Hortz: Can you explain how your proprietary style scan analysis works and why you feel it is a “21st century leap forward” as an investment manager analysis tool?
Surz: Style Scan is a “Style Visualizer.” Every portfolio has its own unique style signature, so comparisons are made easy. Most importantly, the black box of returns-based style analysis is removed. You can visually see exactly which stocks are value or growth, large or small, so you understand why a portfolio is a certain style blend.
Hortz: Tell us about your Centric Core model and why you feel it is “an undiscovered treasure” in defensive diversification?
Surz: Centric Core is the 45 large companies that lie in between value and growth in my style classifications. If you replace the S&P500 with Centric in your core-satellite portfolio you will get better diversification and higher returns. As little as 20 percent in Centric provides as much diversification as 80 percent in the S&P. And because Centric doesn’t dilute the active managers as the S&P does, more alpha reaches the bottom line so you get higher returns.
Hortz: Your biggest concerns though seem to reside with target date funds and their growing adoption and reliance in retirement plans. What do you see as the major problem here?
Surz: The major problem is that TDFs are sold, not bought, and what is being sold is way too risky at the target date, so those near retirement are in jeopardy. I strongly feel that fiduciaries are breaching their Duty of Care by not looking at those risks. Instead they use their bundled service providers. Consequently, Vanguard, Fidelity and T. Rowe Price “own” 65 percent of the TDF market. Fund companies perspectives can have inherent conflicts of interest in skewing more to equities versus protecting beneficiaries around the target date, and fiduciaries are allowing/condoning it.
Hortz: Why is your patented Safe Glide Path technology characterized as a “target date breakthrough” and focuses on managing sequence of return risk?
Surz: Much has been written about the “Risk Zone” and “Sequence of Return Risk.” Losses in the Risk Zone that spans the five years before and after retirement are devastating because the beneficiary’s only response is to spend less, i.e. reduce the standard of living. Losing a substantial part of your lifetime savings is just plain wrong, but that’s what happened in 2008. Sequence of Return Risk shows that in retirement, when we’re spending savings, returns matter most when account balances are at their highest, namely near retirement. Savings will not last long if there’s a loss early on in retirement. The “sequence” matters—losing a lot toward the end of life doesn’t move the needle much, but losses early in retirement matter a lot.
Hortz: How did you go about creating this glide path process and engineer it to systematically optimize risk management?
Surz: I decided that the objective of my glide path would be to not lose participant savings. I coined a Hippocratic Oath for TDFs: do no harm by not losing savings. There is a science designed to achieve this objective. Asset Liability Management solves for an asset allocation through time that meets a liability. I designate the current account balance as the liability I want to meet and employ the math of asset liability management to not lose money. This discipline leads to an entirely safe—no risk—portfolio at the target date. It’s the only way to meet the objective of not losing beneficiary savings. Away from the target date, the allocation for young people is similar to other TDFs, but more diversified. The industry agrees on asset allocation/risk for young people, but there is big disagreement about safety at the target date. Since the most money is invested at the target date, you can see why there can be disparate motives.