richard:00:01:49Good. How are you?

Brad:00:01:50Good, good. Good to see you guys.

Richard:00:01:52Welcome to ReSolve Riffs. And before we get started, Mike, maybe hit us with that good old disclaimer?

Mike:00:01:58Oh, yeah, yeah, yeah. Let me think here. Don’t take investment advice from three dudes on YouTube on a Friday afternoon. In all seriousness, we’re going to have a great discussion on investing, rubber meeting the road, how it impacts portfolios and asset owners and how they might want to think about the challenges and the opportunities that face them. But none of this is investment advice. Obviously, you’d have to check this with your own personal situation. And yeah, so that frees us to have a little bit more of a conversation. It’s a little wider and encompasses maybe a few more topics and tales and maybe give you more insight, but it’s education and entertainment. So, let’s make sure we’re entertaining at least.

Richard:00:02:45At the very least. Well, with Brad, I think we’re guaranteed for at least some of that. I don’t know about you and me, Mike. But Brad, why did you get …

Mike:00:02:53We got BB gun here. He’s going to shoot wisdom at us.

Brad:00:02:56Ah, BB gun, that’s a new nickname.

Backgrounder

Richard:00:02:59So, why don’t you tell us a little bit about your background, Brad and how you got to where you are today. I think that’s a good place for us to start and maybe hit us with a little bit of the more salient points of your trajectory in the financial industry and how that has shaped and formed your views.

Brad:00:03:19Yeah. So, I’ve been in financial services for about 25 years, right out of college. I was lucky enough to be hired as a financial advisor. I had a job, two job offers actually ironically, of one being a statistician because I have a degree in mathematics and economics and the other job of being a financial adviser. And I’m very grateful that I chose the job of a financial advisor because it’s really been a passion and a love of mine. I actually went to college to be a high school math teacher originally, because I love educating. I love helping people learn and bettering themselves and I realized the job of a financial advisor kind of allowed me to educate clients, help them better themselves from a financial standpoint and hopefully help them get A pluses in the class of retirement sort of speak so.

So, I was a practicing advisor for 20 years, I was also a compliance officer. So, I greatly appreciate the disclaimers that are out there that you guys did. And I was a training manager, had many roles in my firm. I was one of the top financial advisors. And about five years ago, I transitioned my practice to my partners. I was a financial advisor again for 20 years right out of college. It’s all I’d ever done. And for personal reasons I wanted to explore other avenues, transitioned my practice to my partners. They’ve done a phenomenal job with it. And took a little bit of time off, but then kept my foot in the business and began consulting and helping other financial advisors that I knew at a variety of firms, and helping them on various topics from business structure to planning to insurance strategies to investment guidance.

And I would say this year especially, I pivoted my business, my consulting firm, hired four other individuals to help me, because the, getting a lot of knocks on my door on, “Hey, Brad, what do you know about asset allocation? Hey, Brad, our investments are having some issues. Hey, Brad, what do you know about alternatives?” And the answer was a lot. And as I talked to more and more advisors and learned about what they’re doing, it’s very different than what I had done as a financial advisor. I had always embraced different uniqueness. You know, I was never one that thought, buy the traditional 60/40 and call it a day. It’s actually funny. When I started as a financial advisor, right out of college again, a degree in math and econ. But I didn’t know anything much about investing. I, again, had excellent mentors and teachers and did good, good work for folks.

But I was taught, pick funds, pick strategies that had what’s called a high R squared. And you guys know what high R squared is. And there was a term back in the day called style drift. Remember, you don’t hear that term as much anymore. But style drift was a bad thing. Like, don’t buy funds that have style drift, red flags, stay away. And I thought to myself, well, geez. I mean, I’m some kid out of college. How do I know whether large cap growth is better than large cap value, is better than bonds? Right? Shouldn’t the portfolio manager who’s more experienced and smarter than me be able to make those decisions? And as you know, funds can only do what the prospectus allows them to do. And that’s something that I educated my clients on a lot around, you know, we can maybe get into that. But…

Funds and Expectations

Mike:00:07:21Well, it’s funny, we wrote a piece on that sort of in the same vein, which was emerging markets versus US equities. And the 99th percentile, the worst performing US equity fund outperformed the best performing EM manager by like 15%. You simply can’t create… the assets class selection provides for a certain opportunity set. And you can’t create US equity returns, trying to invest in emerging markets, no matter how good you are. It’s sort of like planting wheat and expecting to get corn. That’s just not a thing that works. So, back to you.

Brad:00:08:11Yeah, yeah. I mean, you’re absolutely right. I mean, it’s almost as basic as expectations, right? It’s what do you expect from the fund? And it’s funny, many a time, I would talk to a financial advisor, or more so with individual retail investors and clients on boy, this fund really stinks. You know, this fund went down 20% this year. What’s wrong with this guy? What’s wrong with this manager? Fire them. And I would say, well, let’s look at that fund. It’s a five star fund, the manager’s won awards, and I said, actually what did it do last year? Okay, it lost 20% last year. You’re not happy with that. I said, well, what if I told you that that portfolio manager was paid a big six figure bonus last year?

My client would be like, Brad, what are you talking about? He was paid six figures to lose me 20%? And I would say, no, no, no, no, he was paid a six figure bonus on top of his six figure salary to lose you 20%. And the reason he was paid a bonus was because the benchmark, if it’s EM, the EM benchmark was down 22% and he was only down 20%. So, relative to the benchmark, he outperformed exponentially. And that would get into a conversation with the client around prospectus and the mandates in the prospectus. And I’m one of those people that actually reads prospectuses. It’s kind of funny, even amongst financial advisors. I’m not sure if everybody reads those things. I don’t read them all cover to cover.

But you know, if you have trouble sleeping, they’re always a good thing to read. But we would get into what the prospectus allows the portfolio to do and we’d also get into a conversation on relative return versus absolute return. Right. And you know, what do you want? Do you want to relative return? And it’s funny, clients want relative return when the market goes up 30%, right, we all want to make 30% when the market rallies. But when the market goes down 30%, well, then we want our absolute return strategies, which again, are not guaranteed to get us absolute returns every year, right? It’s a different mandate, it’s a different flexibility.

And when I managed money for the last 25 years, including five years, just for myself, and advising advisors, but even when I managed money for clients, we specifically looked for funds that had flexibility, right? You guys didn’t exist 20 years ago, 15 years ago, when I was in practice, and even the number of funds that could be categorized as tactical or alternative or what have you, was very hard to find back then. And alternatives meant real estate, alternatives meant gold and silver. And it’s funny, as I talk to advisors now, and in some of our allocations, we call for 30% alternatives and they’ll be shocked. And they’ll say, we can’t put 30% in alternatives.

Mike:00:11:09Oh, that’s a great one to dig into as well. I mean, if there’s one thing we hear over and over, what’s the allocation? And I’m like, well, let me talk to your compliance department. It’s not us that can determine the allocation, it’s how have you educated your compliance department, and those around your firm who are supervising in order to, for them to understand the different nature of non-correlated sources of return and how they can enhance risk, versus DOL and lowest fee and beta access. And there’s a real sort of tension there. And the tension over the last decade has not had the backing of any kind of return give -up, right? So, it’s just paid to be 60/40. Ignore, buy and hold. Buy as much as you can, hold as much as you can of those typical assets. And there’s, whether it’s a central bank put or whatever, it’s just worked out to be really, really good. But December 31, 2021 came, and I just use that date for fun. I mean, it’s just somewhere in there. But the regime shifted, and relationships have changed. And so now…

Brad:00:12:25Yeah, and it’s funny, like — so, when I talk about alternatives, I joke that I say we look at the alternative to alternatives, right? Because again, alternatives don’t mean gold and silver to me, they mean strategies like yours. Long /short trend following, multi-asset strategies, loss mitigation strategies, market neutral bond alternative strategies, which have knocked whatever out of the park this year, relative to the bond market. Right? And it’s funny, when I talk to advisors, I talk to them about the future. Right. And everybody wants to know, okay, what’s Jerome Powell going to do? Right. And it’s funny, it’s like I know, Jerome Powell, right. And you know, he’s a smart guy.

