Animal Spirits Podcast - Talk Your Book: Compounding Machine

Starting point is 00:00:00 Today's Animal Spirits is brought to you by Standpoint Asset Management. On today's show, Ben and I spoke with Eric Quintington, who's been around for a while, does some great research. You might have heard him on Meb Faber's podcast a few times. He's a really smart guy. They talk a lot about systematic, trend following, all-weather investing, why it works. We spoke briefly about this, but I just wanted to enhance it or double-click on it because he was pretty modest about the returns. but past performance, obviously, et cetera, et cetera, no guarantee.

Starting point is 00:00:31 You did the double-click thing. I did. Sorry. Sorry. Now, I'm a podcaster now. It's official. This all-weather strategy that they run completely missed any sort of drawdown. Missed in a good way.

Starting point is 00:00:46 Very little drawdown during the pandemic. Very little drawdown in 2022 when stocks and bonds got clobbered. And the reason why I'm harping on this is because it's not like he got lucky with guessing. Now, maybe there were some. you know fortunate circumstances whatever whatever but it's not like he made a market call right that's not that's not what they're about that's not what trend following is he has a model and of course it ebbs and flows good times bad times but man time leaves everything and this thing has absolutely destroyed in a good way since inception at the end of 2019 and you and i looked at a ton of alternative

Starting point is 00:01:17 funds in the 2010s and a lot of them had a really really bad decade and you would wonder like how the the stock market did fine. The bond market did okay. The stock market was lights out. How is it, how are all these funds missing completely on like the one big trend? And it's hard, really hard for an alternative investment to survive a bull market like that. And you don't have to match the stock market in that kind of run because that's impossible if you're running some sort of alternative program. But keeping up at all. And it seems like that's the sweet spot that this fund is trying to get to, it keeps up. But it also gives you with less volatility. and the drawdowns.

Starting point is 00:01:58 And the point you made on the podcast was great. I won't step on it too much, but there's so many really smart people who have quantitative strategies that are just like, look at all this beautiful stuff I did in computer that creates this wonderful model.

Starting point is 00:02:11 I'm just going to sit back and the money's going to pour in. And the investment industry does not work like that. You have to consider how it's going to impact the end client or financial advisors who are going to be the ones

Starting point is 00:02:21 putting it in client portfolios. And it seems like Eric has really been very thoughtful about that where some other managers just didn't go that extra step. Yeah, and the proof is in the pudding. They actually have done an incredible job raking in assets. So, all right, don't want to step on too much with the conversation, which I hope you enjoy.

Starting point is 00:02:39 This is Eric Quintitaine from Stanford. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Redhol's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Britholt's wealth management may maintain positions in the securities discussed in this podcast. We're joined today by Eric Quintenden. Eric is the chief investment officer at Standpoint Asset Management.

Starting point is 00:03:17 Eric, excuse me, Eric, welcome to the show. Thank you. Thanks for having me. So we're going to talk today about all weather portfolios, about trend following. And why don't we start there? So you're a fan of systematic investing. How did you come about, there's got to be an origin story to how you discovered the fine art of trend following? Yeah, there's three on-ramps for me.

Starting point is 00:03:43 I say the first would be in college, I did a project where this was in, I think, an investments class where the project was to implement modern portfolio theory by writing the code ourselves. And at the time, I was going to Wichita State University. There was a lot of commodity trading and agriculture going on in Wichita, Kansas. So I had access to Bloomberg terminals, Reuters terminals. I knew people that worked on hedging desks. So I got a lot of hedge fund data. In college, you knew those people? Yes, yes.

Starting point is 00:04:15 Well, my degree was computational finance. And there's not a lot to do in Southern Kansas. So anybody with that interest would hang out at the university. I even started a club for quant finance, before quant finance. was a thing. So I had access to this whole world of hedge fund returns, commodity returns, all kinds of different alternative investments. And I used that data in my project to implement modern portfolio theory. And one asset class stood out from all the others and really added a lot of value to a stock and bond real estate portfolio. And back then, it was called,

Starting point is 00:04:50 oh, it's changed over the years. Some people call it managed futures. Some people call it systematic global macro, whatever. They're all close cousins. But the data I was using added a lot of value to stock and bond portfolios. So during that project, that's what got me interested in the space. And if you look under the hood, come to find out, you know, 80% of the managers, of the successful managers tend to be either 90 to 100% systematic in their approach. So that's what first intrigued me. And then I became an acquaintance of a guy named Tom Basso. You may be familiar with the name. He was profiled in the book, The Market Wizards. I think it was the second version of the book. The New Market Wizards. Yeah, the New Market Wizards. Excuse me. You're

