Trends Watch: September 6, 2018

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.

This week, Elana talks with Jon Robinson, Partner, Blueprint Investment Partners.

What is your outlook for alternatives?

Our philosophy regarding the benefits of alternatives to enhance performance has not changed, as we established our approach to investment management trading commodity futures in the early years, and understand the need for non-correlated exposures.  Based upon the current market cycle, we believe the opportunity for alternatives is more compelling than ever.  With the current bull market in U.S. equities in its ninth year, coupled with historically low volatility, investors are desensitized to a myriad of risks.  It is our view that when investors begin seeking more portfolio diversification via non-traditional asset classes, their preference and selection criteria will be very different than in the past.  Based on discussions with our advisor clients, investors that have ventured out to those non-traditional asset classes and strategies have largely been disappointed, and ‘traditional alternatives’ are largely to blame. Advisors know they need to add exposure, but have not been able to adapt their portfolios accordingly.

We have written about this extensively, but the crux of the issue for investors centers around transparency, fees and performance drag during bull markets in U.S. equities.  The days of expensive black box investments generating investor demand while failing to provide a reliable benefit relative to their costs are over. Similarly, with the indexation of seemingly everything, investors have (rightly) become conscious of the toll fees can create on their portfolio performance as well. 

The current market environment will inevitably increase the need for behaviorally friendly alternative investments.  This is where the opportunity lies.  Advisors have become wary of trying to explain complicated and expensive investments to their clients.  Advisors believe traditional alts can provide some benefit during bear markets, but are wary of the cost of sustaining long periods of drag against the rest of the portfolio during favorable periods.  Strategies that solve for these variables give both advisors and clients a higher probability of achieving financial objectives, and thus success for both over the long-run.

What are the biggest opportunities you see?

For us, it is utilizing the vast array of passive, inexpensive investment instruments as a means for creating sustainable yet competitively priced alpha in a way that is transparent and easy for advisors to convey to their clients.  We think this can serve as a core component of investment portfolios – on our website, we talk about what we call the ‘60/40 problem’ and alternatives to liquid alts.

Another positive effect of the current indexation and rise of robo-advisors is that traditional advisors realize they cannot build their business on their ability to pick stocks or funds.  Not only are they statistically unlikely to consistently outperform a passive option freely available to every investor, these activities also detract from the areas where they can truly set themselves apart. 

What is your outlook for the economy?

For us, the price is everything.  We utilize trend-following methodologies both as a means to mitigate risk and as a dynamic asset allocation engine, which is in our opinion the best approach to consistently take advantage of opportunities and sidestep risks.

By that, we mean that the established market value of the asset reflects all relevant information.  Therefore, in our view the best predictor of where things are going is where they are headed right now.  Based upon the data we review and gather daily, we would say that the U.S. economy and equity markets continue to have a favorable outlook.  After a nine-year bull, market however, it is difficult to say how much longer that will last. Yet one of the most attractive aspects of our process is it allows us to maintain our exposure until the trend changes, reducing exposure only when price dictates.  We allow our winners to persist, while cutting short our losses.

On the other hand, foreign markets are showing some weakness at this moment and of course, rising rates are putting pressure on fixed income.  While our allocations can change within a quarter given our process, due to current price behavior we have minimum allocations to foreign equities and bonds.  Likewise, we are at the very low end of the yield curve for fixed income.

What keeps you up at night?

Two concerns keep us at night.  The first is the aforementioned 60/40 problem. Over the past several decades, advisors have relied on a 60/40 portfolio to deliver a less-volatile yet still relatively reliable return for investors.  This is due to their lack of tolerance for the volatility and drawdowns of a pure equity allocation but does not anticipate the shift in the market that is occurring. In our view, the 60/40 problem boils down to an underestimation of future risks for both bonds and stocks.  With the potential prospect of equities and bonds falling simultaneously over the course of months or even years, the traditional investor in a 60/40 portfolio may experience negative return outcomes that they never knew were possible.
This also presents us with our greatest opportunity, which is to offer an alternative that provides the benefits of a 60/40 risk profile while maintaining persistently higher exposures to risk during a change in regime.  

This brings us to the second concern, which involves the inevitable emotional response to volatile markets.  We are evangelizing our message as much as possible before the environment changes and the bull market in U.S. equities ends.  Our strategies are primed to outperform should that occur, but having managed money through the last financial crisis we know uncertainty can create paralysis for advisors and retail investors.  It is better to have that decision made prior to turbulence, rather than during it.  It is the emotional response to the environment we wish to mitigate with thoughtful and proactive risk management via a thoughtful allocation to alternatives.