Mike:00:13:14Personally?

Brad:00:13:16I call him every week for guidance and discuss the market, but he’s actually never answered the phone. So, I’ve never gotten through his …

Mike:00:13:25You got me.

Brad:00:13:27I gotcha, I gotcha. No, I do not know Jerome Powell.

Mike:00:13:30He’s such a straight man, Richard, you can’t blame me.

Richard:00:13:34He’s kind of grinning. Mike. I think he was letting on a little bit.

Brad:00:13:39Yeah, even though I’m in the Vegas area, I don’t play poker. So, I don’t have a good poker face. But people will say, what’s Jerome Powell going to do? What’s your target for the S&P 500 year end? And it’s like, I have no idea. You know, I’m not in the business of predicting the future, I’m in the business of preparing for the future, regardless of what happens. And that’s a big thing that we focus on is, don’t try to predict the future. Prepare for the future, regardless of what happens. It’s funny, actually, if Ani can share my screen real quick, I’m going to show you something. So, this is complete sense, right? I mean, this is like analysis paralysis. You may have seen graphs like this before, and I put this up there again, for some humor. But it’s trying to predict the market is, I don’t want to say a fool’s game, but it can be analysis paralysis.

And then when you look at what impacts the market you have all these questions, right? What’s inflation going to be, interest rates, taxes? You know, what about North Korea? COVID, Ukraine war, housing market? Is it time to buy, is it time to sell? There’s so many questions. I mean, there’s literally millions of variables that impact the market on a day to day basis. The weather is good, the weather is bad, right? That impacts the market. Your team loses in the World Cup, right, or playoff, right. Sorry, Richard.

Richard:00:15:15Let’s not go there quite just yet. But for those just listening, this is actually a chart of the Dow Jones over the last couple of months, or I don’t know if this is even 2022. And then there are all sorts of technical analysis drawn on the chart. And different question marks of whether this is a good time to buy, a good time to sell, whether this is an inflationary spike or recession, a fear of COVID, and so on, and so forth. So, this is in the industry, the jargon, I think, is dog’s breakfast is the term for what this chart looks like. It’s …

Mike:00:15:51You’re giving me, this chart magic. I know exactly what to do now.

Richard:00:15:53It is, isn’t it? But Brad, before we jump in too far into your current process, I’m very curious, because you started off investing and embracing an investment philosophy that is away from the traditional 60/40, way before it started to come into vogue. So, I’m wondering, why is that? Why did you embrace that? What were some of the formative years of your time in the market that kind of nudged you in that direction? And what were you doing before you had the access and availability of more alternative funds like we have today? How were you addressing your need to try and get truly uncorrelated return streams for your portfolios?

Brad:00:16:38Yeah. So, I started as a financial advisor right out of college in 1998. So, if you go back to 1998 when the market was a raging bull market, right, and I would call prospects, I would call potential clients, and I would hear things like Brad, my Janus Twenty Fund, sorry to throw out an individual name, but my Janus Twenty Fund is giving me 20% a year. Can you do better than that? And I thought to myself, I wonder if this person realizes it’s not called Janus 20 because it does 20% a year. And I wonder if they realize that it’s not always going to do 20% a year and they can’t promise that. And again, nothing against Janus, they’re a good fund family, good firm. But that was the 90s that was the late 90s. Right? It was …

Mike:00:17:29Some clever marketing naming too. Write that down, Richard. ReSolve 15.

Richard:00:17:33Already did. Already did.

Mike:00:17:35What’s the 15 mean? It’s not — doesn’t mean anything.

Richard:00:17:39Yeah, 15% a year, maybe. I don’t know.

Brad:00:17:42And for their fund, it was like concentrated, 20 holdings, that’s what it meant, 20 holdings. It was concentrated growth. And …

Mike:00:17:49I’m telling you, I’m hitting like the — I was in the business then. The other thing that astonished me was the number of new entrants that were trying to come into the business to advise clients who did not survive, because they could not provide a meaningful amount of advice that would sway a person away from that hypnotized Janus 20, you know, highly concentrated tech, hyper growth stock, 98, 99, 2000. I think the number of financial advisors that actually survived that gauntlet was vanishingly small. They couldn’t grow a business.

Brad:00:18:30Yeah, I saw a lot of folks come and go. And I was lucky enough to be at a firm that did financial planning as its core. We were not stockbrokers. You know, we were not insurance salespeople. We were actually financial planners. We charge fees for financial planning. We did analysis. I would always explain to a client that — I would say diagnosis or, prescription without diagnosis is malpractice. Right? You don’t go to the doctor and say, give me a prescription. The doctor says, well, hold on, we got to do an exam, right? We got to run some tests, we got to know what’s the right thing. No, no, I want the pill, I want this prescription. And in financial services, many ways that happens. People come in and like, I want to invest, I want to invest, I want to give you money. And you have to take a step back and say well invest for what? What’s your risk tolerance? What’s your timeframe? What’s your taxes? What’s your estate planning? What’s your cash flow? Like you don’t want to invest if you have high interest debt, you don’t want to invest for long-term if you got to be paying for college in the next year, and you didn’t save anything, right? It’s like, do the examination first.

I would always use an analogy of an X-ray, right? I would say if your elbow doesn’t feel good, the doctor does an X-ray to kind of do an in depth look at what’s working, what’s not working, how do we fix what’s broken? And if it’s not broken, let’s not mess with it. Right. So, that financial X-ray would be the financial plan. And every client we took on did a financial plan, to some degree or another. And again, I lost potential clients because they didn’t want to do the plan. They wanted their high tech growth and mutual fund company after mutual fund company. I would always remember it’s like, oh, we’re launching a tech fund. Oh, we’re launching a tech fund. And it’s every firm was launching a new tech fund, and it just didn’t seem right to me. And I never bought into those tech funds. You know, we tried to have a balance between the growth and the value, but even finding value in the late 90s was hard. You know, it’s funny, a balanced fund back in the late 90s was five growth funds. You know? And —

Mike:00:20:43I actually think it was, to be fair, was actually reasonable to find value. It just wasn’t rewarded, right? There was actually quite a good value market. But the hypnosis on the high growth led to just the marginal investors selling value stocks, and relentlessly chasing NASDAQ and high growth S&P stocks. The S&P incorporated AOL into the index. I mean, the S&P is not a systematic index, it’s an index by committee. And so mistakes were sort of made, if you will. But it’s a really interesting point, like there was value, you just didn’t get paid for it at all.

Brad:00:21:23Exactly. And exactly. And when it comes to recommending portfolios it’s funny, in every prospectus and every disclosure, there’s that there’s the line past performance is no indication of future results, right? We’ve all said it and heard it. But what’s the number one thing investors ask? What’s the number one thing financial advisors ask? How’s it done? What’s the performance? And they try to sell value to a client in the late 90s, you know, Brad, why do I want this fund? It’s averaged 3% when this thing’s done 20%. Why do I want these boring industrial companies and health care companies?

And so one thing that I always tried to find with funds was funds that were multi-asset. They were balanced funds, they were flexible funds, they were global, all allocation funds, right? And yeah, the tactical and multi-asset, like your funds didn’t exist 25 years ago as much, especially in the retail space. But there were global allocation funds, world balanced funds that did that to some degree. So, it would, I don’t want to say hide, but it would kind of hide the value in there with the growth if it’s a good manager, and the sum of the parts were in there, versus each of the individual ingredients kind of being shown from a performance standpoint, right.

Looking For Logic

Mike:00:22:47It’s a really interesting point too from the standpoint of if we go back to that period, sort of late 90s, early 2000s, everyone has to remember, this is prior to the invention and broad adoption of ETFs. So, if you wanted to take a 60/40 portfolio, and you were going to, you were conservative, so you’re going to weight it 42/58, you — And that was a big sort of benchmark shift. But you couldn’t just take two securities and sell 2% of your bonds and buy 2% of an index fund. You actually had to go through your portfolio of individual stocks and bonds, find the 2% across the board that you want to sell across 50 or 60 securities and then reallocate it over on the other side, across 50-60 securities, at commission rates and slippage rates that are far, far in excess of what they are today for investors to think about being more tactical in their portfolios.

