[The 2009 financial crisis drove many in the industry to acknowledge the importance of directly addressing market downturns and spawned a small wave of asset managers dismantling traditional Modern Portfolio Theory and redefining their views on “risk.” This conscious decision led some to explore more dynamic investment methodologies or seek out adjunct analytical tools/overlays to add to their core investment process. Does the current coronavirus meltdown push more investment managers down an already existing path towards a more progressive approach to investing?
The Institute has been chronicling this evolution in asset management through interviews with boutique managers leading this movement to more dynamic definitions of risk management. That is why we are talking with recent Institute member Jon Robinson, founder and CEO of Blueprint Investment Partners—a North Carolina-based RIA firm that has very strong opinions and experience in this critical fiduciary topic. Given the nature of modern-day volatility, what truly represents prudent investing today?]
Bill Hortz: Do you think the current coronavirus pandemic and subsequent market meltdown necessitates changes in thinking and asking new questions in asset management?
Jon Robinson: As an asset manager, the key question is “how does a strategy perform when something occurs that has never happened before?” The ‘Coronacrash’ of 2020 is the first major bout of downside volatility experienced since the Financial Crisis. When prolonged periods of steadily rising markets occur, it dulls our sensitivity to the negative impacts of future catastrophic losses of 30, 40, or 50%. Monolithic markets generate complacency. With the radical market and economic changes realized in the last 60 days, how does one repeatably make objective, disciplined, and unemotional asset allocation decisions? We chose to build a fully systematic approach to address these concerns and believe it is the only way to take human behavioral bias out of the process to reduce the harmful effects of market volatility.
Hortz: How do you define risk and what risk management should entail for investment managers?
Robinson: Risk presents itself on many fronts and must be identified and managed accordingly. We measure portfolio risk in terms of drawdown, volatility, and variance from expectations. Large drawdowns, high relative volatility and a deviation from expectations, which is a form of tracking error, present large risks to investors and create a less emotionally intelligent investment experience, which in turn often lead to poor decisions. Our systems are designed to measure and control ‘the ride’ that our investor’s experience.
In our experience, Decision Risk also plays a huge part in meeting financial objectives. There are many types of decision risks. First, how are investment decisions made? Are they repeatable, robust, and objective? This does not imply rigidity, only the ability to have and follow a process regardless of the circumstances. February and March 2020 provided a test case for this as an asset manager.
Second, Decision Risk plays into an investors ability to maintain discipline, even when they feel the cost of short-term outcomes is too high. Case in point: an investor that experienced the brunt of the March decline might abandon an appropriate strategy at an inopportune time because of the pain experienced at the trough of the decline. Unfortunately, optimal decisions are unlikely to be made in real-time. They need to be addressed ahead of time—when negative emotions and volatility are low.
Hortz: Why do you characterize your firm as holding vastly different opinions, doing all the things that the industry would rather you didn’t do, and thereby offering a “refreshing alternative”?
Robinson: For starters, we are one of the few, if not the only systematic asset manager that is also 100% transparent with our rules. We believe that the rules themselves are not the ‘secret sauce.’ Our rules are time tested and statistically sound, but they are not the reason we will be successful. The ‘sizzle’ is in the disciplined execution of those rules, day in and day out. For some (not us), that might sound boring and uneventful. To paraphrase Warren Buffet, we believe that this is our ‘wide and long-lasting moat.’