45 What Diversification Play Tackles a Stagflation Blitz? The HRAA Playbook

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The HRAA Playbook

Pierre: [00:00:00] Hello, and welcome to Raise Your Average, my guests today are our co-hosts on this show, Mike Philbrick and Rodrigo Gordillo. They are principals at ReSolve Asset Management Global. They’re also sub-advisors to the Horizon’s Resolve Adaptive Asset Allocation ETF, ticker HRAA.

At the heart of our conversation we’re going to be talking about a chronic problem almost all of us investors are afflicted by, is the fact that the overwhelming majority of us are under diversified, profoundly under diversified. And the worst part of this is that by the time we discover this truth it’s often too late and there we are caught with our pants down. This time is no exception. This past year-and-a-half’s conversations here on this show with some of the industry’s most interesting and successful thought leaders has been so highly instructive on this topic. What’s also come out of all these conversations is that our fellow host Mike, Adam and Rodrigo not only love to talk about what they do a lot and what they’re cooking, they also more [00:01:00] importantly eat their own cooking. So it’s fitting that today we’re going to be talking thoughtfully about how ReSolve eats the free lunch of global diversification.

So stay tuned, hit that subscribe button, let us know what you think.

Speaker 1: The views and opinions expressed in this broadcast are those of the individual guests and do not necessarily reflect the official policy or position of AdvisorAnalyst.com, or of our guests. This broadcast is meant to be for informational purposes only. Nothing discussed in this broadcast is intended to be considered as advice.

Pierre: Mike, Rodrigo what’s up guys? What’s going on?

Mike: All kinds of fun stuff’s going on [laughs]. The, the world, the world is right again.

Rodrigo: Yeah.

Mike: Diversification matters. Risk management matters [laughs]. It’s a, uh, dispersion is amazing, it’s awesome. Yeah, no, I mean it’s probably not awesome for most and as you said in your introduction Pierre, um, folks who have sort of fallen a little bit prey to, uh, some over confidence [00:02:00] buyers driven by, you know, recency buyers of certain assets performing and whatnot, have now kind of gotten a, uh, a bias in their portfolio which favors, you know, traditional stocks and bonds only. It’s been a, it’s been a decade of, uh, of, uh, proverbial waste land in diversifying assets such as precious metals or commodities, or hedge funds or, uh, you know, funds that short things. And, um, so now we find many investors being caught flatfooted. They don’t quite have the exposure to those inflationary assets that will drive some returns during inflationary impulses and, and how could they really?

I mean, it’s been a decade where those assets could be largely ignored, but now a bit flatfooted. “What should I do? Who should I allocate to? How should I work that in? When should I pull it back? When do I make a change? Will it come back?”

Pierre: Yeah.

Mike: All of this sort of intuitive thinking that sort of undermines good, thoughtful decision making in portfolio construction. [00:03:00] Uh, so those things are, uh, are, are a bit of our specialty so at ReSolve, you know, we, we design and deploy systematic strategies. So, systematic means, you know, rules based strategy, grounded in some well established investments pr- investment principles. Uh, we do our own proprietary quantitative research and there’s, you know, a little bit of machine learning techniques deployed in there and, and, um, we offer those strategies on behalf of, you know, uh, ETFs, Mutual Funds, uh, some separately managed accounts and hedge funds. And so, you know, business has been pretty good over the last six months [laughs]. I can tell you, you know, it was, it was a tough sled to push for the last decade, you know?

Pushing risk management and diversity has not been the most popular thing, but here we d- here we are, the sun is shining and the, and the, you know, the wheat is ready to be f- harvested, I think.

Pierre: [laughs] That’s good.

Mike: A commodities play, I guess.

Pierre: So, yo- I think you already, you already sort of preambled a little bit but, you know, people know you guys as, as, as our [00:04:00] co-hosts on Raise Your Average but, uh, I, I think it’s time, you know, for us to get a real intro to ReSolve, to you guys. To what you actually do for a living and what you focus on and, and then we’ll get to how investors have largely ignored some important line items in their portfolios.

Mike: Yeah, I, I agree. I mean I think I, I, I think as I mentioned, we are all about diversity, global strategies, risk balance strategies and doing that through the eye of, uh, a mathematician if you will. And, and taking the calculus to a level where, you know, it’s kind of impossible for the human mind to contemplate the different types of asset classes, the ballots and whatnot. So we, we basically, um, boil that down, you know, at the end of every day. A whole bunch of assets in the world trade, uh, markets close, we run our models, we understand the relationships between those assets, uh, the correlations, the volatility of those assets and, [00:05:00] um, the differentiated nature of those assets and what their expected returns are, and we rebalance those portfolios on a regular basis. Anywhere from looking at shorter terms, uh, one to five days to some longer term items in, in, in different implementations of the various, um, strategies across the different structures we might be offering these strategies through, so that’s sort of the basics.

Pierre: Yeah.

Mike: Uh, Rod wh- what would you add?

Rodrigo: Yeah, no. I just think from a very high level what’s important, uh, to help it, uh, advisors and investors differentiate us from other asset management firms is that we, we’ve not ever picked a stock in ReSolve’s existence.

Pierre: Yeah.

Rodrigo: Uh, we don’t do any stock picking, right? This is with 99% of computational brainpower seems to go into. We, uh, Microsoft versus Apple, you know? Investing in Smart, be it ATS or long only in the equity space and happen to be domestic. Our focus is exclusively been on the asset allocation decision, which we’ve all been taught to, to emphasize [00:06:00] and, and understand that 90% of the directionality of your portfolio is in asset allocation rather than in security selection, um, and yet we don’t apply that knowledge. So, what we do is we pick asset classes globally. Domestic, uh, equities, international equities, US equities, sovereign bonds across the German bunds. The UK guilds, Canadian treasuries, US, uh, Canadian bonds, uh, Government bonds, US Treasuries and so on. We, we span the whole spectrum of commodities like, the energies, the grains, the softs, the metals as well as currencies, right? ‘Cause this is where the action is.

If you want to maximally diversify your portfolio and have the opportunity to not just survive a bad s- recession, or an inflationary regime but actually thrive in it, you need to contemplate that universe and therefore that’s the lens by which ReSolve Asset Management, um.

Pierre: Why, why do you, uh, why do you guys think it is that, I mean, uh, you know, going back 20, 30 [00:07:00] years, you know I, I, those statistics have always been true. I mean, they’ve always been out there and the, you know, we’ve all been aware of it for this entire duration of, of the last two, three decades. That diversification, asset allocation, um, is responsible for 90% of the outcomes that we get in our portfolios? Why do you think it is that, that even though we know and this stuff gets pounded into us, why do we ignore it?

Mike: [laughs] I th- I need to think its human behavior.

Pierre: Yeah.

Mike: You get, you get, um, you know, the, what it, what’s happened most recently? That recency buyers tends to drive you to certain asset classes. In 2008 after that major correction, you know, not a lot of people were, um, you know, running out to buy the US 60/40 Portfolio. And, you know, if you look at that run from 2000 to 2007 and eight when, you know, Canadian Stocks and British Market Stocks did particularly well. Portfolios have a lot of commodities and they had a lot of [00:08:00] commodity related products in them, just as we were about to enter into a decade long bear market in commodities. Uh, and, flip the script a little bit, right? And as DAC peaks in 2000 and does nothing for 14 years, uh, I mean, it has the correction in, in OA along with everybody else.

Pierre: Yeah.

Mike: So, it’s got negative, you know, 60% total return for, uh, an eight year timeframe [laughs]. Uh, nobody wants to own that at that moment in time. Uh, and so we find ourselves to some degree in that, maybe peak balanced 60/40 US exposure. If we go back through time that portfolio has, uh, has a Sharp ratio, so the risk adjusted returns for the 60/40 portfolio are about 50, call it 50 to 60 basis points. Well, the Sharp ratio has been two over the last 10 years. That, that is a, a, uh, you know, almost a six sigma event away from the mean.

Pierre: Yeah.

Mike: And so when you spend time above average, [00:09:00] in order to get back to average there will need to be some time spent below average and so, you know, when does that time come? Is today the, is today the, the, the moment? Well, if we think about the input, you know, the inflation and growth dynamics that drive asset prices they have been very conducive for portfolio made of stocks and bonds, especially in the domestic area in the US. Uh, you have growth, low inflation and you have abundant liquidity. That’s what’s happened in the last 10 years. We now are going to have a 10% CPI grid, so inflation is not low, it’s not benign anymore [laughs]. Gr- growth, growth is stuttering, if not slowing outright.

Pierre: Yeah.

Mike: And further we get the, the, the last thing is we have this contraction, or movement away from abundant liquidity. We’ve a quantitative easing which is ending, which when something [00:10:00] that’s easing ends it is tightening along with interest rates that are rising. So, those three pa- legs of the stool that have been such great supporters of the 60/40 portfolio, global growth, benign inflation, abundant liquidity have now reversed. We now have contracting liquidity, we have, uh, inflationary impulses and we have slowing growing. Asset classes that perform in that regime are very, very, very different than the ones that have enjoyed the sunshine for the last 10 years.

Rodrigo: Yeah. I think you want to look at this chart to understand why 60/40 has dominated our psyche for so long, right? This is a chart that goes from 1900 to today. Identifying, uh, so- the l- the equity line here is the 60/40 US Equity Portfolio in real dollar terms, which is important here, right? It’s, what, what matters is your actual real [00:11:00] growth. And the beige areas are periods where you have that benign inflation, persist in growth and abundant liquidity and the last times, with the exception of the mid naughts, uh, 2000 to 2010, which we have forgotten about, we forgot that that was a rough period for 60/40. If you think about when finance, when it really started dominating, uh, and being from a small portion of GDP to being one of the largest portions of GDP and many people getting into financial advice and financial, um, and portfolio management. Having retirement accounts, the RSPs, RESPs and 401[k]s and Roth IRAs in the US, that period started in the 80s and has, you know, grown in its importance.

So, from 1981 when Volcker broke the back of inflation to today, we have been dominated by a secular regime of disinflationary growth. And so that [00:12:00] when, when you’re in that period there’s very le- little that can be a, a developed equity and bond portfolio, which is what a 60/40 is, with the exception of that small period of 10 years. And as Mike alluded to, the last 10 years have been outstanding, possibly the 99th percentile best Sharp ratio in its history. But note that in any other economic regime, whether it’s inflationary growth, deflationary bust, inflationary, uh, sorry deflationary bust or static inflation like in the 70s, your 60/40 portfolio is going to underperform, by underperform I mean no performance, right? Zero. Is what we see in history. So it, it’s, it’s tough to get this point across in the middle of a disinflationary growth regime. I think we’re finally getting there.

Mike: Well, yeah. I, this, I’m, I’m of-, I’m often reminded of the Telab the, the scene, Telab story of the turkey, right? [laughs] I mean, a turkey doesn’t know Thanksgiving day is coming. And, you know, as, as the Turkey gets closer to [00:13:00] Thanksgiving day the farmer feeds him more and treats him even better, keeps the foxes away. How’s the turkey to know that Thanksgiving is upon him?