You can do that with, if you have a 60/40 or whatever, a couple asset portfolio. That’s very easy to do today than the alternatives and the proliferation of alternatives. So, they added the opportunity to provide much more easy access. The challenge is much more easy access also allows for a lot of flip flopping and performance chasing in the short-term, which is a real challenge to ETFs. As much good as they’ve caused, boy oh boy, have they created excess turnover as well, at the same time. So, there’s always a yin and a yang, if you will. But I’ll punt it back to you because it, like, that late 90s period I’m quite familiar with and there’s been quite some dramatic shifts in what we can do now.

Richard:00:24:33Yeah, I think most investors don’t appreciate the amount of friction there used to be in the markets a couple of decades away. I think a lot of investors that have come of age in the post GFC world of index solutions and low cost beta and all that, don’t really understand how difficult it was. I mean, I barely saw that in the very beginning of my career, and I was still back in Brazil, so it was a different landscape altogether. But sorry, Brad, continue.

Brad:00:25:02Yeah. No, I mean, you’re absolutely right. I mean, the evolution in the financial services industry has done an amazing growth in the last 25 years. It’s kind of crazy with the products and the proliferation of products. And now with alts being more wide, not being a dirty word as much per se, and again, alts meaning different things in different ways, right. So, I had always used or tried to find more flexible funds and strategies and use balanced funds and world funds and to have funds where the manager could decide yeah, we like international more than US. So, a world fund allows you to do that. And it’s funny, because back then when we would run an asset allocation analysis, the asset allocation analysis would never call for world funds, it would never call for balanced funds. It would say 12% international, 5% EM, right, and X percentage in US and so forth, and so on, and it would be a static allocation. And again …

Richard:00:26:03And just stocks and bonds, right?

Brad:00:26:06Oh, stocks and bonds. Maybe a little gold, but not really. And yeah, it’s very few and those products have evolved, right? I mean, long-short, funds came out, 130/30, long-short came out. You know, never was really a big fan of those per se. You know, it’s funny, I look for — so, I mentioned that past performance is no indication of future results, but it’s what we all look at. And it’s really what all statistics are based on. And if we have time, we can kind of get into what type of statistics we look at. But statistics again, are all based on past performance, and if they’re not an indication of future results, why do we look at them? Well, because we do and we have to, right, and I don’t want to say they are an indication of future results because that’s not what the disclaimer says. But the other thing we look at, if we can’t look at past performance, is logic. Is there a logical approach to this strategy? And as silly as that sounds, I would look at the strategy, I would listen to the portfolio manager and say, do they make sense? Are they logical?

I remember being at a conference many, many years ago, and there was a manager up there doing a presentation, a portfolio manager, might have been a mid-cap growth manager. And someone in the audience said, asked them and said, “Why do you have X, Y, Z stock in this portfolio?” I forgot the name of the stock. But why do you have this stock in the portfolio? And the manager was like, “Well, I don’t really like that company. But it has a good holding in the index, so we have to own it.” And I thought to myself, “Well, geez, this guy’s not very smart. I mean, why would you buy something if you don’t like it?” You know? I mean, does it pass the logic test? If you don’t like it? Why would you buy it? And obviously, that fund is an index hugger, right. And there’s hundreds of those types of funds out there that are index huggers, because that’s what a lot of people look for again.

Mike:00:27:59We’re back to tracking error.

Brad:00:28:00Yeah, back to tracking error and they don’t want style drift.

Mike:00:28:03Style drift. Sorry, tracking error was style drift, precisely. My bad.

Brad:00:28:09Yeah, same definition. So, it’s like, we look for logic. I always look for logic and picked funds and strategies and say is this logical? And if it wasn’t logical I tried to avoid it. And if there were strategies that followed logic, like market neutral merger strategies, to me, is very logical. And you know, they have their ups and downs and downsides. But it’s very logical as a bond alternative makes a ton of sense. And I’ve used those for 25 years as part of a bond alternative.

Mike:00:28:45Have you thought — I mean, the one thing that’s interesting, and that is this whole positive feedback loop and target date funds and indexing. And have we gotten to the point where the feedback loop now dominates over thoughtful investment strategy. I don’t like it so I would like to underweight it. Versus hey, we’ve had a decade where index crushes everybody. And by the way their capital flows are such that the larger you are in the index, just the more money you get, and you have capital advantage over the other companies that you might be competing with, if you’re in the index versus out of the index. How have you — has any of your thought process there changed? Or is that you know, more driven by a bit of a fad and we’re going to move back to more active management versus this move to passive? What are your thoughts there?

Brad:00:29:31So, we call our asset allocation approach, multi-dimensional asset allocation, because we really take a multi-dimensional viewpoint. Passive, we like passive we like buy and hold. We like 60/40 for a portion of the asset allocation, right, we break it down to sleeves. So, we kind of have three main sleeves. The passive where we use very low cost passive ETFs to get 60/40, 50/50 …

Mike:00:29:59Source the beta, if you will.

Brad:00:30:01Source the beta, right? So, we have our strict buy and hold and a good portion in that. But then we have a sleeve that is tactical, where we will pick managers like yourself that will be tactical. I don’t necessarily believe that financial advisors should be the one making the tactical decisions. Financial advisors have a lot to do. And the alpha that the financial advisor can create for their client is not just investment alpha. Actually, the greater alpha they can do is in tax strategies, estate strategies, insurance strategies, cash flow, planning. The behavioral, absolutely.

Richard:00:30:36Hand holding, at the worst possible times, getting the client to stick with …

Brad:00:30:41Absolutely. And the investment methodology can help with that, right? We don’t necessarily want to — we do this, but we don’t just want to help a client through a stressful time. If possible, we want to try to help them avoid the stressful time to begin with, right? If you don’t like roller coasters, don’t get in the roller coaster line. Right? It’s that simple. And a lot of clients’ portfolios, I know they are until it starts to go down. Right? And what people don’t realize is they’re in that line for that roller coaster ride. And…

Mike:00:31:15They really don’t realize that. You’re so right, they really don’t realize.

Brad:00:31:19They don’t because they’re in the 100% buy and hold strategy. So, we have buy and hold passive, we have active where they’re truly active, where their tactical active, where maybe they go from large cap to mid-cap to bonds to cash to again, exactly what you guys do multi-asset, long-short. And then we do that on, we look for funds that are — that way in multi-asset, we look for tactical equity managers, and we look for tactical bond managers. There are tactical bond managers that have not — that are not down 15% this year, because they are tactical. And within that tactical sleeve, we do further analysis to again use logic to say not just past performance, how have they done, but what’s their approach? Are they quant? Are they fundamental? Are they using technical analysis? Are they using a combination of the three?

Ideally, we try to pair a quant manager with a fundamental manager with a technical analysis manager. Because a fundamental manager is sometimes early to the game, right? And the quant manager can sometimes be late to the game. You know, I always use the Peter Lynch example with Walmart, right? Peter Lynch famously was a very early investor in Walmart. And he invested in Walmart because he walked into a Walmart store, I don’t know 20, 30 plus years ago, and said, “Boy, there’s a lot of people here, and they’re buying everything.” Right? I mean, there’s no quant screen that Peter Lynch saw. I mean, he literally walked into a Walmart, the old buy what you know, type of investment theory, right? He was early to the game. A quant manager back then would not have invested.

So, having a balance between quantity and fundamental and technical, you may get some overlap between them. And that’s okay in our strategy, in our idea, but you smooth out the ride. And then the last sleeve we look at is the alternatives. So, we have three sleeves, buy and hold, tactical and alternatives. And the alternatives again are kind of alternatives to alternatives. Where again, your strategy kind of goes between tactical and alternative. But the arbitrage strategies, structured strategy, defined outcome, there’s a lot of different true alternatives, not just alternative assets, but alternative strategies that are in there. And it really boils down to, again, having been a financial advisor for 20 years, having managed clients’ money, having gotten calls from clients, you know, “Hey, Brad, how’s it going?” “Oh, it’s good. What’s up?” “The refrigerator blew up. We got to remodel the kitchen. There’s bacon and milk everywhere.” I’m like, “Oof, how did that happen, right?”

