Besides being systematic and transparent, we are also different in that we diversify across both assets and time. Asset diversification is standard operating procedure due to the mass adoption of Modern Portfolio Theory. Our risk budgeting process ensures that a portion of each asset class held in the portfolio remains passive, with infrequent rebalances. Time diversification is where we depart from standard Modern Portfolio Theory orthodoxy.
We apply two trend following strategies to each of the asset classes in the portfolio in order to gradually and systematically adjust asset allocation weightings, depending on the environment. This is how we diversify across time. Codifying this allows our decision making to be unemotional and disciplined with the objective of sidestepping major asset price declines. Additionally, the individual time frames are distinct to the extent they provide an additional layer of diversification through noncorrelation.
Hortz: From your extensive experience creating and researching systematic investment strategies, what you have learned that you feel is most important to share with your investors?
Robinson: There is tremendous value and freedom in keeping it simple. When we were designing our first investment models nearly 15 years ago, our assumption was to make things as mathematically complicated as possible. It was inconceivable to us that more simple rules could work given the efficiency of the markets and the immense computing power applied across the globe attempting to discover and profit from price discrepancies. What we realized is that simplicity provides strategies that are much stronger and more robust than complex. This realization did not come without a cost to our egos, but it did put us on the path to developing models that in our research and experience, are much stronger and more effective than before.
Hortz: What are examples of more prudent processes and actions needed in asset management that your research has led you to?
Robinson: One word: price. We utilize asset prices as the chief input in the decision-making model. The price of an asset is the only variable that directly affects the value of an investors account. There is no fundamental data point that can claim such a strong force. To precisely measure and manage risk, we focus almost exclusively on price to make decisions. Many times, fundamentals simply cannot react or update quickly enough to reflect a change in the environment. Price reflects these changes, in real-time. This line of thinking is not reflected in the current zeitgeist.
We recognize that by being different, we are often held to a higher standard. We welcome these heightened expectations and attack them with our time-tested core beliefs: be transparent, be a good partner, be disciplined and listen to the data.
Hortz: How do you see that our current experience is going to change asset management for the future?
Robinson: That is a good question and I am hesitant to speak to the future decisions of our peers. The industry has long been faced with the challenge of proving its value by virtue of performance. The digitization of markets has diluted the argument that a given manager can outperform a given benchmark and therefore be paid well for skill. The indexation of everything and the push towards passive investing has its merit, in fact, we have built our strategies largely using passive instruments. But without a rules-based plan to adjust allocations and exposure as environments change, investors may be overly exposed to risks that perhaps they (or their advisor) have not previously encountered.
With the level of Government and Fed intervention that occurred over the past 60 days, asset managers that rely on fundamental analysis alone are going to face some tough questions. In an environment where the Fed expands its balance sheet by $2.1 trillion in one month to backstop the credit markets, traditional fundamental signals become noisy and, in some cases, obsolete. How are managers adapting to this? When something that occurs that has not happened before, what is the plan? For us, this is business as usual since price is the ultimate arbiter of whether these policies are enough to overcome the tremendous economic impact of the virus or just a speed bump on the way to an eventual capitulation from investors.