Pierre: [laughs] I think, I think it’s ironic that, you know, like, it, it, it takes us so long to let go of our emotionality. It takes us, you know, like, the, you have the dot-com crash and then, you know, it took literally, what? 12 years for us to resume interest in technology stocks.

Mike: Yeah.

Pierre: And now we’ve had, we’ve had, you know, we’ve had a decade of, of, uh, this disinflationary boom, or, uh, that, that we’re talking about. How long is it going to take for us to let go, or unwind the emotionality of how well the last 10 years went before we, we actually start to make meaningful or thoughtful decisions for the portfolio [00:14:00] that, that put us in a good position for the next 10 or 12 years?

Rodrigo: Yeah.

Mike: Nothing motivates like a crisis, right? I mean it’s always, it’s always going to be crisis necessity change. And, uh, you’d be surprised Pierre, how much change is happening that we see. We se- we are definitely seeing a, a strong adoption of what we’re going to discuss today, of co- protecting against Bond bear markets, protecting against Equity bear, bear markets, it’s, it’s happening and it’s happening quickly of course. The best time to, to plant a tree is 50 years ago, the next best time is today, right? So, better something than nothing and these people are, are acting.

Pierre: I mean, I think, you know, wh- how we met and how we came to know you was through the amount of education that you guys have been producing over the last decade through this, this period that was really li- as you said Mike, a tough sled to push, and l- lets get in [00:15:00] to your research. What motivated you guys to, what, what made you realize that, that you have to, you put all the cards on the table and show everything you know and say, you know, you know? And, and make this effort, this gargantuan effort that you guys have been making for a decade to, uh, to get advisors on board.

Rodrigo: That’s a good question. I think it starts with our personalities. I think, um, Mike, myself and Adam are really, we love to seek truth in, in uncomfortable discussions. And, uh, we’ve always had that wi- with each other. Uh, people love to be a fly on the walls when, when we ac- when we’re going at it and while it may seem uncomfortable, it often leads us all to move to a place of commonality, you know? It’s, it’s an ongoing process, but it ap- those discussions lead to insights that, uh, it just, it, it would be folly not to go out and tell the world what we’re thinking and what we’re discovering as, as we have these discussions. And, our personalities are ones liking to, to, to [00:16:00] coach, to educate. It’s always been part of our DNA at ReSolve and we’re lucky that, um, that we have enough people on the team that can clearly articulate that in writing. Adam’s a fantastic writer.

Pierre: Okay.

Rodrigo: Um, we all help in the narrative, but he can distill it very clearly and so, and then, you know, from, from being able to put on a podcast and, and be able to articulate things well Mike, Adam, Mike and Adam and myself are pretty, um, willing to do that and, and then take the backlash on social media when we.

Pierre: Yeah. And you guys, and you, and you, and you.

Rodrigo: Uh-huh.

Pierre: So, that’s part of it. A big part of that is that the, you know, the three of you plus the, uh, the full ReSolve team, you don’t agree with each other on everything. Or, or, rarely [laughing], rarely agree with each other.

Rodrigo: Yeah. And we, it certainly does, it’s an honest [inaudible 00:16:46] [laughing].

Uh, so that’s one aspect. The other aspect is what, what we went into is so esoteric for the average investor and advisor that there was no way that we were going to find success, [00:17:00] if we didn’t do our part in breaking it down, piece by piece, time and time again. Telling the same story in different ways until we got enough, we got to enough, enough people that, that we were getting, you know, they were taking the red pill and not coming back, right?

Pierre: Yeah.

Rodrigo: Once you go down the rabbit hole it’s not the ReSolve rabbit hole, it is the truth rabbit hole. It is the, the understanding and recognition of the true dynamics of markets and what you can do, um, if, there’s no turning back. So we, what’s been beneficial about the content that we put out is that once we get people to go down that rabbit hole, we seem to keep ’em for a long time as, as dedicated and loyal, uh, you know, followers and, and investors. Unlike, you know, just trying to say, you know, “Dividing stocks.” You know? “We run a dividend company, you understand that fully, right?” We, we’re, we’re slightly better than the competition and you get a bunch of assets and when you underperform you get redeemed, right? We have, um, we have a following that has led to people adding to our products when we have a, uh, a.

Pierre: [00:18:00] Well I think, I think a big, sorry, uh, I.

Rodrigo: That’s, that’s the key.

Pierre: I think a big part of that Rodrigo, is that what’s, what’s really, uh, refreshing about the way that you guys have gone about it is that, um, you’re honest about the fact that you don’t know, you just simply don’t know what’s going to happen, uh, you know? And, and, and I think what you’ve taught, what you’ve done, what you’ve gone to great lengths to, to teach and sort of what I’ve sort of gleamed from it, from, from all of our conversations is that, um, is to let go of those directional biases. To let go of, of what you, you know, what we all think at any given moment is a high conviction bet that we’re willing to, to vote with our money, um, and, and, and, you, you know?

Rodrigo: Yeah.

Pierre: I love that, that Voltaire quote, you know, the, um, about uncertainty [laughs]. That’s one of [00:19:00] my favorites and, you know, you guys happen to use it, but it’s, it’s, uh, that there’s, there’s nothing, there’s nothing worse than, nothing more risky than, than having this high conviction that your, your, your bet is the right one at any given time and that’s why diversification is, is so important. The kind of diversification that you’re talking about, that we’re going to talk about. Um, and you got what, what’s really cool is that you guys have distilled it into your strategy.

Rodrigo: Yeah. And I think, uh, my favorite quite is from Mark Twain, just to throw it in there and then I’ll let Mi- I’ll pass it on to Mike. It’s the idea, uh, his quote is, uh, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”

Pierre: And is that your fav- is that your favorite or, or is that Mike’s?

Rodrigo: It’s my favorite. That is my favorite.

Pierre: Yeah.

Mike: It’s one of mine too, for sure. For sure.

Rodrigo: But I think, I think the idea of sharing too is, is, uh, something that I’m very comfortable with and I think I’ve had to, to [00:20:00] some degree, help our team understand that, you know? It, it’s, it’s Docain from the Turtle Traders and he said, “It doesn’t matter.” And I don’t know if you remember Docain, Turtle Trader and then you had, you know, sort of the, the, the, the great movie with Eddie Murphy trading places with Mortimer and Randolph Duke and they were emulating, you know, William Eckhardt and Richard Dennis, back in the day.

Pierre: Yeah.

Rodrigo: But, you know the trading greats said, “You can publish your rules your winning rules, just put ’em on the front page of the paper. No one will be able to fault them, because they don’t, they haven’t internalized what it means to follow them.” They’ve seen some sort of profit outline, or some sort of percentage thing that they s- suspect to get, but they haven’t traveled the path. And we have encountered this many, many, many times where institutions or other investors or, uh, have tried to emulate what we do in adaptive asset allocation. There’s been whole parts of certain pension funds we’ve [00:21:00] heard of where they say, “Oh, we’re going to take this concept and run it.”

Pierre: Yeah.

Rodrigo: And it always seems to go aray, um, they want to put their own twist on it. They want to throw bias on it. They don’t quite fully understand the philosophical journey that they’re on and so, sharing very openly about that journey and how hard that path is to walk and then staying true to that path, is a big part of getting people to adopt this. And it is, it’s, it’s very much in my mind, still a Blue Ocean Strategy, it’s still a strategy where we’re doing something different. Um, the reason the Porsche is still an amazing sports car is because the engine’s over the back wheels and that is what matters.

Pierre: [laughs] Yeah.

Rodrigo: You can doll it up, you can paint it, the stereo in it sucks and you can, you can try and line it up against a Maserati or [00:22:00] an Aston Martin, or whatever other super car that you would like this little VW bug with the engine over the back wheels, to eat its lunch. So, the engine over the back wheels from a Porsche’s perspective is very much, “Hey, asset allocation matters more than security selection.”

Pierre: Yeah.

Rodrigo: That’s a concept that still has not been sort of well adopted and so you have to share, you have to, you know, sort of take it af- to, to the highest mountain top and yell and then people will, in the short run say, “See, you’re wrong. Look what happened over the last three months, or one month ago since you said that.” And, you know, what’s misunderstood is that these things happen over, over timeframes of three, five and 10 years. Look at the cycles we’ve talked about in the past. Whether it was a tech cycle, the resource boom, the second resource boom, the oil embargo of the 70s. Again these things are longer moving cycles, which does give time for [00:23:00] people to prepare. We’re seeing early adopters now start to say, “Wait a second, there has been a regime shift. How do I deal with this? Hey, let’s call the guys at ReSolve.” Because they’ve actually sau- thought this through and because we’ve been talking about this for 10 years.

At least they know who to call [laughing], you know? You know, it’s kind of like Ghost Busters, we’ve got a ghost, you call ReSolve [laughing]. More, if you want more 80s movies references I’m here all.

Pierre: You know what? I, I remember, I remember from our, uh, conversation with, uh, with Hugh Henry, not too long ago. Um, he talked about, one of the things that he talked about that was really, uh, an interesting point was that, you know, when he thought a decade ago or 12 years ago that China was going to bust, um, you know, he, he, he honestly just comes out and says, you know, he was way too premature. What he realized was that, you know, he sort of put this idea together that, that, you know, the Chinese zodiac is based on [00:24:00] 12 years and, and, and what he…

Rodrigo: Mm-hmm.

Pierre: … Of years. And-

Mike: Mm-hmm.

Pierre: … and, and what he misunderstood was that, you know, what he thought was imminently going to happen, would actually take a 12-year cycle to unfold because of the …

Mike: And what I loved about Hugh’s thought process was if we’re gonna get to some deflationary, you know, uh, Dave Rosenberg type of scenario, well, it’s, it’s a sign wave. You gotta snap the rubber band way over here and then some stuff has to happen to cause-

Pierre: Yeah.

Mike: … governments to rip it back down here. It’s not something that can just manifest on its own, you’ve actually gotta bend or you gotta stretch that band in one way in order to get it rip back the other way. So as he’s gone through that, hey, here’s how we get back to zero rates. Well, let me, let me-

Pierre: [laughs] Yeah.

Mike: … roll that out for you. It’s pretty epic, because you’ve gotta do what we’re doing; get this really massive inflationary impulse, [00:25:00] have central banks of the world have to orchestrate a slow down in growth to allow supply chains to heal and allow the resource components to cath up to the potential growth, which then means you have this, this growth, um, uh, cavern, which means, you know, economy collapses again and then you have to go back to zero rates again in order to re- to restart the whole system. And so, he’s got this very interesting way of thinking about how things proceed to an eventuality and what’s required in one direction in order to make the thing that you think’s gonna happen in the other direction.

Pierre: Yeah. Is it- you know what’s … what’s amazing about that and what’s unfortunate about the way we see portfolios today, which tends to be dominated, uh, by 60/40 or maybe it used to be, now it’s more like 80/20 and the 20 percent is more like private equity and private credit-

Mike: Right.

Pierre: … which is more equity but without market to market volatility, um, is [00:26:00] that … what you just described, Mike, is a period of, uh, of, like, back and forth between inflation and recession. What are the two blind spots for the 60 and 40 portfolio? What are the two things that they’re-

Mike: Preach.