Mike:00:33:59I love those parties, bacon and milk everywhere.

Brad:00:34:03Yeah, they’re fun. I wasn’t invited. So, it’s so where do we take 20,000, 30,000 from to remodel the kitchen? And if you’re just in stocks and bonds and everything is down, you’re having to sell at a loss, right? So, by having non-correlated, truly non-correlated assets, the goal of asset allocation is not to get the highest return. The goal is a smoother return with ideally at least something in the portfolio, making money every timeframe. Again, can’t guarantee it, but that’s the goal so that when a client needs to tap into money unexpectedly, you have something to tap into that’s not at a loss, so you’re not locking in that loss and you give the portfolio time to kind of, you know, recuperate.

Private Equity

Richard:00:34:46You’ve conspicuously not mentioned the private versions of the public stuff that everyone loves. So, private equity, private debt, which we oftentimes will be in debates whether on the podcast or just in the broader conversations that we have about how people seem to think that they are the desirable components of an alternative sleeve. And I guess from a behavioral standpoint, I guess it’s been well-established that the lack of a frequent mark to market is such a behavioral tailwind that, especially from an institutional standpoint, but it sounds like or at least you haven’t mentioned those yet, have you largely stayed away from them for your alternative sleeve? Do you embrace the privates at all? What is your approach on that? And do you get questions from clients regarding your embrace, or lack thereof?

Brad:00:35:38We have, I mean, we’ve gotten some questions on that. And it’s funny. So, I would always tell my clients and I tell the advisors I work with that part of our job, part of my job is to scour the investment universe, right, looking for new and better investment opportunities, and literally what we do day in and day out. So, yeah, we look at private equity, look at private debt. And at the end of the day, its equity, its debt. So, the long-term correlation between private equity and equity, in the short-term, you’re right, because it’s private. It’s not marked to market.

And I think there could sometimes be a false sense of diversification, right. The non-traded REIT market is that way, right? Where REITs are non-traded, so they’re non-priced. You know, people look at their house the same way. It’s my house didn’t lose money. Well, it probably did, but it’s not marked to market. I mean, can you imagine if your mortgage statement came with a mark to market value on your equity in your house, every month?

Mike:00:36:40I think you’ve got some great slides too that I noticed. I think slide 10 starts with that in the presentation you sent us in getting prepped. And I think it’s really informative for a nerd like me. So, I mean, I take it that I don’t think people sort of internalize private debt or corporate debt is more a function of economic growth than it is some sort of certainty around inflation. And I thought your slides are a great job of here’s your pie chart, by the way, and here’s the correlated nature of things. So, I don’t know if you can pull that up and maybe walk us though that.

Brad:00:37:14Yeah, I can show that. And it’s, again, we look for logic. We would say yeah, what’s the risk to private equity versus public equity? Global economic recession, right? What’s the risk of soybeans relative to Apple stock? Nothing, right? I mean, what does one have to do with another? Neither, right. So, here’s a traditional asset allocation pie graph, right. And I would put this type of pie graph in front of my clients many, many times, and financial advisors show them all day long, right. And it’s funny what a number of clients would say to me after I show them this, they would say, “Oh, look at all the pretty colors, right?” And that’s kind of what — it’s kind of what the industry wants is all the pretty colors which show different sleeves. I must be getting a lot of different stuff. And this shows a lot, large cap, mid-cap, international, all that stuff.

But when you look at the correlation between all that stuff, the correlation is extremely high. So, the way this is done is large cap is the — is what everything’s being judged against. And then I just shade the transparency of blue, relative to its correlation. So, international stocks are 87% correlated, 87% transparent, high yield is 78%. So, you’re not getting a lot of oh, pretty bunch of different little colors in a traditional asset allocation, maybe you’re getting two different colors. And this is a 10-year correlation. And what do we know about correlation during times of stress? They merge, right? So, this is year to date correlation. Everything is highly correlated. The only thing that’s —

Mike:00:38:56Beautiful, .81 for investment grade and US Ag at .68.

Richard:00:39:00Yeah, the color contrast there is a really good depiction of the point you’re trying to drive there.

Brad:00:39:07And it’s funny, the only thing in this that’s somewhat non-correlated is EM stocks. And that’s because they’ve actually gone down a lot more than other things. So, that’s a problem. I’ll share this one too. This is the normal matrix, right? So, I like to show this because this is what clients tend to see and feel. But if you look and say, okay, here’s the normal correlation feature …

Richard:00:39:31Maybe zoom in —

Brad:00:39:33Yeah, I can zoom in.

Richard:00:39:34— just a click or two, I think will help.

Mike:00:39:38Yeah, perfect.

Brad:00:39:40Is that better?

Mike:00:39:41Yeah.

Brad:00:39:41Yeah. So, this is the normal correlation. You have large cap, mid cap, so forth and so on. And, again, this is just a year to date number. So, again, you can see EM is the only one that’s kind of highly — somewhat non-correlated. What we look at when we do our assets allocations is, and I’ve blocked out the name of the categories for proprietary purposes. But you can tell a dramatic difference, right? I mean, not all dark blue, right, 15 different asset classes. And again, these asset classes, quote unquote, may be strategies, may be — they’re not just buy and hold asset class. They’re a strategy, right?

Mike:00:40:29Yeah, there’s factors like maybe trend or as you say, risk parity. You grab risk parity, which is a really interesting point, because not only are you having these correlations vary, but it does matter on size, right? So, in your traditional portfolio where you had, I think it was aggregate bonds and high quality corporate bonds, whilst they are, well, they have low correlation, they also have low ambient vol. So, whilst you’re sitting there with, I don’t know, let’s just do the traditional 60/40, 40% of your portfolio in bonds that’s supposed to be an offset to your equities, the ambient volatility of those bonds is 6 to 8% versus the ambient volatility of equities, which is 15 to 20%. And so the capital allocation is also a bit off, from the perspective of we have this non-correlated asset, but we’ve significantly under-allocated on a risk basis to balance off the risks of the growth shock that might occur in the equity assets.

Brad:00:41:41Exactly. And it’s part of the issue as financial advisors, because you guys do the heavy lifting on the true money management, on deciding which areas to be invested in and long-short and exposure to this market, exposure to that market, right? The financial advisor has the job of finding you, deciding to allocate to you and strategies like yours and others. With our sleeve approach, we do that for advisors. But it gets into statement line risk with clients, right.

Mike:00:42:16Yeah, absolutely. Line item risk. Yeah.

Brad:00:42:14Line item risk, yep, yep. Kind of like headline risk, but line item risk. Exactly. And that’s a risk to advisors, that’s a worry of advisors, right? And I’ve actually had advisors say to me, “Brad, we love the idea of alternatives, but if they go down, then how do we stay in that?” And that’s like, well, I would tell my clients, if everything is going up at the same time, it means everything goes down at the same time. It’s as simple as that. You explain it to that. And I’ve heard other presenters at conferences say diversification means always having to say you’re sorry. And if you’re not apologizing for something in the portfolio, then you’re not really diversified.

Richard:00:42:58Or diversification works even when you don’t want it to, right. This idea that a truly well diversified allocation towards different strategies, like a portfolio that’s made up of all these different strategies. If it’s truly well diversified, as much as you don’t want it to have, it’s always going to have a few strategies that are down on any relevant timeframe. And that can be really hard for any advisor or client to look at their statement and just say you know what, why don’t we just fire these guys that are down, right? It’s kind of like, this visceral human nature thing that you need to continuously push against through education and through, I guess some degree of hand holding.

