"Question we feel advisors must ask themselves is whether or not it is prudent to continue doing what they are doing or make deliberate, yet methodical, changes to their asset management infrastructure." - Jon Robinson, Blueprint Investment Partners
[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?]
Hortz: Do you think the current coronavirus pandemic and subsequent market meltdown necessitates changes in thinking and asking new questions in asset management?
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 creates 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.”
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.
Hortz: Any last comments or perspectives you would like to share with advisors?
Robinson: Yes, I would like to say that we care deeply about the advisor-client experience. We have tremendous respect for the value advisors create and we want to provide innovative and client-friendly solutions so they can focus even more time on their strengths of relationship, advice, and communication. Everything we do, from investment strategy to marketing, incorporates the complex dynamic of this relationship. With strategies designed with the advisor and client in mind, we feel honored to continue partnering with advisors and delivering a more behaviorally friendly investment experience.
Having said that, and in the context of this unique time in history, the question we feel advisors must ask themselves is whether or not it is prudent to continue doing what they are doing or make deliberate, yet methodical, changes to their asset management infrastructure. The ongoing history of market shocks and meltdowns tells us that a new approach to asset allocation is required to do two things: 1) increase the probability of achieving the client’s investment goal and 2), in order to do that, better manage investor emotions during future shocks. That we can glean from history!
This, in our opinion, has become a fiduciary issue that has to be addressed because we know that these shocks will continue to come. That is behind the design of the mechanism we have built into our investment methodology to better position advisors and their clients.
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