Pierre: … most susceptible to? Right? Like, I mean, you got your bonds with CNN, you got bonds getting crushed at the same as equities. Why? Because we’re seeing a dual inflation and recession i.e. stagflation. But this is gonna go back and forth. There’s gonna be a period of, there’s gonna get- get to a point where it’s gonna be a pain point.

They’re gonna, uh, the Fed and, and, and the governments are gonna do fiscal and monetary spends, that’s gonna lead to a reflation. It’s gonna lead to growth, but bonds are gonna continue to suffer because inflation g-, uh, uh, is gonna happen. So this yo-yo, this inf- this, this period of inflation volatility-

Mike: Yeah.

Pierre: … we have not seen since 1981, so prior to 1981 and AHL-

Mike: Yeah.

Pierre: Was it AHL, Mike? I think AHL put a report up that showed that. Like, wha- what were the [00:27:00] differences [inaudible 00:27:00]

Mike: … Inflation volatility from 1925 to 1990 was about 4.8 percent. Since 1990, it’s been 1.3 percent. So, like a 65-

Pierre: What people don’t- Yeah, and what people don’t understand is that recession and inflation-

Mike: Yeah.

Pierre: … come hand in hand. This is just … it has to, right? Because remember what the dual mandate is of the fed governor. Is to- to balance inflation versus growth and, and what Volcker had to do in 1981, he had to break the back of inflation and the consequence of that was a massive recession, right? But, it’s- it’s what … it’s the medicine that it requires. So, what is 60/40 need, and needs- we need to fill in those blind spots, right? This is par- this is been the major focus of our research for more than ten years, and, uh, and how we’ve structured our products in-

Mike: See, isn’t it- isn’t it funny how, like, I- I- I just think it’s reminiscent with your journey, like, the length of- the length of time that you guys have actually been on this journey [00:28:00] to, to talk about all these different components, uh, sort of parallels what we’re talking about as well. I mean, you know, even on a v- uh, uh, you know, on a simple point is like, for the last decade fundamentals have fallen on deaf ears, you know, for the last decade diversification has fallen on deaf ears, has led to these, you know, these unbelievable biases that culminated in, in, you know, the, the end of 2021, uh, and then the turn at the- uh, the turn at the beginning of this year, I mean, this year, so far has been just uh, uh, you know, a route. And, um-

Pierre: Mm-hmm [affirmative].

Mike: … so, it- it- it- it’s amazing to see just, you know, the- the- the way things unfold, uh, how that’s unfolded into a- a … all so much, exactly what you’ve been talking about for so long.

Pierre: Yeah.

Mike: Yeah.

Pierre: And it’s gratifying to see that- the portfolio’s respond in the way, um, we have [00:29:00] suggested they would and many of the, the investors and clients along the way have been very heartened by that and even the perspective clients have said, “oh, actually, it worked like you said it was gonna work. That never happens.” And like, well, [laughs] thanks for waiting and keeping us on the, uh, on the docket but-

I think, just also, one more thing, the- the- the other thing is there’s this inflation that’s occurring, I wanna, make sure we emphasize Rodrigo’s point, cause there’s- there’s this, you know, mean rate of inflation, right? It is, you know, whatever the average rates gonna be. These dynamics of inflation and growth shocks, create the volatility around inflation. That’s what we saw pre-1990. It was volatile. The idea of inflation and growth, they were volatile. They have not been volatile since 1990. What happens, well, you get assets priced for pr- perfection. You get very high multiples, because you’ve had benign inflation, because you’ve had consistent growth. Because you had abundant liquidity, you get these very lovely valuations. Those have shifted.

Even if [00:30:00] inflation were to continue to moderate, run lower, there are going to be shocks that cause the volatility, the variance around the mean to be higher, which means that asset prices have to have higher future expected returns, i.e. be lower than they are now, in order for an investor to justify investing. And this is happening across the board. So, paying attention to how much risk you’re taking, where’s the balance of your risk in asset classes that respond to the various regimes, is incredibly important and is at the core of what we do and have been doing-

Mike: Yeah.

Pierre: … for ten years. So those are the blind spots. Those are the blind spots, right?

Mike: Yeah.

Pierre: I mean …

Mike: Correct.

Pierre: So, how can investors, you know, how can we think about filling in those blind spots?

Mike: Yeah. I- I mean that’s a good question and a lot of advisors we’re talking to, both … in Europe, U.S and Canada, im- immediately go in to what’s easy for them, right? So, what’s … what’s been comfortable, and what do they know? They know stocks.

Pierre: Mm-hmm [affirmative]

Mike: Right? And [00:31:00] so, immediately what they try to do is they … within that stock realm, they try to pivot towards, uh, inflation sensitive stocks. And that is a g- like, by the way, it’s a good first step in, in, in rotating to the energy sector maybe, right? But the reality is, it starts on their own. Or half what the underlying si- uh, product is, in this case, would be energies or commodities of some sort. But half is their cash flows, right? And so, in a bare market, in a … in a period where all of the economy’s going down and there’s less demand for everything, you are going to have … you’re not going to have that diversification that you need on the inflation side by tilting towards the commodity-based energies and you’re gonna get hurt on the bare side. So, it’s not a perfect product. So, what’s the next best thing? Canada especially-

Pierre: Right.

Mike: … seems to be gold. Okay. So gold as in inflation hedge. And sometimes it’s a disaster hedge, right? The problem with gold, of course, is that, inflation isn’t just monetary inflation, right? [00:32:00] It’s supply shock inflation. It’s demand pulling inflation. It is a wide variety of things, and, and people have gotten very disappointed with gold’s performance in the last, in, in 2021 because the monetary inflation happened in early ’20, right? That’s when we went from positive rates to negative rates we- gold is highly correlated to that monetary impact, and then flat lined when energies wh- when all the energy markets, the green markets, you know, all the traditional supply chain disrupted elements were making a killing. So, you a- you can’t just do it with gold. So, then you get into the passive commodity sleave, you can buy the Deutsche Bank commodity and invest in ETF for example, right? And absolutely, that has been tremendous. Um, as a way to hedge inflation. But again, inflation and recession go hand in hand. So, what has happened to passive commodity index as a hedge during periods of recession when th- when the fed finally starts fighting that inflation? You have massiv- I- it drops highe- uh, [00:33:00] uh, lower and more aggressively than your 60/40. I- It drops lower and more aggressively than your equity. So, you’ve managed to momentarily fill the inflation gap of your 60/40, but you’ve d- super-sized your bare market risk, right?

And so, a- again we have an imperfect hedge for the two blind spots that, uh, 60/40 have, right? A good hedge w- would be an out-sized allocation to sovereign bonds when that recession happens, assuming there’s no inflation. But, of course, we have gone down to nearly zero allocation of sovereign bonds.

Pierre: N- Not we …

Mike: You know-

Pierre: Mike’s investors. Not we.

Mike: Not we [laughs].

Pierre: We in the sense of, other people and investors.

Mike: Yeah. At large.

Pierre: [laughs]

Mike: So, that’s kind of the paradigm. That’s what we- that’s what I’m seeing and that’s where I’m seeing everybody stop at, right? The- They’re thinking, “those are the things that we can do”, and then th- it becomes their job to become traders as advisors. Now you have to trade when the inflation trade is over to get … to get out of your commodities [00:34:00] and you have to trade when it’s appropriate to along sovereign bonds-

Pierre: Yeah. Equally dangerous.

Mike: … It’s a tough gig ad- advisors are focused on building their business. You want t- you wanna create a strategic asset allocation that has those three engines; your equities for growth, your sovereign bonds for bare markets and something that can fill in that commodity inflation, and maybe help out the bonds when, um, when the recession comes. And to us, the natural next step in AHL … Diversified also wrote a fantastic report on this that kind of, goes through what works and longshore multi asset, you know, the manis futures of the world, the trends, th- that carries, the value investing this picking stock, uh, asset classes long and short across commodities, equities, bonds, an- and, uh, and currencies have been always, from the beginning of our research, the ones that make the most sense. To fill in-

Pierre: Yeah.

Mike: … both the recession [crosstalk 00:34:52]

Pierre: But I seriously doubt that, that advisors wanna actually become Randolph and Mortimer, you know, I- I- I- It’s [laughs], [00:35:00] it’s such a reach and it’s so outside of what the requirements of, of the profession are, in terms of managing y- you know, your book and managing your clients that, that, you know, why wouldn’t you, you know, hand that off or delegate that responsibility to people who do it all day long. And that’s all they do. They’re not … they’re not, you know, they’re not … they’re not having to, you know, managing one on one, their client’s expectations, they’re … they’re … they’re, you know, they’re … they’re bread and butter is literally just doing what you’re talking about all day long, and … and … and without having to have th- the client management interaction a- you know, interrupting that.

Mike: W- I think, I think, what are the challenges there? Um, is that the advisor, uh, or allocator often will assume that that role of asset allocation is theirs. And then they’re going to delegate the security selection. Um, the [00:36:00] challenge then becomes, of course, what we see happen in portfolios is, the line item risk.

Pierre: Yeah.

Mike: Which is; why do I have this line item of commodities that went down 55 percent, then rallied a bit, then went down fiftee- back down to fifty f- why, why do we have that over the last ten years? And this is why, many of those asset classes have been punted out of portfolios, both on retail and on institutional portfolios over the last decade and a half. Because they’ve been a drag. And diversification, by definition, is a drag. You’ll have something in your portfolio that’s killing it and something that killing you. And we perceive … you know, our sort of no-harm place to start is the all whether a risk parody portfolio where your balanced across the different regimes and you are including all of these asset classed, and you’re saying, “hey, I’m prepared and I’m just gonna de-emphasize prediction”. We obviously … that’s … that to us is beta. That’s the do-no-harm m- base [00:37:00] of the market portfolio.

Then, as Rodrigo alluded to, there’s longshore multi asset strategies that are very, uh, accretive to that portfolio, but let’s start with the no-harm portfolio, let’s measure whether we actually add value, uh, with active bets in the portfolio, or active allocations in the portfolio, which, we do, um, on- from our perspective, um, and then let’s add those tilts to the portfolio. Uh, but, you know, first; be diversified and be diversified so people think of 60/40 as diversified. It’s neither diversified nor is it balanced. You know, the balanced portfolio is silly. It’s 90 percent stock exposure from a risk perspective, right? So, that’s imbalanced. And, um, you know, that’s not diversity. You know, you got one, one basic bet and it’s overbalanced to that thing and that regime t- the regime has happened to work.

So now, if you’re in a risk parity portfolio, you’ve basically sailed through [00:38:00] the last year quite nicely, you know, even the year to date, I think, most, most, sort of, well conceived risk parity portfolios are down two to three percent. Some are down a little bit more, some are-

Pierre: Yeah.