Starting point is 00:05:33 right. And became friends with him, and I learned a lot vicariously through him and met other people in the industry. And I just saw all this, what I considered to be success, you know, non-correlated, positive, absolute returns from an industry that didn't get a lot of press. and that was highly diversifying in nature when combined with stocks or bonds, but most importantly, stocks and bonds at the same time. And then the third one was, it just fits my personality. I was in college when those first two on-ramps happened. And then I grew up and entered the industry myself and found that a disciplined, slow-moving,

Starting point is 00:06:13 risk-managed, systematic approach is completely consistent with my personality. And I think that's important. And I think Tom would reiterate that, too, that however you're investing, at some point, your feet are going to be held to the fire, and you better be doing something that's consistent with your value system and your belief structure. Otherwise, you won't be able to stick with it. What about guessing? The guessing is no good?

Starting point is 00:06:33 No, it's no good. Not a good strategy. How much do you think things have changed in your own personal strategy and then in the managed future's sort of quant space since you were in college? Because I've got to imagine the computational power, the competition, all this stuff. How much has that changed and how much has your, have you personally changed that philosophy? Yeah. So I'm going to be pretty controversial on my response there because I'm completely on the other side of the spectrum.

Starting point is 00:07:00 Most people are going to tell you everything's changed. Everything's faster. Everything's more complicated. There's so much more going on. That's all true if you make it true. But the structural risk premium that exists for extraction in the markets hasn't changed at all, at least at a medium and long-term frequency. Where all the change happens is in the shallow,

Starting point is 00:07:17 bloody waters with all the sharks with the short-term trading, mean reversion, you know, spread trades, you know, short-term supply chain issues, stuff like that. Yeah, that's very dynamic, very exciting, but it's not where I play because you need a structural advantage, you need size, you need a network in order to play that game. So there's been a lot of change there, and that's what gets all the press, and that's what people read about and whatnot, but the plain vanilla old school trends and risk premium that you collect by providing liquidity to hedge at a medium and long-term frequency hasn't changed since the days of Holbrook working back in the 1920s. I'm so glad you said that. Ben and I were talking last week about the zero days

Starting point is 00:07:57 to expiration option phenomena where they're like 50% of all option volume or something like that crazy. And does the fast-moving markets require you to go quicker? And I said something like, no, if anything, you should probably go slower. So I think there's probably a lot of market dynamics that have changed intraday. Markets might move faster. But if you look at something as very blunt as like just a 30-day rolling standard deviation or price change of the S&P, going back to the 1920s, it looks how it looks. Stocks are volatile. They always happen. They always will be. So it sounds like the lessons and discoveries that you had in, I'm guessing, in the 90s, have not changed dramatically till today. Two points. They haven't changed dramatically at the frequency

Starting point is 00:08:44 that I'm looking at them. They have changed. Like you mentioned, on an intraday frequency, certainly there's been a lot of changes there, but it doesn't affect me or my firm at what I do. So it's not that significant. I would say, though, that the lessons I learned in the 90s were not good lessons. You know, the 90s were an unusual decade. The lessons I learned were the lessons from the 70s in the 80s and the 2000s. So I think it's very important, or at least I would attribute success and preparedness to being a student of markets throughout history. Look at what your strategy would have suffered or benefited from in the 60s and the 70s and the 80s because it's more likely that we're going to get

Starting point is 00:09:26 environments like that going forward than we're going to get a repeat of the 90s. How do you explain managed futures to someone who's never invested in the strategy before? I try not to. Well, a couple things. Manish futures is... So do you think it's hard to convert people to this type of strategy? Well, to the managed futures component of it, yes. But we are not a managed futures firm. We come from a managed futures background. My background was long short equity and then managed futures and now all weather absolute returns. So what we try to do is extract the useful attributes out of managed future strategies, the ones that matter the most, and combine them with equities and

Starting point is 00:10:08 fixed income products to offer more of an all-weather portfolio. So I gave up trying to convince people to use meaningful amounts of pure managed futures because it's not what they want. It causes too many psychological problems for their clients. So I have a saying that, you know, you can give people what they want or you can give them what they need. They won't buy what they need if they don't want it. So what we've done, or at least the standpoint is an experiment.

