WA MAGAZINE JanFeb PDF A - Flipbook - Page 13
THE STACKED RETURN
sensitive to the way “large blend” has bifurcated into a few gigantic technology
stocks (the “Magnificent 7”) on one side
and everything else on the other.
In their view, Big Tech has gotten too
big for the rest of the market to resist
its gravity. True diversification becomes
challenging, especially if your clients
are already overweight these companies. And if that makes you or your clients nervous, nobody truly sleeps well.
You might disagree with the fine
points, but the market has clearly
changed a lot since Burton Malkiel started pushing the passive approach as “good
enough” in the long term. A handful of
high-beta giants loom over the random
walk, skewing the risk-return characteristics the index once reflected.
Yes, it’s been a good ride. These
stocks grew to their current scale
through years of innovation and outperformance. But as vanilla funds get more
concentrated, their innate volatility can
become a trap for what’s now a $7 trillion system built around the S&P 500.
When something goes wrong at the
top of the food chain, the impact is harder
to diversify around. Think of it as a kind
of style drift pushing the market closer to
the NASDAQ and all that implies.
Either way, those who think the
benchmark itself is broken would rather
stack the core with different stocks,
which for all practical purposes means
this is how active security selection
creeps back into the ETF universe.
RODRIGO GORDILLO IS president of ReSolve Asset Management and one of the
n Stacked ETFs. But what do these funds do?
masterminds behind the Return
n stacking is a new name for a very, very old idea that has been used by
Return
evolutionary back in the ’50s when
institutions successfully for decades. It was revolutionary
William Sharpe actually came up with the concept of capital efficiency.
In essence, this is exactly what it sounds like: stacking one diversified
fering is that for every dollar that you
return on top of another. What we’re offering
e to something, let’s say like
invest, you’re going to get a full dollar of exposure
the S&P 500, and then on top of that, an extra dollar on a diversifying
asset class or strategy.
It could be another dollar of fixed income, another dollar of manes carry. So, when
aged futures trend, another dollar of managed futures
you put your X-ray goggles on, you now have your core portfolio of
100% plus an extra 100% in that diversifier as an example.
Some of these managers have relatively modest objectives, opting not to
radically redesign the S&P 500 so much
as reweight the portfolio to capture a
higher cash yield. That’s not a lot in absolute terms, but it’s enough to raise the
return floor just enough to turn some
bad years into neutral or good ones.
It’s enough to cover a meaningful portion of RMDs where those are a factor.
It’s enough to cover your fees. Same beta
as the fund your clients could pick out on
their own. Enhanced income that helps
compensate for miserable bond yields.
FRESH IDEA 3:
ACTIVE MANAGEMENT
And then there are managers who effectively ignore the market-weighted core
in vogue elsewhere to focus on bottomup growth at a reasonable price.
ACTIVE WITH DISTINCTION
MATT BARRY WEARS two hats at Touchstone Investments: capital markets and
product management. Here’s how he explains what makes the company’s non-indexed
ETFs different.
Distinctly active. That’s our mantra. That’ss what we’ve done at Touchstone
for 30 years on the mutual fund side. And that distinctively active approach is
carried over into the ETFs that we’ve launched over the past couple of years.
I think there’ss a place in the world for passive, but I also think the conventional wisdom about active managers has been overstated. And I think
lumping all active managers in the same bucket can be a mistake. We’ve
ch about identifying what characteristics with active
looked at academic research
managers has been associated with the ability to potentially outperform.
e best-in-breed
That’s how we build a portfolio at Touchstone: we hire
institutional-caliber subadvisors that have decades-long track records
of generating compelling performance in the institutional space.
That’s a research-intensive proposition in a world where market cap
calculations do all the work for index
funds and size has effectively eclipsed
quality. But for a lot of retail investors
(i.e., your clients) and a quiet minority
of advisors, that’s still what wealth
management is all about.
Stock picking survives because it can
add value over time if you focus on the
right asset classes or otherwise screen
the market more cogently than the people who construct the benchmarks.
And it plays a psychological role. Investors want to feel like they’re investing in something. They want a piece of
a company, not an abstract aggregation
of all the companies. They look to their
advisors to tell them why they’re in one
company and not another.
The “random walk” narrative works
when you want people to forget about
that and disengage from the process. It’s
good for convincing retirement plan participants, for example, to stop agonizing
over their month-to-month statements.
I think you want your clients to be
engaged. Motiv
Motivated. Excited. That doesn’t
mean they’re activ
actively getting in your
way. It only means the
they’re emotionally
invested in wha
what you’re doing.
That’s a good thing, right?
FRESH IDEA 4:
IMPACT AND OTHER THEMES
And on that note, while reshuffling the
core can add a point or tw
two to the
return pr
profile or smooth the
w
seas when
the market gets
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