Mike: … up a little bit more. Construction, but, sort of average, maybe down two or three percent. Kind of a yawn. Not down 20 percent, not down 15 percen- it’s kind of a, “oh my god, what’s happening to my portfolio? Oh nothing. I’ll go back to work. I’ll go back to do the [inaudible 00:38:26]”. Because you were prepared! Because you know the steps you’re gonna take. You know how you’re gonna re-balance. And those things are being done daily. And so, that’s where we would start and in the horizons, resolve, adapt a vast allocation ETF in that particular product, the base is, that risk parity base that we’re talking about. First start there.

Pierre: Yeah. Funny how … funny how, you know, ten years of S&P returns, S&P 500 returns of 16 percent, you know, twice the historical average, is [00:39:00] the reason why nobody’s diversified, up till the end of 2021. And … and-

Mike: Of course.

Pierre: … and they’ll- [laughs] You know, what you just said, which was that … that the, uh, you know, if you look at … at the .. at the risk parity, you know, average being, you know, what, minus a few percent, um, a yawn, but, you know, who wants the excitement of negative 20 p- you know, minus 20 percent, right? Which, which then … which then forces you to rush for the exit, like, you know, like a crazy- “oh, I need diversification”-

Mike: As long as my friends … you know, as long as my friends are down 20 percent, I feel a little bit better about that-

Pierre: Yeah, absolutely.

Mike: But that’s, you know, that’s, that’s a problem with investing, right?

Pierre: Yeah.

Mike: That’s your … that’s tracking error. And so that’s definitely something that needs to be attenuated and we’ve written on, uh, attenuating tracking error through return stacking, which is, you know, okay, you’ve got the 60/40 as your tracking error sensitivity. So, mean- we need to make sure you get [00:40:00] that. And now let’s stack on all of these alternative sources of return, to make sure that you can stay the course, you’ve got your 60/40, so you know you’re suffering or celebrating with your friends. But, hey, look at how we can enhance that even, um, and give you all of that, plus this diversifyer, wh- on our products, what we’ve sought to do is say, “okay, well, we’re not, you know, I don’t wanna sign up for the 60/40 right now, cause I don- I don … that’s not my tracking error and I don’t think it’s gonna be a good thing to track for the next ten years.”

So, in our products, it’s the risk parity; the most balanced, the highest sharp ratio portfolio and multi asset, generally speaking. Um, and then add the elf on top.

Pierre: Y- Can you imagine .. I mean .. Can you .. can you imagine-

Mike: Yeah.

Pierre: … what happens if you’re … you know, if a- a- a bunch of people are at a party and, and everybody’s down 20 percent and then … and then, and then … the one … the one person who’s at the party, who’s only down two or three percent speaks up. Wh- wh- wh- what would happen there? You know, like, the [00:41:00] immediate-

Mike: There’s … there’s two-

Pierre: [laughs]

Ridrigo: I was there. I lived there.

Pierre: There’s two types of people … So, go ahead [inaudible 00:41:05].

Ridrigo: Well, I … in a way, you know, for uh, uh, from my book, you know, in- in my allocation decision that included this type of multi asset longshore, I mean, we’re up 20 percent in that section of the portfolio and overall, um, we’re looking at seven percent positive return-

Pierre: Yeah.

Ridrigo: … in 2008, right? And so, I’ll tell you what I thought when I … when it first started happening, when that September, October came, I felt vindicated. I felt like high-fiving somebody. When I put my hand up, there was nobody around. Advisors were literally not around; literally depressed, right? I think we all … anybody who lived it- I’m … I’m … I’m not even saying this as a joke, like, it was tough … it was a tough go for any investor, where associated were taking the calls for advisors where … friends of mine weren’t getting callbacks from advisors because the- they didn’t have anything positive to say, they w- it was, it was a really tough period. P- Obviously not all advisors, [00:42:00] but it … a large proportion, didn’t show up. And I don’t blame them. It is a depressing thing, where you think your career, all the assets that you built, were gone in th- in that three month period, right?

If you were a Canadian small cap manager, focused advisor that killed it in the previous ten years and then got wiped out 70 percent, how you feel? So, for me living through that was moment- a moment of vindication and then actually, wanting it to stop. I rememb- I kept, you know, the portfolio kept growing, but I really wanted it to stop, because it was hurting so many people around us, right? So, I- I- It’s … I don’t … you know, it’s not a point of pride that we’re out-performing everybody. I don’t wanna be proud. I don’t wanna feel like I’m better. I just want everybody on board. And, and there’s no reason not to diversify that risk away. I don’t want advisors to be paid to hold people’s hands-

Pierre: Yeah.

Ridrigo: … when they’re losing 50 percent. I want advisors to be paid, to make positive returns when the markets are th- the equity [00:43:00] market specifically are down 50 percent. That’s what I want. That’s the dream. That’s why we educate. And that’s why we put, like, eight- ar- HRAA, the Horizons ReSolve Adaptive Asset Allocation fund, provides that base balance of risk parities and then on top of that, that pure alpha that’s lowly correlated through risk parity. It’s going long and short things. And has allowed us to be, for example, short bonds this year.

Pierre: Yeah

Ridrigo: Right? Y- y- the advisor needs to have a strategic allocation of bonds, we’ll short for you, right? We, we can go long energies and grains. We can short the S&P and then Aztec, we’ll go in long emerging markets. Like, there’s a wide variety of things that we can do that you can’t to provide that protection. I think we can- we’re coming to a point where we can actually add that value, add that piece of mind. And so, yeah, what are people thinking at that party? They hate you. And then you hate, you know, you. For being that guy. Uh, to answer your question [inaudible 00:43:49]

Pierre: Some of them … some of them [inaudible 00:43:50]

Mike: Who does Rodrigo think he is? [laughs]

Pierre: Who’s your … who’s your advisor? I need to talk to him.

Ridrigo: Yeah, exactly.

Pierre: Don’t … Don’t invite those people back to the party ever again [laughs], You’re [00:44:00] just never invited back. And the funny thing is, like, I mean, I don’t think we’re particularly smart guys. I don’t think we’re particularly dumb guys, you know, we’re sort of disciplined guys b- and, and, you know, all of a sudden, the last eight months is, wow, you know, th- Geez, how did you know? It was like, I- we didn- we- we’re doing the same stuff we were doing before, it’s a bit of Groundhog Day, here are the core tenants to successful investing. Here’s how you do it. Here’s how you layer them together. And here’s how you attenuate some of the behavioral biases that you might have. That message, for us, has been pretty much the same, for a decade. Now we’re just popular at the party.

Ridrigo: Because … here’s the thing Pierre. We- we- We’ve said a lot of things about, we disappointed people in the last ten years, you know, people like, stuck with us, but we really didn’t … our longest running track record’s ten years. Has a sharp ratio of 0.85, okay? That’s twice that of a … of the long sharp ratio of [00:45:00] 60/40. I mean, for a- if you, if you … run that at ten percent volatility, you’ll get eight percent rate in return. Isn’t that what everybody wants? Is it … shouldn’t everybody be happy?

Pierre: Apparently not. I mean …

Ridrigo: Of course, they’re unhappy about that.

Pierre: Yeah.

Mike: They’re unhappy about that because you mentioned the 16 percent analyzed return of the S&P. And so, it’s not that we failed. It’s not that we disappointed. We did ex- we put together exactly what we, what we wanted and the outcome was exactly what we expected. In a year to date, there’s a- April 29th of 2022, we’re up around ten, eleven percent. No different than what we’d be up on average most years, right? There is no difference. This idea of all whether … this idea of being persistent and consistent. That’s … that’s something achievable and a- right now it seems crazy good because markets are down 15 percent and we’re up ten, that’s 25 percent differential. By markets, I mean equity markets. But within that portfolio, you know, we have things that are losing money as [00:46:00] well. So that’s the point. The point is, not that we did- something … we’re doing something outrageously great right now, is that we done something that is super accessible, middle of the line all year, and this is what happens when we can differentiate, based on what people care about, which is-

Yeah I- I think … I think …

Pierre: Sorry Mike, I- I- I just wanted to say that, that, you know, everything boils down to, like, it doesn’t matter, you know, good versus bad doesn’t seem- doesn’t matter anymore. Everything is just better or worse. I’m doing … I’m doing better than or I’m doing worse than and everything is relative, right? I mean, a lot of the industry has shaped a lot of commentary around relative performance and what’s doing better and what’s not doing as well. But, you know, it’s like, when somebody, you know … when you say to somebody, “oh, how’re you doing?” And they say, uh, “better”, you know, that doesn’t mean good. That just means, [laughs], you know, that doesn’t mean good, right? It just means …

Ridrigo: Yeah.

Pierre: It just means [00:47:00] better and better could still be minus ten versus minus 20. Y- and, and either way, that’s not good. So, like, there’s very … there’s very little absolute talk in- in- in markets and investing.

Mike: Well, there will be once we get [inaudible 00:47:15] market.

Pierre: Yeah. Yeah, but-

Mike: We’ll start to hear about absolute returns once we’re … once we have, you know, 20-

Pierre: But as an advis- as an advisor, do you really wanna wait for that? Exactly.

Mike: No. I don;t think so. And, and there’s been, you know, the other thing that’s, that’s occurred in Canada that has been, uh, quite advantageous for Canadian investors, Canada continues to be on the leading edge of a number of different product developments and one of the things that allowed us to create HRAA or Horizons ReSolve Adaptive Asset Allocation portfolio, uh, we were running a pure risk parity portfolio, but you coulnd;t get leverage into an ETF.

Pierre: Right.

Mike: Uh, there was … prior to the liquid all regulations changes. Now once we had the liquid alternatives regulations [00:48:00] update and they allowed for some use of leverage across a diver-

And they allowed for some use of leverage across a diversified portfolio. All of a sudden, you know, some, some real doors open for uh, providers and asset managers like us to partner with Horizons, and really offer an absolutely kick ass product uh, to investors. And there’s a couple of very unique features to this that are exceptional, that are no- … Literally not available anywhere else in the world that, that we should talk about. So not only is it a strategy um, opportunity, it’s a structure opportunity.

Interviewer: Yeah.

Mike: And structure often limits strategy. Um, in the case in Canada with liquid alts, you know, this is, this is a medium risk product, and as a medium risk product, has just tremendously attractive tax considerations, and tremendously attractive sort of portfolio construction opportunities within a… Rod, do you wanna just elaborate on a few of those?

Rodriguez: Yeah. [00:49:00] So, so, yeah let me, let me parse that out. So what Mike means by moderate risk is that we run it at volatility [inaudible 00:49:08]. This is very similar to that of a blue chip uh, bond portfolio, but without the tail risk. Uh, blue chip bond portfolio, we’ve seen draw downs of 35-40% in a wait um, because of the diversification benefits of what we just described, your, we shouldn’t expect um, we should probably expect half of that drawdown in the future history, or the future of this product. So that’s from a structural perspective, and from a volatility perspective, uh, and labeling within the vast majority of broker dealers. We run at medium risk, which means that advisors can allocate a, a significant amount to make an actual difference-

Interviewer: Yeah, so.

Rodriguez: … To their pool. That’s key [inaudible 00:49:48]-

Interviewer: So that, that’s, saying, saying that, that you’re getting 8% volatility, that’s basically a cap on, on, on the amount of volatility that the strategy-

Mike: … Well, it’s an average.