Starting point is 00:10:38 we know what people need, or at least we believe we do, looking at all the weight of the historical empirical evidence. They need more trend. They need more diversification. They need assets that aren't dependent upon rising GDP and falling interest rates. That's what they need. They need these things. And these things exist, but they don't want it until after it's too late. So there's two ways to tackle this problem. One, you can try to educate people to help them finally start wanting what they need. Now, that's a massive uphill battle, riddled with bodies. I mean, I have not seen very many people be successful at that. Or you can take the easy way out and the smart way, I would argue, out, re-format, repackage what it is they need into a format that they want. So basically,

Starting point is 00:11:23 create the Reese's peanut butter cup. Nobody wants to buy chocolate from you. They don't want to buy peanut butter from you. You can't break into those industries. Margeons are razor thin. Mix the two together, and you've got a whole new industry, blue ocean, huge margins and no competition. So that's one idea. Or just put some wheels on the bottom of the luggage. You know, do something. You know, deliver what people need in a format they want. You can do business. So that's the standpoint experiment. So I am aggressively nodding my head. I agree with everything you said. I want to come back to the differences between managed futures and all weather. But before we do that, can we just start out with something basic? What is trend following?

Starting point is 00:12:00 Why did trend following work in the 50s? Why does it still work today? What is it behind the nature of trend following that is immutable, for lack of a better word. Great, great triage of questions there. So in practice, trend following is tracking a diversified basket of uncorrelated assets, hopefully global in nature. So you're looking at metals, grains, energies, bonds, currencies, all the global liquid markets. And you're making sure that you hold positions long in markets that are rising and that you

Starting point is 00:12:35 hold positions short in markets that are falling and that you have some sort of a risk budget for when you're wrong on your position so that you can have a calibrate the degree to which you're going to lose money and some sort of a stop loss or a sell discipline to get out of positions that turn negative before they grow into a serious problem. So you're buying strong markets and holding them for as long as they remain strong. You're short selling weak markets and holding them for as long as they remain weak and then managing the transition process from week to strong and from strong to weak.

Starting point is 00:13:08 That is in the simplest form, just a rules-based trend-following approach. There's millions of different ways to do it. You can be a short-term trend follower, medium-term. You can use moving averages, breakouts. You can do all kinds of really complicated stuff. But at the end of the day, if you look at the returns of profitable trend-following firms,

Starting point is 00:13:25 if you look under the hood and audit those returns, you'll see they made money from basically the same markets. for long energy right now, they're short bonds right now, they're long stocks right now, they're short grains, so on and so forth. One of the reasons why this strategy works to the extent that it does is because it's systematic in nature that goes against all of our human biases.

Starting point is 00:13:44 In other words, people, I've been guilty of this, I'm sure a lot of listeners have, have a tendency to pick a bottom or to call a top, right? And it's very difficult to let your winners ride, whether they're going up or down or longer or short. but trend following in a systematic way completely removes all emotion. At least the model is not emotional. As the manager, you might be emotional.

Starting point is 00:14:08 But the underlying decisions and structures of the model have no feelings. Yeah, it's a very productive robot, almost sociopathic in nature. You know, it's designed to be a compounding machine and to hold winners ruthlessly for as long as they win. And these things, you know, if you look at the empirical data going back to, say, the 1950s or 60s, you can see these markets. have a tendency to go up more than you expect when they first start breaking out and to drag on longer and longer and longer. And then when they reverse and go back the other way, they have a tendency to blow right through the stop and just keep going down and down and down. Not every time, but enough to blow you up if you don't have rules to govern the process. And a trend following system just simply forces you to hold your winners and to cut your losses.

Starting point is 00:14:55 Eric, I wasn't like you were the trend idea made sense to me immediately. it took me some time to kind of understand it and figure out, because it kind of went against my own biases, but I understand it now, and I am a believer, but how do you get over the fact that you can get so caught up in the minutia here and, like, the details and not, like, the big trend piece, like you said, is the big thing without figuring out, like, and torturing the data and going, well, if we did a six month here, but a seven and a half month here, like, how do you avoid getting caught too much in the details when the big trend, to your point, is all that really matters for most of it.