Brad:00:43:37Yeah, I’m a big analogy guy. I found analogies through my career have helped me stay motivated and help me explain things and I think of it as a cookie recipe. You know, I love cookies, right? It’s the holidays. Who doesn’t love a good gingerbread cookie this time of year, right? So, I would talk to clients, talk to advisors about what’s more important. Is it more important to look at the ingredients in the cookies, or is it the cookie? If the cookie tastes good, if the cookie is what you want it to be, that’s what’s important. There’s an ingredient in cookies that a lot of people don’t realize. That ingredient is salt. Sugar, but salt. Everyone knows …

Richard:00:33:18Forget the sugar content, just…

Brad:00:44:21Yeah, yeah, hopefully we don’t …

Mike:00:44:24A little bit of salt makes the sugar taste so much better, though, right?

Brad:00:44:27You need salt. You need salt in the cookie recipe. Otherwise, the cookie doesn’t taste good. Right? But if you just looked at the salt by itself and you tasted the salt, sometimes it doesn’t taste good, right? So, it’s changing the narrative with investors to say, let’s focus on the cookie. Let’s focus on the total portfolio, right? My job as your financial advisor is to pick the ingredients, right? I go to the store, and I pick the best ingredients I can find. And then I pick the best recipe right? So, sometimes my team, and I’ve got a great team. They don’t like the cookie analogy, because I beat it to death sometimes, but I just think it works really well. And you know, when you’re building an asset allocation, it is a recipe, right? It’s the advisor’s job is to go to the store, buy the ingredients, find the best ones, the best category, and then build the best recipe, right?

We would argue that, don’t just stop with one type of cookie, because again, we like cookies. So, that’s again, where most advisors limit themselves and they’ll only do a 60/40 cookie. Right? They’ll only do the buy and hold. They won’t do a tactical cookie, they won’t do an alternative cookie or risk parity cookie, a trend following cookie, right? They won’t get a basket of different cookies, they’ll just be all chocolate chip cookies. And chocolate chip cookies are good, don’t get me wrong. But variety helps, right? So, I think that analogy, that paraphrasing for advisors can help them with the line risk, statement line risk. Because at the end of the day, that’s what matters is the cookie.

Mike:00:46:09Yeah, the compounding factor there is the fact that over the last 10 years prior to December 31, 2021 really hasn’t — the diversification has been an albatross. And there’s been significant changes in the regime that tend to look like or lead to very different relationships structurally between asset prices, between the asset classes, where bonds have been a very good offset prior to 2021 against shocks and have formed with this very strong negative correlation. That’s unusual actually. You know, the 1982 to 2021 period, where bonds have this, — the structural negative correlation to stocks, is the unusual part. But we’ve got a whole cohort of advisors who are advising on portfolios who may not have experienced any other type of environment. And now alternatives come in and are popular again. Last time that was 1970s, when you had to incorporate other asset classes, like commodities or trend following in order to survive. So, it’s going to be interesting how adoption goes and how long we have to suffer through the period of difference in regime before lights go on for folks.

Brad:00:47:30And that’s again, why we have the multi-dimensional, where we would argue, don’t pick one type of cookie, right? Don’t pick just risk parity, right? Don’t just pick trend following, right? Have different sleeves, different approaches. So, that if look, if Jerome Powell wakes up one day, all of a sudden says, yeah, I was wrong, we’re going to cut rates 200 basis points, the bond market is going to go bananas, right? I mean, and you get out of your bond funds into alternatives now, I don’t know. Again, I can’t predict the future. You know, we hold bonds, we hold alternatives to bonds, and we hold tactical bond managers that can go back into bonds or out of bonds based on what they’re seeing.

Because, again, I don’t necessarily think financial advisors should be making those decisions. They should educate themselves, they should watch this podcast, this YouTube, other ones out there as well and educate themselves. But our lane as financial advisors… it’s funny, I say financial advisors should be financial advisors. And people say, what do you mean by that? That’s — what do you mean? It’s like, well, it means don’t be an economist, don’t be a prognosticator, don’t be a stock analyst, right? I mean, have opinions, certainly. But at the end of the day, your job as a financial advisor is to know the client and help them meet their goals. And if an advisor takes time to analyze things and say, yep, we’re going to get out of EM debt, we’re going to go into floating rate bonds, and then we’re going to go into, maybe next month, we’ll go into T bills, and then we’re going to short copper or whatever, it’s like, there’s no way a financial adviser can do that. No way they can do that.

That’s why I think picking managers like yourself, and there’s a lot of other good ones too, that complement each other where the heavy lifting of the trading is done by the advisor; that frees up so much time for the financial advisor, to grow their business, to meet with their clients, to get to know them, to explore these other opportunities and, again, create kind of true alpha overall for the client.

Richard:00:49:48Yeah, on the financial planning side and estate planning and those other considerations that the managers aren’t looking at all, and they’re only seeing their own sort of niche within the whole portfolio. I wonder if you might talk a little bit about the behavioral considerations of all this. I mean, I would imagine there’s some selection bias. I mean, the clients that have gravitated towards you throughout the years, must share some of your beliefs/biases, and they need to embrace kind of the same, at least base hypothesis of you know, the next several years are going to be different. Or maybe they were even earlier with you on this. So, they must have been embracing the same kind of views and values that you were. So, do you deal with the advisors alone and their clients, to some degree? Do you meet with some of these clients in some of the conferences? How do you think of those behavioral considerations?

Brad:00:50:40Yeah, so again, this is where I’m a little — our firm is very unique in the — in what we do, right, and even what we do. There’s a term called an OCIO, and Outsource Chief Investment Officer. You could label us as that, you could label us as an asset allocator for financial advisors. We’re unique in that realm of OCIOs in the sense that we were created by financial advisors for financial advisors. We’ve been — everyone on my team has been a financial advisor. I have the longest history of having individual clients for 20 years, and then consulting advisors for five additional years. So, we’ve sat across the table from a client, and sometimes I hear OCIOs say things and I cringe. It’s like if I was a retail client, I would run out the door based on what I’m hearing.

And it may be from managing money from a pension company standpoint, completely okay to say that. But managing money for a retail investor is much different than managing money for an institutional pension company that has an endowment that’s planning to last 500 years, right? Most clients aren’t going to live 500 years, they don’t want to. So, it is a very important part of it, which is why we again, try to build our portfolios to be smoother, to avoid the stressful times, not just walk you through the stressful times. Advisors now are hungry for this because this last year has been one of the worst starts or worst returns for a 60/40 portfolio in the history. And is it going to continue, is it not? I don’t know. We don’t predict the future. But the psychological component — it’s funny. People will spend all their time trying to pick the best fund, right? You know, and again, that’s kind of how I started. It’s what’s the best large cap growth fund, the best large cap value fund, the best mid-cap fund, and then they buy them.

But the real returns are not made when you buy an investment. They’re made when you sell the investment. Right? And that is the emotional side. So, mitigating that risk is probably one of our number one most important things, right. And investors, investors go through cycles, right? Again, I started in the late 90s, and it was 20% is not enough return, I want more. Right? We don’t have that type of environment right now. You know? People want — the old adage is the return of their money, not return on their money during times like now. So, yeah, psychology is crucial. And that’s where, again, advisors, good advisors spend time with their clients, getting to know them, listening to them, truly understanding their risk tolerance. And it changes over time with clients. So, it’s — yeah, it is probably one of the most important things. And it’s — I think one thing that …

Diversify Your Risks

Mike:00:53:53So, it answers a couple of questions that come to my mind. One is, when folks are looking at these types of asset classes, whether it’s our products or others, they tend to feel like, trend is an example, just generally has had a really good start to the year. And the question is, have I missed it? And how much should I allocate to it? So, in my mind, it’s more of as you’ve already articulated, this is a strategic allocation. And a strategic allocation if you didn’t have one, okay, well, that — we can’t go back in time, but now we have to establish one. So, how should we establish that strategic allocation? Do we do it all at once, do we do it over several quarters, several months? All of which is fine. None of it really matters to be fair. Just get it to a place where the current portfolio is not optimal, given circumstances. Here’s new optimality and there’s a journey there. It can be a day, it can be a year, but you’re going to journey to what you want in the end or start with the end in mind, if you will.