Interviewer: … Yeah.

Mike: It’s an average.

Rodriguez: Plus or minus, plus or minus, 2% depending on [00:50:00] average, but yeah.

Mike: My, market cycle’s 8%.

Interviewer: But it sets a, it sets a ceiling, like, like a put, like it sets a, it sets a ceiling on, on, on, on uh, how much volatility can be expected or experienced. Yeah.

Rodriguez: It’s an important aspect of risk management-

Interviewer: Yeah.

Rodriguez: … On drawdown for sure.

Interviewer: For sure.

Rodriguez: Drawdown, meaning, maximum peak to trough loss. And then the other structural advantage, I mean one of the reasons why this all weather concept, and, and investing in futures in Canada has not been uh, widely adopted, or widely offered. We really are like one of a very small handful of public products available in this space. Is that, futures are taxed really inefficiently, right?, and every year, regardless of whether you bought or sold your mark to market, and what you made, and you pay a full income, whatever your income is on that P&L, and you get a-

Interviewer: Right.

Rodriguez: … A tax slip that you have to pay. So that tax’s inefficient, there’s [00:51:00] no capital gains, there’s no, there’s just pure income. So why would that be attractive? Well, within the Horizons corporate class structure, we have an ability to redistribute that, and so, there’s no expected distributions at the end of the year. And as far as I can tell, and this may have changed, we’re the only ones in Canada that have this ability, right? So within this handful of structures that could do long short multi asset across commodities, equities bonds, um, rates, and um, currencies, we’re the only ones that can keep that in people’s pockets until they sell them, when they sell [inaudible 00:51:36].

Interviewer: But that’s, that’s seriously, yeah, and I agree with you, that’s seriously important. That’s, that’s something that, that, you know, anyone who would try to do these things on their own uh, would not have the tax efficiency that you’ve accomplished there. That’s, yeah.

Rodriguez: And then the last thing I’ll say, because we, we threw up the liquid alt uh, label. Um, I, I think it’s [00:52:00] kind of like saying equity manager, right? There’s many styles within that space. And in Canada, we’re dominated, the liquid alt space is dominated by traditional long short-

Interviewer: Right.

Rodriguez: … Canadian equity managers. It, it’s just more of the same, it’s just like, uh, you know, the S&P/TSX 60 with a slightly lower volatility um, that’s not gonna give you inflation protection, and it’s not gonna give you bear market protection most likely, okay? Um, within the many alternative sleeves that exist in the world, and if you go to the HFRI index categories, you can kind of look to see them, we have a chart that I can you know, link to, that shows the correlation of all these that are, you know, merger arm, long short equity, market neutral, and so on, every single one of them has a, a positive correlation to the S&P, and a positive correlation to bonds. The only category uh, in the hedge fund space that has very close to zero in both equities and bonds is the [inaudible 00:52:59] NCTA index for [00:53:00] example, or the Goldman Sachs uh, global macro systematic index, which is kind of the two categories-

Interviewer: Right.

Rodriguez: … They fall into, right? So this is a unique liquid alternative. Within the liquid alternative space, this category in my opinion is the most crucial to really focus your attention on, and get educated on, ’cause it’s, it’s the most likely to fill in those key gaps. And so that’s another structural reason why we’re so excited about this product. I, I can’t wait to see what this looks like in 10-12 years.

Interviewer: Yeah. What are the actual moving parts of HRAA?

Rodriguez: So the moving parts are, we’ve addressed it quite a few, right? And, um, and there’s a ton of education on it if you guys wanna go to our site, um, and we’ll put some links to it, but really it’s, it’s trying to, everybody’s probably at this point heard of Ray Dalio, right?, and heard of Bridgewater. I mean, a huge inspiration, right? You, you wanna have a sense of humility, and you, you wanna have the belief that you can do better [00:54:00] by uh, your profession, and our profession is one, of course of trying to predict the future, and trying to pick the right asset classes at the right time, and the right weights. Um, let me talk about the, the humility part, that’s risk parity. The idea of risk parity, it’s an explicit recognition of our ignorance. It’s, it’s the belief that it’s okay to have things, killing, killing it, and have things in your portfolio that are killing you, in order to-

Interviewer: Yeah.

Rodriguez: … Have that balance, right? So that is the first layer of HRAA. For every dollar that you give us, you’re gonna get a dollar risk exposure of risk parity, that is our attempt to be humble. And to, and to participate in global ingenuity, and global growth, it is a long only strategy. And it’s a long way strategy, but it’s tactical, because we’re, we’re putting our risk parity goggles on. And instead of giving, you know, commodities, equities, and bonds, and equal dollar weight, what we’re doing is we’re putting equal, we want equal risk contribution. So that means that when I put my goggles on, I can see how risks are changing [00:55:00] by how much they’re correlating to each other, and what their relative volatilities are. So for example, the last couple of months, equities, and bonds have become highly correlated, and so a risk parity portfolio will de-emphasize both of those assets, and emphasize commodities, not in an attempt to predict the future movement of them, but in an attempt to ma- maintain that perfect balance.

So you have that key component of humility. And then we have, we believe we have expertise in trying to predict the next five days movement-

Interviewer: Right.

Rodriguez: … With all these asset classes, right? So we’re not trying to predict what’s gonna happen to commodities over the last 12 months, we’re legitimately trying to just try to find on average what’s gonna happen in the next five days. And the, the second layer, so for the other dollar that you’re gonna get in risk exposure is gonna be in this systematic global macro, which is just a fancy word for saying, “I can go long, and short. All of these asset classes over 50 different futures contracts. And at any given day, I have an equal chance of going long, and short, each one of these.”, and so [00:56:00] the correlation of this, of this stacked um, uh, asset class or strategy is zero to that risk parity. And so what you’re stacking is, whatever return you get from risk parity you’re gonna get, whatever return you’re gonna get from the uh, systematic macro you’re gonna get, you’re stacking those returns, but because of the zero correlation, you’re not necessarily stacking the risk.

Interviewer: Right, right.

Rodriguez: Right? It’s zigging, and zagging it. It’s buying a ski company-

Interviewer: Yeah.

Rodriguez: That has cash flows in the winter, and then also buying a bike company that has cash flow that some of them, both make money, but they do it in offsetting ways so that at the end of the day you get the same return, if not more, because of the rebalancing of cash flows, but with a lower volatility. So that is the, that is the Ray Dalio approach is, their all weather strategy that they offer institutions, and their pure alpha that they offer institutions, and then they let them mix, and match what they want. We’ve been presumptuous enough to say 50/50 is probably good for advisors, and investors. And then the final piece that we, that we added that we’re very proud of is the, [00:57:00] you know, the blanks, everything has a blind spot, and the blind spot for risk parity um, that’s rarely talked about is liquidity shocks. So Mike talked about-

Interviewer: Right.

Rodriguez: … Abundant liquidity, that benefits risk parity as well, because when there’s abundant cash, everything floats, right? I mean the, all boats, uh, floating with end or rising tide. But there are moments, acute moments like in October ’08, and March 2020, where liquidity dries up everywhere, right? So in that crash of the COVID crash, we saw risk parity flatline, while the market crashed in the first couple of weeks, and then had a big drop. That was because they were flatlining because treasuries, and gold was going up. And in the last few days, both equities, treasuries, and gold went down together. So that liquidity shock, the only thing that goes up in a liquidity event is volatility, and so we have an overlay that’s almost always off, 95% of the time it’s off, but when we identify through quantitative methods, when the term structure of the volatility um, markets change, we have the opportunity to [00:58:00] go long [inaudible 00:58:01].

Interviewer: Right.

Rodriguez: And long the V stocks, which is European [inaudible 00:58:04] in order to build that liquidity gap, right? So, having identified that gap, we’ve found a process to be able to fill that gap. And, uh, and so those are, you’re in essence getting three in one, you’re getting your best beta, your best alpha, and a tail protection overlay. That’s what HRAA is as an all-weather hundred year portfolio, that also happens to fill a nice little gap for advisors as a sleeve on their traditional-

Interviewer: Very quick.

Rodriguez: Portfolio.

Interviewer: That’s very cool, wow. The, uh, I like the, uh, [laughs]-

Rodriguez: You see why we’re excited about it.

Interviewer: … I like the, uh, the, the third, the third turn there with the, with the volatility overlay, that’s, that’s very interesting.

Rodriguez: Yeah.

Interviewer: Uh, I mean that makes it even more-

Rodriguez: [inaudible 00:58:46].

Interviewer: … Yeah.

Mike: Yeah, there’s a bit of a story on that recently whilst, uh, Russia was invading Ukraine initially, and there was a lot of talk of all kinds of very serious implications for geopolitical issues. [00:59:00] Um, you know, the red, if we, if we think about that volatility, um, tail protection, uh, strategy was flashing red, and so he had pretty significant exposure to the opportunity for significant bad, you know, high risk outcomes, where we had that hedge on. Now it abated, nothing happened, didn’t cost a portfolio too much, uh, but it’s certainly heartening when you get into those situations to see the portfolios responding, and having protection, um, from those types of extreme outcomes.

Interviewer: Absolutely.

Rodriguez: And, and look at it around last, I saw 11 basis points to return for the year, so nothing much, but while it was on, it abated volatility.

Interviewer: Yeah.

Rodriguez: Right? So it’s okay maybe we don’t make a return there, but it minimizes the risk if you’re caught outside. So that, that’s been kind of neat to watch.

Interviewer: Yeah, I mean, you definitely sleep better at night. You touched on it already but, but talk about how, uh, talk about how HRAA [01:00:00] has no bias, and, and because of that, could be uh, extremely painful to most investors to hold during, uh, concentrated, and prolonged bull market. I know, I know we touched on it but, but, uh, I think what goes hand in hand in that, uh, with that is that HRAA is expected to outperform during inflation in bear markets, and, but underperformed during bull markets, right?

Mike: It depends on the bull market. So, recall, we’ve talked about the inflation and growth dynamics a lot today, and that they create those four regimes, and if you think about that chart that, uh, Rodrigo showed very early on, you could see when we’re in a disinflationary growth period, or even in inflationary growth, a lot of stock bond portfolios can perform quite well. Where we get into stagflation or disinflationary growth, uh, the 1929 period, 2008, and then stagflation will be the ’70s. When you get into those periods, [01:01:00] that traditional 60/40 portfolio does really poorly. And so now, remember what we talked about, it’s a comparative.

Interviewer: Right.

Mike: So if the uh, particular zeitgeist of the moment for investors has a particular tracking error to it, whether that’s Nasdaq, or S&P, or Arc, um, that, that is going to be an area where a well-diversified, properly balanced portfolio, even adding some alpha, it’s going to underperform. You’re just simply not gonna compete with the best asset class. Now most people aren’t in the best asset class for the whole rut, they’re in it at the end, they’re not in it at the start. So this is something where, and why we do so much education to keep them in these diversified portfolios when they’re suffering this tracking error, this perceived underperformance. And then, when we get an impulse [01:02:00] like this, and, “Oh wow, look, crisis necessity change. Hey, hey change.” You know, you think about changing some stuff, that they’ll be, um, comfortable enough, and confident enough to actually make allocations and make changes to the portfolio. I think one thing that’s, that’s really difficult is when you get losses in a portfolio, people won’t make the change because they, they just want to hold back on-

Interviewer: Yeah.