Starting point is 00:15:31 Yeah, a couple things I'll say about that. You're talking about model risk, where a six-month breakout system looks great of the last three years, but a five-month breakout system was a license to lose money. Yeah, so you could look at it and go, well, we're going to change it now

Starting point is 00:15:43 because it would actually look better if we would have done this instead of that. Right. So we diversify across different models. We have short-term models, medium-term models, and long-term models. That way, we're not, we always have something that is not terribly out of favor.

Starting point is 00:15:58 I'll give you an example. So from 1970 to current, our medium-term model is by far the most profitable, much more profitable than the short-term model and, you know, moderately more profitable than a long-term model. However, since we launched a standpoint at the end of 2019, the short-term model has been absolutely lights out. It's been the Atlanta Braves this year. I mean, it has just been on fire.

Starting point is 00:16:20 And the medium-term model is just, eh, it's kind of, it's doing okay. And the long-term model, I think, is dramatically lagged. So just like you diversify across stocks, different bonds, different asset classes in the trend following space, it's important to diversify across models because they do go in and out of favor. The other thing I would share is that if you have a model that is fragile, meaning like a five-month breakout's great, but six is terrible and seven's great, that's a really bad sign that you're on the wrong. You've got a fragile system that's not durable and robust. Because if I see that, what that means is you haven't zeroed in on a strong. risk premium in the marketplace. You've curved fit to some spurious nonsense.

Starting point is 00:17:02 And now it's just luck that decides whether you're going to, whether it's going to work going forward. So that's something you throw out. And Michael, this gets me back to, I didn't answer your, you asked three questions and I answered one of them. And then we jumped off topic. And that is, why does this even work in the first place? Is that fair?

Starting point is 00:17:17 You asked that question, right? Yep. Yeah. So in practice, trend following on futures and forward contracts is basically, like Ben alluded to, the exact opposite. What you end up doing is the exact opposite of what would make you feel comfortable on a day-to-day hour-to-hour basis. Your human emotions would say, why do we want to buy something instead of a 52-week high? Why didn't we buy it earlier? And why am I selling it now that it's gone down by nine ATRs or nine standard deviations? Why didn't I sell it earlier? Every single thing

Starting point is 00:17:47 you're doing is basically the opposite of what makes you feel good right now. So it takes a strange personality to be able to say, I don't need positive feedback. My emotions are not the prime consideration here. I definitely need positive feedback. Yeah, well, I mean, most human beings get worn down by this. And that's why people can't stick with it. Because underneath the hood, it's basically you're doing the opposite. It's like being a professional poker player. You're not a hero. You're a grinder. Right. And it is not fun. That's why most people can't do it. Now, investing's not gambling here. And this is the point. Really important. point I want to make. In practice, trend following tends strongly to trade opposite hedgers.

Starting point is 00:18:31 Hedgers love to buy declining markets, and they love to sell rising markets. So production hedgers like to buy declining markets to lock in lower and lower input costs. And I'm sorry, consumption hedgers love to do that. Production hedgers like to sell rising markets to lock in their profit margins and their output prices. Why? Well, it's because. they're using the futures and forward markets as a form of insurance to manage the risks on their balance sheet and their income statement. I know this from my days of living in Kansas and having family members that were hedgers and working with people that worked on hedging desks and looking at how they trade. They're basically pure counter trend on a dollar

Starting point is 00:19:11 weighted basis. So who's on the other side of that trade? And who wants to buy rising markets and short sale declining markets? Not very many people. It's just the systematic trend followers. So If these people are using the markets as a form of insurance, a valuable form of insurance, which really reduces their cash flow variability, which in turn lowers their bankruptcy costs, which in turn lowers their own debt financing costs, they can issue bonds at a much lower interest rate because they're a much more stable business because they hedge, that's very valuable. And it's an inverted form of insurance. Now, in what world is that insurance free? It makes no sense. It should not be free. So what ends up happening? And this is a theory, and this is my theory, and I can't prove it, is that the risk premium that they pay flows from them to the trend follower over time. And because they're notionally trading and trend followers are trading on a leveraged basis, you know, that 2% can easily become 6, 8, 10%, depending upon how you're calibrating the risk in your portfolio.

Starting point is 00:20:14 And that is a symbiotic, sustainable relationship. And that's structural, right? Those hedgers don't leave the market. No, they're the reason the market exists. Yeah, they didn't, these markets were not designed for investors. Yeah, sugar, sugar futures, that's not for retail. That's for literally people. That's for domino.