So, thinking about it from a strategic perspective, I think that’s where people should be thinking. The regime has shifted, inflation volatility is upon us. If you go back through history and study what inflation volatility means to asset classes, doesn’t matter whether inflation is sustained or not, it’s the volatility around the mean that’s the real meaningful factor and that, I don’t see that abating. Though it can fall a lot, it can rise a lot, but these have implications and provide opportunities for active asset management. So, now we’ve got this strategic gap. We fill that strategic gap.

Maybe Brad, you can enlighten us on what does this thing look like? Like, what’s the strategic endpoint aiming chart? Like, where do you — So, you kind of do a third, a third, a third? Is that generally where you start, or does it get a little bit more deep than that? Are there areas that you’ve decided not to include that others do? Like, give us a little bit of insight? We don’t want, certainly, the secret sauce, but give us the edges of the secret sauce, where we’re like, oh, we’re dying to learn more, but he didn’t tell us and he didn’t do it on purpose, because he doesn’t give his services away for free.

Brad:00:56:09Sure, sure. Yeah, so our, and we’ve done a lot of testing, right, and you have to have enough different stuff to matter, right? You put 5% in alternatives, it doesn’t matter, right? If it calls for a quarter cup of — I mean, I wouldn’t call it quarter cup of salt, but you know what I mean. You got to put enough in there for it to matter. So, our overall philosophy is a 40/30/30, where we put 40% in buy and hold, we put 30% in tactical, and then we put 30% in alternatives. And then within those sleeves, there’s components. There’s a multi-asset component, there’s an equity component or focus, call it equity focused, and then bond or income focused, right. So, we have a conservative multi-dimensional model, we have an aggressive multi-dimensional model, right.

So, there are the different spectrums of risk within there. And we have a number of other portfolios, some are tax sensitive, some are loss mitigation, ultra conservative, ultra aggressive, right? You know, and we customize portfolios as well. But kind of our core philosophy is that 40/30/30. And with inside there again, so like the tactile, kind of giving you a little bit already, that we look for quant fundamental and technical analysis managers in there. When we pick funds and in categories, it’s a challenge because the industry doesn’t think like we do. The industry doesn’t talk like we do. There’s no Morningstar screen for multi-asset alternatives. There’s no screen for income oriented alternatives, right? So, we have to do a lot of that ourselves, and categorize and label things ourselves. So, when we do that, yeah, we don’t build asset allocations with 50 different funds in them, it’s too much for advisors, right. Even when 15 sometimes that may be too many fund categories in there for smaller accounts. So, we have some more consolidated concise accounts in there. So, we try to pick strategies that are different.

So, on the bond fund alternatives, right, which have done very well this year, so there’s three strategies we look at. We look at a merger ARB, we look at convertible ARB and we look at a dividend capture strategy. There’s a lot of other income, alternative type arbitrage or otherwise type strategies out there. Those are the three that we look at. There’s logic behind all three of them being there. It’s funny, one of the things I emphasize when I talk to advisors is remind them on what asset allocation actually is supposed to do. And what really won the Nobel Prize and everybody gets it wrong. Everybody says, “Oh, you diversify your assets.” No, it’s not diversify your assets.

Harry Markowitz is very well known for asset allocation. But what he actually emphasized was diversify your risks. Right? Not your assets, your risks. So, what’s the risk to the bond market? Well, you have default, you have interest rate risk, right? What’s the risk to a merger ARB fund? Well it’s not, it’s none of those two risks. Right? It’s merger risk, right? Does Elon buy Twitter or not? That’s the risk. Right? If he does, the deal goes through, you make money. If he doesn’t, you don’t. Right? And that’s a good example, because everybody knows about Elon and Twitter, but it’s a bad example, because most merger ARB funds wouldn’t have touched that with a 10 foot pole because of — there’s Elon risk, right?

Mike:00:59:38Well, it’s that idiosyncratic risk. You’re trying to harvest this sort of normalcy, and now you inject, you know, political vigor and the randomness of Elon. That is entirely idiosyncratic and can’t be taken many times. Right? If it’s, I guess by definition, if something’s idiosyncratic, you can’t take that bet a thousand times. You just can’t find similar situations that accrue so you don’t know your edges and so you just say no, thank you.

Brad:01:00:14Yeah. And again, we pick managers that have the experience to look at those deals and decide what to go in and not. But we look for logical reasons, right? Is there a logical pair between your fund which is quant versus a technical analysis fund, right? There is because there’s going to be different signals between the two. So, we include —

Mike:01:00:32Different asset classes included, right. So, you have different …

Richard:01:00:35Yeah, structural reasons to be different — …

Brad:01:00:37Structural reasons, so yeah. So, we build in the structural reasons for the different funds with inside the allocation. So, again, that there’s a logical reason to have them. And we do look at past performance, but we look at — So, like, we break our analysis of funds down to qualitative and quantitative. So, qualitatively, we look at what we call the three P’s; the people, the process and the purpose, right? Who are the managers? What’s their philosophy? What’s the background? Do they make sense, right? And as silly as it sounds, I’ve listened to many managers and said, nope, and moved on. Right.

Mike:01:01:16We passed that screen?

Brad:01:01:19Yes. Very much so, very much. So, we look at the people, we also look at are the people investing in their own stuff, right. So, go back to my cookie analogy. If I make a bunch of cookies, and I don’t eat my cookies, why would you want to eat — you know, if the chef isn’t eating their cookie, you shouldn’t eat their cookie. So, we look for manager ownership of the strategy, then we look for the process? Is it a detailed process, is it logical, is it repeatable? And then what’s the purpose of the fund, right? If the purpose is loss mitigation, we’re not going to judge it against the S&P 500. Right? We’re going to judge it against more appropriate benchmark. And then after qualitatively, then we look at the quantitative, which is arguably the easier part, right? That’s looking at all the statistics, but we go a fair amount deeper than probably most, in the sense that we don’t just look at point in time analysis, point in time returns.

What’s his three-year return, five-year return, 10-year return? You know, we look at rolling returns and we also look at rolling Sharpe ratio, rolling Sortino ratio. And it’s funny, I have a conversation with advisors sometimes. And we say, I asked them like, do you look at standard deviation? Right? And you shouldn’t have this conversation with clients but advisors, like, you look at standard deviation? Yep. You look at it as a measure of risk? Yep. Don’t. Standard deviation is not really a measure of risk. It’s a measure of deviation. And in 25 years of financial services experience, I never met a single investor that did not want deviation on the upside. Everybody wants deviation on the upside. So, if you avoid funds

Mike:01:02:58… like Sortino, or Ulcer or what —

Brad:01:03:01Yeah, so we look at the Sortino ratio. To me, Sortino ratio is an amazing statistic that we look at and we track. One of one of our team members has a hedge fund experience, a global macro hedge fund, and he shined the light on Sortino ratio with me some time ago. And it’s not a statistic a lot of financial advisors really look at. It really is much more of an alt hedge funds statistic. But advisors should look at it much more because —

Mike:01:03:30Yeah, I think it reflects the actual behavioral bias of the client. So, now that I’ve said that, I’m going to let you explain the Sortino ratio, because I’m not explaining it.

Brad:01:03:41Yeah. So, we first have to understand the difference between standard deviation and loss standard deviation, right? So, standard deviation is broken up between your gain deviation and your loss deviation. Clients want the gain deviation, they just want a smaller loss deviation. So, when we look at funds, and we compare funds and decide what to look at, we look at loss deviation relative to benchmarks, relative to other funds. And then we look at — so a lot of advisors are familiar with Sharpe ratio. Sharpe ratio is basically return divided by standard deviation, really. Technically, it’s return minus risk free return divided by standard deviation, but our tagline …

Mike:01:04:22We’re going to have to start incorporating that too now because that was zero for a while now. It’s like real. So, we’re going to have to from now on.

Brad:01:04:27True. Now it’s actually something.

Mike:01:04:28— from now on. Yeah.

Brad:01:04:30True. True. But —

Richard:01:04:31Yeah, when you’re in the futures space, it’s all excess returns, right? But anyway, carry on, Brad.