Mike: … Until they break even, right? That loss aversion, uh, behavioral bias. And so, you know, if you’re there early, and you’re kind of always prepared, you don’t have to think about that stuff that’s happening underneath the surface, um, but if you’re a little, you know, off-site or tilted, you’re now looking at your portfolio, maybe it’s down 10, maybe it’s down 20. You’ve got 90, 80-90 cents in the dollar, and you, and you’re like, “Oh, maybe it’s over, maybe it’s gonna come back. Those commodities haven’t done anything anyway.” And so, so, you know, having some discipline, getting some education you know, um, making sure you [01:03:00] have, you know, the, the understanding of what’s going on to traverse the journey, uh, are important.

Rodriguez: Yeah. Pierre, I don’t wanna tell you how much we’re currently underperforming, those that are obsessed with the natural gas [laughing] for example.

Mike: Yes, precisely.

Rodriguez: Like that, that is a bad, that is a bad look.

Interviewer: Yeah [laughs].

Rodriguez: And the point is, underperformance is relative to those people that really cared about Nasdaq, right? Or FAANGs.

Interviewer: Yeah.

Rodriguez: Or tesla.

Interviewer: Yeah.

Rodriguez: Arc, right? Like, it’s even advisors that have been thoughtful about diversifying with inequities, the ones that prefer S&P/500 over FAANGs have felt the pain of underperformance relative to what people cared about, right? So I think, broadly speaking we can say, because we are diversified, and because most advisors are not, because you have the 60% in domestic equities, maybe a little bit of international, that when there is a [01:04:00] very low inflation, uh, and, and, uh, and really transparent market where everything seems to be working fine, when global communities are collaborating, where inventories are moving around freely, where there is no inflation, you’re gonna have a highly con concentrated set of equities that are gonna benefit from that clarity and growth. Uh, we’re gonna underperform that, because we will have some of that, but we just won’t have 100% of them. Now, switch over to when they perform poorly, inflation rears its ugly head, growth stocks are a low duration asset, they require long-time horizons, people that are willing to invest when inflation’s low, they’re willing to invest with 30 on a project that may or may not happen more, and then when inflation’s high, and they’re looking now at real tangible assets, because they don’t know what’s gonna happen with the gross assets. So all of a sudden you have these growth stocks go down, and so, gross stocks are down aggressively, we look amazing compared to them.

So we are likely to outperform in periods where that shift changes, and we’re likely [01:05:00] to perform really nicely because we have exposure to, to commodities, and we have the ability to shore bonds and so on, right? So, in bear markets, we can short equities, and we can go along the things that are working, maybe at that point it’s treasuries that are, that were long, right? So, um, so yes, I think one can safely say, versus a domestically based, 60/40 portfolio, we’re likely to underperform in a, in a traditional bear market, and we’re lucky to outperform an inflation periods, and, and, a bear market.

Interviewer: Do you ever feel funny?

Mike: So, I think that’s-

Interviewer: Do you ever feel funny that you… I mean, you’ve been doing this for, for over a decade now, but do you ever feel funny that you have to constantly explain this? Does this feel like, like, like it’s a constant? I mean [laughs].

Mike: Honestly, honestly, no. Not at all. No. [laughs].

Interviewer: [inaudible 01:05:54].

Rodriguez: I used to take it personally.

Mike: To the, to the, to the same person many times?

Interviewer: We’re so, we’re so fallible.

Mike: [inaudible 01:05:59] they talk to, we talked about this-

Interviewer: Yeah.

Mike: … As a, [01:06:00] as… But they only talk to us once in a while.

Interviewer: Yeah.

Mike: And they go back into the world, in the real world, and they get hit by all this other stuff. And the, you know, the financial, um, you know, so the more traditional financial pornography out there is kind of steering them to just stocks, just stocks, just stocks all the time. And I think, you know, adding to, you know, a point on what Rodriguez was saying, what he’s really talking about is dispersion-

Interviewer: Yeah.

Mike: … Right? If there’s only one market… Or we have 10 markets to choose from, but they’re all doing exactly the same thing, there’s no opportunity to outperform.

Interviewer: Yeah.

Mike: When 10 markets are fanning out, and you have dispersion amongst your return vectors, or your areas of return, or your return, rates of return, this gives the active managers the opportunity to provide differentiated performance, that’s on stock indices, as well as multi-asset, it expands in the multi-asset space, because you have so many [01:07:00] more unique bets.

Interviewer: Yeah.

Mike: As Rodrigo said, Apple and Microsoft, you know, Google, these things are somewhat correlated.

Interviewer: [laughs] you know, I, I remember-

Mike: CIBC, Royal Bank, BMO, they’re somewhat correlated.

Interviewer: … Oh, come on.

Mike: Um, so.

Interviewer: [laughs] I remember, I remember, uh, you know, I remember the presentation that, that we did with Craig Lazzara from S&P.

Mike: Right.

Interviewer: And, and, you know, the, the one point that I remember to this day was his, his, you know, point that dispersion was at a historical low, and that, I mean, that was, that was-

Mike: That’s right, he did do that. I gotta pull that presentation.

Interviewer: That was four years ago, right? Three, three years ago, or four years ago?

Mike: Yeah. And it, and it continued until-

Interviewer: Until last year, yeah.

Mike: … Or six months ago. [laughs].

Interviewer: Yeah. So, you know-

Mike: Yeah.

Rodriguez: Yeah, that’s, that’s a point I’m trying to make. So I did my own dispersion analysis, and saw that in the 2000s, when we saw two bear markets and inflation go high, like you [01:08:00] saw the commodity super cycle started in ’99, and end in February 2011, you were looking at new peak dispersions. And we measured by bets, by just looking at, forgetting about the line items, just you can do, uh, max diversification algorithm to identify how many unique things-

Interviewer: Yeah.

Rodriguez: … Are pulling in different directions, and you would see peaks of like 25 unique bets. Fast forward to the last decade, we’re looking at peaks of five, right? So, very different, um, very different secular, uh, environments. And, and this kumbaya, peace and love, you know, multinational, uh, globalized Goliath economy has started to fall apart, and it’s a lot harder to build something, it’s a lot easier to break it. And so we’d broken the system in many respects with the wars that we’re seeing, with inflation that we’re seeing, you know, all, it’s no longer US dollar-

Interviewer: Right.

Rodriguez: … Against everything, it’s cross uh, currencies acting very differently, emerging markets that can do [01:09:00] really well in the commodity bull market like Peru, South Africa, um, Argentina, which are exporters of grains, and gold, and silver, and zinc. They’re doing really well, and the emerging markets that import all of that are doing really poorly. So that’s the type of dispersion that you can intuitively understand is happening, and not likely to go away for a while. The same thing with sovereign bonds in different company, countries, same thing with equity markets, right? All of a sudden you go from FAANGs being the winner, and hence The US being in the only asset class that made any real money in the last decade to opportunities absolutely everywhere. And the idea that this is gonna end tomorrow seems to me outrageous. And so-

Interviewer: [laughs].

Rodriguez: … I think, not just us, not in the multi-asset space, but I think we’re gonna go back to a point where Vanguard is like the, the, the wrong thing to do. This idea of passive equity investing-

Interviewer: Yeah.

Rodriguez: … At five basis points. We’re gonna go back to a time in the 2000s if you recall, the best performing fund in the 2000s was Sprott equity fund that [01:10:00] made positive returns in 2000, 2001, 2002-

Interviewer: Yeah.

Rodriguez: … By being long only. And why? Because they went into the commodity space. Berkshire Hathaway made money by being a value manager, positive returns during those three years. So all of a sudden, we’re gonna go from the S&P market cap weighted index being the be all and end all at the lowest cost to advisors wanting to buy the best equity managers, buy the best active bond managers, buy the best multi-asset managers. And that’s gonna be a transition, but you’re better for it I think, given what we’ve seen in the economy.

Interviewer: It’s just, you know, I, just to go back to, you know, Craig Lazzara’s point, which was, I, I felt like the underlying, the underlying message there was, “just give in. Give in to passive.”

Rodriguez: [laughs].

Interviewer: Right? And I almost, I almost hated it.

Rodriguez: Well, S&P launched the risk parity index-

Mike: Yeah [laughs].

Rodriguez: … Shortly thereafter, right? Like, the problem now is that I’ve always had this like, “Well, now Vanguard’s gonna suffer.” Well, [01:11:00] Vanguard just launched a bunch of active ETFs.

Interviewer: Yeah.

Rodriguez: Right? They’re too smart, they’re too smart for us. They’re one step ahead. Everybody’s just gonna go from Vanguard passive to Vanguard active.

Interviewer: [laughs].

Mike: Well there’s, there’s also the issue-

Interviewer: Yeah.

Mike: … Uh, active has, um, you know, constraints, you know, that there are constraints of capacity and things like that, that have to be contemplated, so, yeah. It’s not quite that easy, and there’s lots of hurting, and probably lots of behavioral alpha to be, uh, garnered as we go from, from here to there. And, uh, yeah, bit of fun along the way, hopefully.

Interviewer: So now, it seems like a little bit of what you’re doing is, uh, like it’s a bit of a black box approach. So, imagine you have to do-

Mike: We think of it as a clear box, the glass box.

Interviewer: But you have to do a lot of work obviously, right? You have to-

Mike: Right.

Interviewer: … You have to bridge that, that gap between, between, uh, you know, the traditional… Like, if we’ve had 40 years of 60/40, and, and-

Mike: Hmm.

Interviewer: … You know, we’re, [01:12:00] we’re, we’ve got, like, so we’ve got 40 years of… You know, we need, we, we need so much con-

Speaker 2: … [inaudible 01:12:00] we’ve got, like so we’ve got 40 years of, you know, [inaudible 01:12:02] we, we need so much confirmation bias, right, when we’re making these decisions. Like, on, I mean, I don’t mean-

Rodrigo: Sure.

Speaker 2: … you know, specifically us, but I- I- I just mean in general, investors require so much confirmation bias. And, you know, we’ve had 40 years of, of confirmation bias of- of how, you know, to do a portfolio, how to, how to, you know, have the, uh, the stock bond mix. What would you say just in order to help make that leap from, from, you know, the 60/40 of the last 40 years, you know, bias to abandoning some of the elements of that in favor of what you’re doing?

Mike Philbrick: [inaudible 01:12:41] I think the, the one is I- I’m not sure that anyone should abandon anything.

Speaker 2: Yeah.

Mike Philbrick: One should, each individual investor needs to think about what their tracking error is, how they wanna think about the comfort and discomfort that they’re going to feel on the journey, both in tracking error to their friends and drawdown because these [01:13:00] things will end the, uh, journey, and they always end the journey when someone has experienced maximum risk. And then what will happen inevitably is return will come, but you’ve crystallized your risk and you don’t get the subsequent return. So, you really have to be honest with yourself as the individual investor looking at your circumstances, looking at your behavioral [inaudible 01:13:24] and figure out what’s real and true for you.