Brad:01:04:37Yeah. And our tagline at our firm Dynamic Alpha Solutions is we like to simplify the complexity, right? We simplify the complexity for advisors, for clients. It’s something that I always did with my clients, tried to keep the financial jargon out. So, return divided by risk, that’s the way why I describe Sharpe ratio, right? You want a higher number on the numerator, and a smaller number on the denominator, right? And then you get a bigger number and you want to compare Sharpe ratios of similar asset categories to each other. So, Sortino is basically the same thing, it’s the return divided by the loss standard deviation, right, the loss deviation. So, it’s the same thing. You want a smaller loss deviation, and you want a higher return minus risk free rate of return. Right? So, because that’s what matters more.

And it’s funny, we have our own customized fact sheets that we create on funds. And if any advisor watching wants that, they can certainly reach out to us and I’ll give my contact info at the end. But we have a whole list of all the statistics, right, the alpha, beta, correlations, all that stuff, and we actually have a blog on our website called the ABCs, the alpha beta correlation of financial statistics, where we kind of go through those in plain English to say what’s really most important, and we define Sortino ratio.

But of all those statistics on our list, there’s really only one that the client cares about and really feels. A client doesn’t feel a Sortino ratio, a client can’t feel the average return, right? They can’t really feel averages, right? I think Mark Twain said it best, averages don’t mean anything. If they did, you’d put one foot in a bucket of boiling water and another foot in a bucket of ice water, and you’d be okay. Right? It doesn’t work that way. So, one statistic we report is probably the most important from an advisor — a client standpoint is worst monthly return or worst drawdown. Right. A worst monthly return is what client actually feels. And if we’re comparing two strategies, or we’re comparing your strategy to a balance, a 60/40 benchmark, right. And we see that the worst monthly return from your strategy is dramatically less than the 60/40 benchmark, that’s a win in our category, right? Because that’s what a client is going to feel.

Mike:01:06:58And it’s interesting on a monthly basis is when they’re going to feel it, right, when they get their monthly statement. And so it’s not monthly in the middle of the month, it’s monthly at the end of the month, when print statements will be printed and sent to clients, and they will have some sort of reaction.

Brad:01:07:15Absolutely, and there’s still a lot of clients that get monthly statements, a lot of clients still get monthly statements, or they log online. And you’re right, it’s end of the month, you want the market to go up for those statements, and that worst monthly drawdown, it’s an important category we look at in judging funds and saying, is this going to be a good fund? Because that gets back to, Richard, your previous question on investor psychology. Right? And building the portfolio to start with, with the mindset of smoothing out the returns, is crucial. And looking for that worst monthly return is one of the ways that we do that.

Richard:01:07:59Interesting. I’ve had to run a couple of analyses, or more than a couple now, both for the mutual fund in the US and the ETF that we manage in Canada. When asked how would you pair this strategy with other alternative strategies for our bucket, like what complements well, and you’re talking a little bit about sort of the merger ARB, the stat ARB and then the dividend, captured strategy. So, I’m wondering, do you look at some of these, I ran a couple of analysis, like the rolling correlation between the strategies, because they might have a correlation on a daily frequency that’s one thing, weekly, monthly, so that can vary. But also, the rolling correlation against, say, US equities or the equity benchmark for their market, which will give you a little bit of a sense of how much beta they’ll carry at any given point in time, which is conditional or not. And another component of this is the coincidental drawdown. So, do these strategies tend to be correlated or not? So, do their drawdowns coincide? These are some of the things that one of our analyzer tools here allows us to do. I’m wondering if you ever looked at any of those stats.

Brad:01:09:08Yeah. So, we do look a lot at rolling, so we look at rolling everything, right? So, again, it’s we look at rolling returns correlation, Sharpe ratio, Sortino ratios to look for consistency, right? We don’t want one hit wonders. We want consistency with the funds that we use. But even rolling correlation can be misleading, because there could be periods of time where correlation is high. And sometimes you want that correlation to be high when beta is in favor, right, when stuff is going up, you want high correlation, right. So, what we’ve tried to identify and there’s no screen on this, is we try to identify causation versus correlation, right, or non-correlation, right? We say is there a causation for the non-correlation?

We can look at a strategy and say, yep, you guys are quant, risk parity, trend following, whatever; it’s going to be correlated sometimes with the technical analysis, fundamental managers, sometimes it won’t. But the causation difference is there, right? So, again, it’s we try to put logic into it and look, stocks and bonds were non-correlated for a while, and now they’re super correlated, right? So, correlation is just a statistic. It’s a mathematical calculation. We try to dive deeper and say, what’s actually underneath the hood, right? What’s actually powering this strategy to say yes, it’s non-correlated, no it is correlated, right?

And it’s funny, there’s a statistic I saw at a conference some time ago, and the person put this on the screen. And it showed the correlation between cheese consumption in America, and death by bed sheets. And it’s like 98% correlated. The more cheese Americans make the more people die in their bed sheets. And I thought, oh, my goodness, how do you even die in your bed sheets? But that aside, that’s like illogical, right, totally illogical correlation, right? Highly correlated, but no causation, right. And we try to find that causation for the non-correlation in the strategy. So, like, everything is baked into it? And yeah, we look at the numbers too, but numbers can be misleading. Again, my degree is in mathematics and economics, right. And I understand math, but I understand the power of math can really be abused sometimes, right? I mean, they get another …

Richard:01:11:40You can torture the numbers to give you whatever results you want. So, it is really about understanding the structural underpinnings of the strategy and why they might correlate with the beta at times, and why you might actually want them to, whether it’s because they timed it well, or because their process allows them to get access to beta in the opportune moments when markets are ripping and…

Brad:01:12:03Yeah, absolutely. I mean, a tactical manager that might be using technical analysis, if they’re in the market now, they’re going to be highly correlated. And you want them to be in the market when the market’s going up, but you want them to get out of the market when the market’s going down, right? Again, that goes back to investor psychology and expectations with clients, right? Clients will fill out a risk tolerance questionnaire and say, oh, yeah. And there’s been studies on this, right, and a lot of studies. And in bull markets, the number of clients that say they’re aggressive is higher than the number of clients that are aggressive in a bear market, right? Risk tolerance really shouldn’t change. But to label, put that label on it with clients is a challenge, right. And we’ve all seen those studies of what the average mutual fund does versus the average investor, right? And the discrepancy is exponential. You know, and again, that’s what we try to …

Mike:01:13:00We’ve seen fund flows for years … at the wrong time.

Brad:01:13:06Yeah, fund flows can come at the wrong time. That goes back to your point earlier, Mike, of when is the right time to move into it? And we would argue there is no perfect time. Right? You can’t time it perfectly. Do you slowly mitigate into it? Again, are bonds the right place to be right now, hard to say, hard to say. We have bonds, we have core bonds in our allocation. But we have other strategies that are not core bonds that have done very well. And we think, and we’ve done the testing on them, those strategies did well when bonds were doing well.

So, if we can find a strategy that’s non-correlated in the bad times that’s positively correlated in the good times, it has a rolling experience of doing well when, or even beating the benchmark and a good time and beating the benchmark in a bad time, that rings our bell, and kind of meets our criteria. And again, we do all that heavy lifting. We do all that heavy lifting for the advisors of all the screening, the hours of research, the mind power, give it to advisors in a nice easily implementable format, where they’re not having to make the arduous decisions on saying, okay, let’s overweight international, overweight EM, right? It’s like no, buy these funds and these applications. Here’s the past experience. The future, you know, it’s going to be actively managed for you. We continue to monitor, we continue to look for changes, right. We look for causation of changes to manage our changes to what’s going on in …

Richard:01:14:39How often are you rebalancing? How often do you think about the rebalancing process? Quarterly, annually? And to tack on to that question, what would give you pause to perhaps re-jig the asset allocation or perhaps remove a manager? I mean, we are coming into a period now where you know a lot of people are describing as a paradigm shift. The Fourth Turning  gets thrown around there as well. Like, if we are indeed coming into a drastically different period for financial assets, for markets, for the economy, what process do you have in place? Or have you given much thought about what would cause you to remove a manager or change the makeup of these buckets?

Brad:01:15:23Great question. Yeah. So, we rebalance based on a threshold basis. So, we’re not just fixed every quarter, we rebalance, right? I mean, that can lead to unnecessary work from the advisor, as well as more tax ramifications and more cost to the advisor and potentially the client. So, we have thresholds where if an allocation is over a certain percentage from its initial planned allocation, we will send out a rebalancing recommendation back to the fixed. We’re always scouring that investment universe, as I say, for new and better investment opportunities out there. And there’s always new funds, new ETFs, new indexes that are coming out that are intriguing to us, new products that are being launched that are intriguing to us. And we identify them as they come, and we say where would this fit within our list? Would this fit better than a current allocation? Or will this fit as a secondary choice, and give advisors some choices on what they want to do.

If a portfolio manager would leave a fund? That’s certainly a red flag for us. If the head manager or managers leave, then then we would examine the fund to say, Okay, why, who’s who are the new people coming in? How different is the strategy going to be, and can we look for the causation for wanting? A bad month, a bad quarter? No. We look for if performance was bad, we would look at historical performance and say, is this within the realm of past experience, and if it’s within the past standard deviations of a loss, that’s okay, it’s performing as expected and we’re not going to just sell out of it. And again, diversification means always having to say you’re sorry, but that’s okay.

You know, again, remind our clients that if everything goes up at the same time, it means it’s all goes down at the same time. And we want to have some things that are non-correlated, right? So, it’s, again, we simplify complexity with clients, we don’t talk non-correlation and causation and Sharpe, Sortinos, and you know, all this other stuff. It’s as simple as, that’s my presentation with clients, right, individual clients, because they understand it, right. I always felt that if, and maybe it’s because it was the math teacher schooling inside me, where I did a lot of tutoring in college to help fellow students learn statistics and other math. And it’s like having to explain a concept four different ways before someone would understand it. It’s like, you have to really simplify it. And clients should understand what they’re getting into, they should understand the strategies, right? They don’t have to know how the engine works to go in there and tinker with the engine themselves. But they should have the basic understanding of it, so that if they do, they’re more likely to stick with it when times get a little problematic, right?

Personally, I’ve been a long-term investor in Tesla, right? I owned Tesla back in 2011. I walked into a Tesla store at the Oakbrook Shopping Mall. And like, this is a pretty cool concept. It’s a skateboard, it’s a car in the shopping mall. What is this thing? And got to learn about the company and their stores were designed by the same guy, George Blankenship that designed the Apple stores. So, it’s very hands-on. It’s like this is a cool company, I’m going to buy a little bit of stock. And then I bought the car. And I was one of the first Tesla owners back in 2012. But because I believe in the company, right, I’ve been able to ride a lot of waves with Tesla, and have sold some along the way and you know. But if you believe in the strategy, you’re more likely to ride through those dips, right? So, with me, it’s the Elon Musk dips, right? It’s the going public at 420 dip. It’s the Joe Rogan dip, it’s you name it, right? It’s been a Twitter dip. And you know …

Mike:01:19:31Oh, that’s pretty good. Well, it’s funny you say that. I remember when Amazon was the craze last year, three 90% drops and not quite 90, there’s a couple 90s, there’s a couple there 80. But in order to have held this Amazon stock when it was issued  in 98 till last year, I mean, you went through three basically 90% declines in the stock along the way. You got to be a believer in something that may hit through a 90% decline.

Brad:01:20:05You do. And certainly our portfolios aren’t designed for that type of volatility.

Mike:01:20:10No, no, no. This is individual stock tribalism.

Brad:01:20:13Yeah, exactly, exactly. That’s why I’ve held the Tesla shares as long as I have, right. And I’ve owned Apple for a long time. But most of my money are in funds like yours and other funds that are, … yeah, that are been actively managed and fit within the multi-dimensional viewpoint. but with inside there will be funds that underperform certain years and that’s okay. You know, that’s part of the expectation of investing in it.

Richard:01:20:40So, I expected nothing less, Brad, that you would eat your own cookies.

Brad:01:20:44So, yes, I do. I do eat my own cookies. I always did. Yep, yeah.

Mike:01:20:51I don’t know, Richard, I don’t know. He’s here all week, folks. That was a good one, that was a good one. So, what do you think, guys, should we wrap it up here, or do you want to —

Richard:01:21:00Any questions that we didn’t ask you, Brad, that you think are relevant as we draw to a close and…

Brad:01:21:09I don’t think so. I mean, I think we covered a bunch of stuff. We’ve covered a bunch of slides, we can always save some slides for the next time we chat if you want to chat again. But no, it’s been a pleasure. It’s been an honor. And I’ve watched you guys for some time now and you guys do great work, and yeah.

Mike:01:21:33Welcome. Well, give us, give everybody your digits. And I think you’ve mentioned the company name, but the name Twitter, LinkedIn or whatever, however you guys communicate, make sure we get it out there.

Brad:01:21:44Yeah, and if  Ani can share the screen, my contact info is on there. You can certainly email me at Brad@DynamicAlphaSolutions.com. My Twitter handle is DynamicAlphaSol, as solution. And my LinkedIn, I’m more active on LinkedIn and Twitter. We have a few websites, DynamicAlphaSolutions.com, you can read our blogs. We also have Rethink Asset Allocation where we have a nice big picture of a cookie on it. Which again, probably doesn’t surprise you.

The other thing that I would mention is, especially this time of year, if I can give a little plug to charity, charity work is in addition to running this firm, I also head up a charity nonprofit called the Alliance Foundation, where we help people with food, shelter and emotional support, which is kind of why you see our logo showing a house and apple and the dog.

Richard:01:23:43Is that a puppy?

Brad:01:23:45Yep, little puppies, right? Because we think animals can be amazing emotional support animals and support.

Richard:01:22:53You haven’t met my dog. But yes.

Brad:01:22:55Yeah, and sometimes my dog needs his own emotional support person as well. But you know, there’s a lot of blessed people that are watching this. And no matter what organization you give to, I think it’s always good to give to some organization this time of year. There’s also an amazing program through Amazon that I find a lot of people are not familiar with, it’s called the Smile.Amazon. So, if you shop at Amazon, it’s much better to shop at smile.amazon.com. It’s the same Amazon, same prices, same Prime, same everything, except Amazon will donate half a percent of whatever you spend to your charity of choosing. If you want to choose our charity, you can click right on that or you can’t click on the link, but you can go to that site there. Or you can find your own local organization.

The beauty is it doesn’t cost you anything if you’re shopping on Amazon anyways. It’s a great way to help those less fortunate. Charity work and philanthropic planning is something I’ve done many times as financial advisors. It was one of the ways that I connected with clients was talking about legacy planning. And I would encourage financial advisors if — again, that’s kind of the beauty of what we do is we free up time for the financial advisor, for them to do more work with their client. And I think having conversations with their clients on what are their philanthropic goals? And do they have organizations that they’re close to? And you can learn so much about an individual by learning about what organizations they’re close to, right? Whether it’s the animal shelter, the autism school, the whatever, and to get to know your client.

And then to build in strategies that can help them with taxes and charitable giving and estate planning; whether it’s donor advised funds or CRUTs or… a few years ago I did something called a flip NIMCRUT with the spigot. And we can probably have a — …

Mike:01:24:57Bless you.

Brad:01:24:59Yeah, we could probably have a webinar just on a flip NIMCRUT with a spigot. But it’s an awesome planning vehicle, honestly. I did it for myself and it can work for a lot of clients. And again, I’m not a lawyer. Consult your legal adviser, all that fun stuff. But there’s so much good work financial advisors do. It’s such a noble, wonderful profession. And yeah, our goal is to help advisors be better advisors, to help them help their clients.

Mike:01:25:29Fantastic. It’s been great, Brad.

Richard:01:25:31Thank for joining us, Brad. Yeah, thank you, Mike. Thanks, everyone, for watching. And are we on next weekend? Yeah. Well, you guys on, I’ll be off. But enjoy the weekend everyone.

Brad:01:25:44Be well.

Show more

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.