Speaker 2: Yeah.

Mike Philbrick: So once we get that out of the way, you know, then you have to start thinking about how might I add these different types of strategies, and so we do get, you know, sometimes, hey, there’s a lot of math [inaudible 01:13:38], you know, you’re doing a lot of calculus and whatnot, but th- there are humans there with significant amounts of, of, um, experience and oversight that are constantly, you know, watching the models, the portfolios that are coming out of the models, and there are things that your, your models don’t know that you do know. [01:14:00] And so, there is practitioners. So, we’ve been in this business, we have our traders been trading for 15 years, our, uh, you know, h- head of, uh, ReSolve [inaudible 01:14:10] Jason Russell has had 20 years of experience-

Speaker 2: Right.

Mike Philbrick: … with the Futures. Um, so the team is pretty steeped and experienced in this marketplace. The rules or the, the systematic nature in which we, we build positions is simply because the dimensionality and the complexity of that space is not approachable by the human mind.

Speaker 2: Yeah.

Mike Philbrick: We have to take some, we have to do some calculus, we have to think about these things, and then we have to review that out but then say, okay, we’re the blind spots here, and how might we manage those blind spots. Those, those blind spots are often fairly rare and they beget the question, why is this a blind spot and why isn’t that decision-making systematic? Um, but [inaudible 01:14:55]-

Speaker 2: So this is not actually, it’s not actually a black box. I mean-

Mike Philbrick: No.

Speaker 2: … I [01:15:00] know, I know, I know-

Mike Philbrick: It’s a clear box.

Speaker 2: … I know if you weren’t kidding [inaudible 01:15:02] [laughs] it’s a, it’s a clear box, it’s a, it’s a clear box. See, I think, I think even if you just, like, like, if you just, if you broke out your portfolio to everybody at any given moment on any given day, you know, they wouldn’t know what to make of it, right? Because there’s so m- there are so many components-

Rodrigo: Well, this is, this is where I think it’s an important-

Speaker 2: … [inaudible 01:15:23] get- get a general idea.

Rodrigo: I mean, it could be ’cause we have done [inaudible 01:15:26] a strong effort. We’ve, we’ve done a strong effort to be able to translate those many line items into something [inaudible 01:15:32] so-

Speaker 2: It’s clear to you.

Rodrigo: … uh, the, the efforts here requires eduction.

Speaker 2: Yeah.

Rodrigo: Requires education a- and it requires access, right? So, we with Horizons have teamed up to put together a report at the end of each year, the attribution report that shows, you know, top five long positions, top five short positions, top gainers, uh, bottom gainers. And also, the risk exposure is both long and short so that people go right now, they’ll see that last month, we were not short bonds, we were not, [01:16:00] you know, not short, um, or not long the US dollar and so on and so forth, and they get an idea of what’s happening. We’re also working on putting together a, a dashboard that provides live access to what’s happening in the bond complex for the [inaudible 01:16:14]-

Speaker 2: Right.

Rodrigo: … what’s happening energies. So because it’s different, there might be a day where we’re down two and equity markets are up one. They’ll, they’ll have questions, clients will have questions by being able to, to log in and check out what’s going on underneath the hood. They ha- they are empowered to say, oh, I see that ReSolve is [inaudible 01:16:32] long energies in a big way, and today, the market’s lost [inaudible 01:16:36] 5% that’s why we pay ’em. This is exactly as expected, right? So this is, again, trying to go from very what may seem like I don’t understand what’s going on to providing access and education through these meetings and, and our, your podcast and our personal podcast and, and the research support that we do. And once you do that a- a few times, you realize, oh, this is no different than anything [01:17:00] else. I actually don’t need to ask Coca-Cola, you know, how they make Coca-Cola and understanding that Coca-Cola isn’t just that one beverage, it’s a wide variety of distribution and, and different countries providing multiple products. And you wanna go down that rabbit hole or do you just wanna kinda get an idea of what Coca-Cola [inaudible 01:17:18]-

Speaker 2: Well, like, like a, like a bottle, like a, like a bottle of Coke-

Rodrigo: … so on.

Speaker 2: … you know, you can see what’s in the bottle. So, you guys are actually… I think what I wanna clarify is just, is- is- is that, you know, you guys are doing what you’re doing. You’re doing it in a fishball. Everybody can see what you’re doing if you want them, you know, if- if they want… If they wanna look at it, they can see, right? So, so-

Rodrigo: If you wanna look at it.

Speaker 2: So-

Rodrigo: Yep. And they’ll understand it, and then the [inaudible 01:17:44]-

Speaker 2: Yeah, but the illusion that there’s some kind of a black box strategy happening there is just because of the knowledge gap-

Rodrigo: It’s much more intuitive.

Speaker 2: … [inaudible 01:17:51]-

Rodrigo: Yeah.

Speaker 2: Yeah.

Rodrigo: It’s much more intuitive than people think.

Mike Philbrick: It’s, it’s sort of like, you know, there are different types of people and, um, there are [01:18:00] different types of wrist watches and people would like to know the time. And some people just want a watch that says what time it is. Some people want a really want a fancy watch where you can see inside and you can see all the gears working. And, you know, those people not only wanna know what time it is, but they wanna know how the time is calculated. And then, there’s other people who just ask a friend what time it is and don’t wear a watch. So there’s, there’s a lot of personalities out there about how you might wanna tell the time. And at the end of the day, if you’re looking for non-correlated [inaudible 01:18:34], [laughs] I’m assuming you have of these [inaudible 01:18:37]. [laughs]

Um, I think it’s just a function of wh- what are you looking for. Well, if you’re looking for a non-correlated, differentiated product that will provide returns when things might be, uh, shitty in the rest of your portfolio [inaudible 01:18:54] correlated and is risk-managed and has some of the features we’ve talked about today, well then, this watch is for [01:19:00] you. And if you’d like to look at the inside of the watch, we will oblige you to look around the inside of the watch. It’s fine. It’s a clear box. We don’t, we don’t have a problem. There is, there are some things that are proprietary, you know, no question about that. They’re, they’re… We have to protect-

Speaker 2: Yeah, absolutely.

Mike Philbrick: … the internal knowledge and proprietary knowledge we have. We have to preserve that edge for the clients we have today. We can’t give it all away for free, but we wanna make sure you have a good understanding of how the watch works. Now, the next question is, are you the guy who’s just gonna ask your friend what, what time it is? Y- You know, you want the clear watch or you just want the watch? You’re gonna do it on your phone? We’re, we’re happy to help.

Speaker 2: Yeah. I just don’t like the way it gets trapped under my shirt cuff. I hate that. [laughs]

Mike Philbrick: [inaudible 01:19:38].

Speaker 2: All right. That’s good. [laughs] So, wh- what type of ongoing risk can people expect from HRAA?

Rodrigo: Well, this is a great thing about having thought about this for as long as we have, right? Uh, you got to remem- remember that this is, this was not built in order to create something that looks really good for [01:20:00] marketing purposes. This was built because we wanted to put our own money and wealth in in something that is as robust as it possibly can be, right? So, one ongoing risks, well, we target a level of volatility to make sure that we don’t see any real outsize risks, but diversification from an intuitive perspective means that that idea of the left fat tail in the distribution, you know, that [inaudible 01:20:23] black swan event [inaudible 01:20:25] that, that once your diversify, and any advisor can do this by adding some golds, some commodities, some equities, some bond with the right allocations, you’ll see that the fat tail has become really thin. So, we’re already managing that, that, that black swan risk.

You [inaudible 01:20:38], on top of that, you, you tack on the ability to go short and, and do it systematically, you start narrowing that distribution even further. So just broadly speaking, this has been designed for my employees, my families, my partner’s wealth and, and what I considered to be my extended partners, which are the advisors in the US, Canada, and globally [01:21:00] that invest in our product. Now, this, all of, everything that I just discussed is risk that we have diversified away and that we understand and can see, inflation, growth, liquidity. What is the non-diversifiable risk that from an academic perspective means we should expect [inaudible 01:21:20] a positive re- re- return above cash? Well, the non-diversifiable risk that largely due to the black box inside of politicians and Fed governor [inaudible 01:21:30]. And this is not a unique risk to us in HRAA, it’s a unique risk as we know to every investor, whether you’re an equity investor, bond investor or otherwise.

When Bernanke came out, it started raising rates, uh, unexpectedly in 2006 or, or [inaudible 01:21:48], right, when they thought inflation was out of control. That- That’s, that’s a hit that wasn’t expected. When Powell comes out and says, we are nowhere near neutral in terms of what rates should be, the market didn’t [01:22:00] expect that, that came overnight. Once the market realizes that their [inaudible 01:22:04] price of cash is here and overnight it’s over here, the present value, this kind of mechanism means that everything goes down at the same time together, bonds, equities, commodities. The whole thing just, boom, just takes a step down. And that is the risk, that is non-diversifiable because it is [inaudible 01:22:20] very human and very immediate. Um, so it’s not, it’s- it just doesn’t solve anything. Volatility will exist in a product, a very diversified product like this, and that’s the volatility that you, uh, that pays for that excess return above cash.

Speaker 2: It does.

Rodrigo: Does that make sense?

Speaker 2: It does, but that, that’s largely, that’s why you have the volatility overlay as well, right, if-

Rodrigo: Yeah, but even then, that, that volatility overlay is more of a liquidity shock that happens over days within a drawdown. What I’m talking about is on Sunday, the Fed governor thinks to do something and announces it on a Monday. And there is an immediate repricing [01:23:00] of, of assets. That’s, that one, you can’t just diversify away from, like you can’t go long volatility fast enough.

Speaker 2: Well, that’s good. That- That clarifies, that clarifies things. So, um, access is clearly important to most investors and it seems like the ATF is ideal for most investors, but you guys also, you have offering memorandum-based hedge funds for accredited investors in Canada, the Evolution fund and the Osprey fund. For those accredited investors listening to this, can you tell us what you’re trying to do with the hedge funds in contrast to HRAA?

Rodrigo: Yeah. So, the hedge funds as I described what HRAA is, right, this is trying to democratize institutional quality, best equity, best long only portfolio, the All Weather risk-parity strategy alongside a unique pure alpha strategy that has equal chance of going long and short with that tail protection, right? The- The reason that [01:24:00] this works well in retail is number one, an 8% volatility, most people will be able to stick to it long term [inaudible 01:24:06] in the portfolios. And number two, it participates in global growth. It- It a… 50% of the exposure is a All Weather and yet, a portfolio that will benefit from positive liquidity environments and will participate in that equity growth, in that bond growth when it’s appropriate, so we do provide a little bit of that traditional exposure while it being more balanced in a 60/40 portfolio. So th- this has been tried and tested in the United States.

There’s been plenty of products that [inaudible 01:24:35] good beta, with good alpha over years, and it is, has, like, Mike alluded to, a stick-to-itness, right? Investors require, don’t just require the pure mathematical best model, they require the, a combination o- or proportion of the pure mathematical best model and their behavioral best model. And I think the, the best beta plus best [inaudible 01:24:56] alpha approach at a level of risk that people can take was [01:25:00] ideal for, uh, the public product, the HRAA. There’s also, uh, constraints that exist within a, uh, even a liquid alt- uh, alternative that don’t exist in the hedge fund’s face. So, there’s a lot of money we’re leaving on the table by just only offering a pro- public product. So, with the offering memorandum fund, uh, allows us to target higher levels of risk. And so for the Evolution fund targets the volatility similar to that [inaudible 01:25:26], uh, in the S&P 500 at 15% volatility.

So for this accredited investors and, and advisors that really do use that [inaudible 01:25:34] are okay with having something that’s very different ’cause we’ll, the hedge fund excludes the beta part, excludes that risk-parity, it’s just offering the pure unadulterated alpha at a level of risk that matches that of equity. So, it means that if you can, if [inaudible 01:25:50], if you’re inclined to allocate the private product to the offering memorandum funds, you can now allocate less to a product like, uh, Evolution and [01:26:00] get more bang for your buck, more diversification benefits. And because it has a zero correlation long term to equities and a zero correlation long term to, to bonds, it means that you can be, you can use it as a, a pick and shovel type of line item for your client’s portfolios, right? So, that funding contrast to Horizons is up around 33% [inaudible 01:26:19], so that’s three times the, the [inaudible 01:26:21]-

Speaker 2: Wow.

Rodrigo: So this is, this is what, um, what the differentiation is, it allows being enable to have no restrictions [inaudible 01:26:28] in terms of, um, what the regulators have on public product actually creates opportunity, um, and, uh, and, and, you know, it requires a bit of education, so [inaudible 01:26:38], but it is available in most platforms. Um, it is in Fundserv as well, so retail advisors can take advantage of this, uh, if they’re inclined to do [inaudible 01:26:47].

Speaker 2: Amazing. Uh, th- that’s actually pretty-

Rodrigo: [inaudible 01:26:50]-

Speaker 2: … [inaudible 01:26:50] that you offer the, the different tiers of participation.

Rodrigo: Mm-hmm.

Speaker 2: Yep.

Rodrigo: Yeah, I think it’s great. We [01:27:00] just need to [inaudible 01:27:00] seems to be… Because of this massive growth in private, in, in, um, passive investing, it’s become… People [inaudible 01:27:10] are willing to jump [inaudible 01:27:12].

Mike Philbrick: Yeah. It- It’s- It’s for, you know, again, a sophisticated, accredited investors and there’s requirements around that for those who can participate, and that’s, that’s the regulatory regime we live in and… So, of those who are interested, certainly reach out and we can see if that, that’s appropriate, um, for you or reach out to your advisor and ask them if it’s appropriate. I- I think the, the one thing I would emphasize is, is just to put it out there, capital efficiency, just that wording is what Rodrigo was talking about in that, in that real estate in the portfolio. So, you know, if you are having a 15% allocation to HRAA, you could probably get away with the 5% allocation to the Evolution product and have the same impact to your portfolio. That means of course, you have an extra 10% of your portfolio that you could [01:28:00] be invested in the other beta assets. And so, um, you’ll have something meaningful in your portfolio that can really change the feel of the bear market from the portfolio or change the feel about inflationary impulse, et cetera. And, uh, and we’ve, we’ve written too, so if you wanna [inaudible 01:28:16] learn about capital efficiency, it’s, you know, investresolve.com and can, you can find it there. Just use that, uh, Google, Google [inaudible 01:28:24]-

Speaker 2: Yeah, but [inaudible 01:28:25] okay, then we talk about where investors can find you or where advisors can find you.

Mike Philbrick: Yeah. I think if, if you were to Google either my name, Mike Philbrick or Rodrigo [inaudible 01:28:36] going to be an absolute treasure trove of, of things, but certainly, investresolve.com is the, uh, the website. Um, for, uh, social media, I’m on LinkedIn under my name, and then, uh, for Twitter, it’s MikePhilbrick99, um, and you’ve got Gestalt U is our, uh, partner and our CIO. [01:29:00] Adam Butler and, um, and Rod. I’ll let you [inaudible 01:29:03] your-

Rodrigo: Rod, yeah, RodGordilloP. There was another Rod Gordillo without the P, so make sure you get that P in there for Twitter. And, uh, yeah, wanna see for the ETF, just go to Horizons and, uh, look for HRAA. Look it under the corporate class and you’ll be able to see what All Weather equity lines look like. Um, and then, for the Evolution fund, you can go to investresolve.com and go under strategies, and then, um, alternative funds, and then Evolution Canada ’cause we offer these in different jurisdictions. So, you’ll be able to get in there and get all the information, uh, for that, uh, for that fund. So yeah, there’s plenty of places to choose, uh, we’ve written over 300 articles. We pub- We- We’re over 120 podcasts, uh, on the ReSolve risk and, um, and we wrote a book called, um, Adaptive Asset Allocation: Dynamic Global Portfolios [inaudible 01:29:58] to thrive in changing environments. [01:30:00] So, um, plenty of places to, to look at. I think one of the ones that I wanna emphasize is the Masterclass podcast series. Uh, you can just go to Spotify and look up ReSolve’s Masterclass podcast [inaudible 01:30:13]-

Speaker 2: Yeah, and you can get a-

Rodrigo: … uh, [inaudible 01:30:13]-

Speaker 2: … get 2% of CE credits on advisor analyst too. Yep.

Mike Philbrick: That’s right.

Speaker 2: You got to our CE page-

Rodrigo: That’s right. So you can go to, um, [inaudible 01:30:23] yeah, you can go the CE page in advisor analyst and get that CE credit if your an advisor that [inaudible 01:30:29] that needs them and, um, and I think that’s it, that’s a great place to continue this journey. If you’ve, if you’ve, uh, stayed with us this far, you wanna get, you wanna reiterate and, and kind of, uh, solidify your understanding of what we talked about, that will be [inaudible 01:30:43].

Speaker 2: Yeah. And it’s all there, it’s all, I mean, it’s all at investresolve. It’s all, it’s all in your blogs. I mean, you know, anybody who actually wants to learn, uh, 300 articles, uh, it’s, it’s a pretty, uh, profound, well of [01:31:00] knowledge that you’ll find there. Um, guys, we love you. We love what you do. Um, wow, every success, guys, it’s- it’s just, uh, it’s such an exciting time for you and, and it’s an exciting time for, uh, HRAA. Uh, thank you so much for, thank you so much for this incredible 90 minutes.

Mike Philbrick: Um, thanks for having us and-

Speaker 2: [inaudible 01:31:25].

Mike Philbrick: … we love, we’ll see you on Monday afternoon and, uh, yeah, the other thing is we could raise your average. We’re here hosting a myriad of other advisors and portfolio managers and just talking, uh, talking shop generally.

Rodrigo: Thank you [inaudible 01:31:38]. I really appreciate all your efforts and, um, and I hope to continue contribute. [inaudible 01:31:43] anybody who hasn’t been listening to the podcast, uh, we like to poke holes on other people’s, uh, thought process. It’s, it’s a, it’s a fun thing if you have [inaudible 01:31:52].

Speaker 2: Absolutely. [inaudible 01:31:52] I, you know, my, uh, my average has been raised just by doing it, so [laughs] thank guys.

Rodrigo: Thanks, [01:32:00] [inaudible 01:32:00].

Listen on The Move


Our guests this episode are our co-hosts, Mike Philbrick and Rodrigo Gordillo. They are principals at ReSolve Asset Management Global. They happen to also be the sub-advisors to the Horizons ReSolve Adaptive Asset Allocation ETF ( HRAA:TSX ).

We talk about the chronic problem that the majority of us investors are UNDER-DIVERSIFIED. Profoundly under-diversified.

Why? Diversifiers are either 'killing it' or 'killing you.'

The problem is that effective uncorrelated diversifiers underperform during benign market periods, and therefore wind up being under-invested or not-at-all in portfolios during volatile down market periods. This time has been no exception, as most investors have discovered.

The past two years' conversations on this show with some of the industry's most interesting and successful thought leaders has been so highly instructive on this topic.It's become obvious in all these conversations is that our fellow hosts Mike, Adam, and Rodrigo from ReSolve Asset Management not only love to talk about what they do, i.e. what they're their cooking – they eat their own cooking.

So it's fitting that today we're going to be talking thoughtfully about how ReSolve 'eats the free lunch' of global diversification.

Having been in your shoes, as investors, as former advisors, and then as portfolio managers, Mike, Adam and Rodrigo and their firm, have been through multiple major market cycles. They each brought their personal experience and learnings of the last 20-30 years to the table and devoted the last 10-12 years to developing versions of what they do now at ReSolve Asset Management, in the strategies they manage and sub-advise.

They co-founded ReSolve Asset Management in order to break out on their own in September 2015 and began the process of offering their investment strategies to investors via separately managed accounts, mutual funds, hedge funds, and ETFs (HRAA is sponsored by Horizons ETFs) in both the U.S. and Canada.

The last three years, which have seen some the most volatile and unprecedented bouts of uncertainty and market fluctuations beginning with the Pandemic, and culminating in this year's violent reaction to inflation volatility and rising policy rates, have been a seismic proving ground for ReSolve's strategies.

YTD to September 21, 2022, HRAA has a positive return – during the same period that has seen the traditional assets of 60/40 portfolios get trounced, as inflation volatility, market volatility, and rising rates have moved sharply against both stock and bond values, broadly and at the same time.

We hope you enjoy our conversation – we get to the bottom of these questions:

– Where are we in the life-span of the last cycle's winning 60:40 portfolio model?
– What are some diversifiers investors have been reaching for?
– What is different about ReSolve Asset Management's investment approach?
– What is HRAA?
– How is HRAA possible?
– What is ReSolve's Adaptive Asset Allocation framework?
– How does it work?
– What can you learn from it?
– How does ReSolve manage risk?
– How does the strategy provide tail risk protection?
– How can you begin to think about risk-balanced adaptive asset allocation and portfolio diversification?
– Where and how does it fit in a portfolio?

Where to find the Raise Your Average crew:

HRAA - Horizons ReSolve Adaptive Asset Allocation ETF
ReSolve Asset Management
ReSolve Asset Management Blog
Mike Philbrick on Linkedin
Rodrigo Gordillo on Linkedin
Adam Butler on Linkedin

Pierre Daillie on Linkedin
Joseph Lamanna on Linkedin


"You don't have to be brilliant, just wiser than the other guys, on average, for a long time." Charlie Munger

Welcome to Raise Your Average, our deep dive journey into learning from the people and process behind the world of investing. Through conversations with leaders in the investments game, we peel back the layers of the onion on how these holders of the keys to the kingdom allocate their time, their energy, and their dollars.

We are all students and we are all teachers. We are the average of the 5 people we spend the most time with. Come hang out with us for a while and raise your average, as we raise ours.

Music credit: In Hip Hop, Paul Velchev (8MJZA6T3LK)

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