Starting point is 00:20:34 Yes. Yeah, it's commercial hedgers. And then you got the speculators and large participants on the other side, providing them liquidity. So you mentioned earlier about managed futures, which might be what people need, but not what they want. And I couldn't agree with you more. I was looking at, so I'm a fan of trend following in almost all forms.

Starting point is 00:20:55 But I was on a quarterly call with an asset manager, just checking out their managed futures. This is probably like 2018 or so. And it had been a really, really rough decade. And one of the biggest drivers of underperformance for that particular quarter was, you know, a short sugar trade actually. And that example always stuck with me. If you're trying to explain to an end client why they are having a rough time and you point

Starting point is 00:21:17 to a short sugar trade, it's like, Whoa, whoa, why am I shorting sugar? Now, I understand the non-correlation diversification benefits fully, but if you can't at least even remotely survivable market, now if the S&P's up 11 and you're up nine, or even seven or six, that's not what I'm talking about. But if the S&P's up 9% a year for a decade and you're flat, I don't care how sophisticated your incline is,

Starting point is 00:21:44 you're just not staying with it. That's fair. Yeah, I mean, that's the empirical opposite. Now, whether they should is a completely different argument, but it's true, right? People can only handle so much relative performance envy before they have to move on. And so how did you come

Starting point is 00:21:59 to the conclusion that, all right, managed futures, maybe that's the pinnacle of what I'm trying to do, but again, human beings are the buyers of this. So let's do the next best thing, which is an all weather strategy. Can you talk about some of the differences between the two? Because in my mind, they're synonymous, but obviously they're not. Well, let me take a step back

Starting point is 00:22:17 and say, I don't think all weather is the next best thing. I actually think it is the best thing. So in that project that I did back in 1996 at the university, the maximum sharp ratio portfolio and the maximum Sortino ratio and the maximum CalMAR ratio were all about the same portfolio. It's about equal risk contribution from pure trend, managed features, systematic global macro, whatever we want to call it, at global equities with the cash balance going into treasury bills. And that was from 1970 to 1996. So if you run it again from 96 to now, same weightings. It's the same portfolio. That is the optimal compounding vehicle. When you limit yourself just to scalable asset classes,

Starting point is 00:23:02 so I'm not talking about some weird asset classes that don't have a lot of liquidity. So I view the all-weather as the appropriate balance between a managed future strategy, global equity, you know, risk premium that you're collecting, with the balance going into T-bills to try to keep up with inflation. So I view that as the best, by my definition, the best, which is I want a stable, reliable compounding machine for a very uncertain future. So, sorry, I didn't answer your question, but. Well, what's the, yeah, what's the biggest difference? Yeah, I'm curious how you differentiate. Between managed futures and all weather?

Starting point is 00:23:41 Yeah. Yeah, well, it's not very meaningful. So we run a managed futures program that's diversified across 75 different markets around the globe, currencies, grain, soft commodities, energy, bonds, so on and so forth. And when you run a futures program, like, let's say you guys loved my futures program and you gave me a million bucks and said, Eric, go run your program. I only need 100 grand to run the program. That's it. That's the way futures programs work, because all you have to do is put up the margin deposit. And $100,000 is twice what I need for the margin deposits to control all the futures contracts on a $1 million program.

Starting point is 00:24:20 So what do I do with the other $900,000 where a typical managed futures manager is going to just stuff it all into T-bills. That's all they're going to do, you know, to get that, you know, the yield. We take about half that money and put it into globally diversified market cap-weighted equities. So basically the MSCI World Index, leaving us with still about. 40%, 45% sitting in cash. And we take most of that and we put it into a laddered treasury bill portfolio, leaving us with about 5 to 10% sitting in pure cash. And that, my friends, is an all-weather portfolio. And it has about equal risk contribution from global equities and the managed future strategy with a nice little kicker from the T-bills, or at least today

Starting point is 00:25:04 we're getting almost 5.5% from T-bills. So what does the breakdown end up looking like between stocks, T-bills, and then a trend strategy? So if you crack open, if you look under the hood, you'll see anywhere, generally about 50% of the monies in stocks, right? And about 30 to 33% of the monies in T-bills, and the balance is just used to run the futures program. Now, the futures program might have 150% notional value, might be 200%. Most CTAs are like 7 to 1. We're not a very aggressive CTA, so we're more like 2 to 1. But then if you look at it, at our risk, the notional values are deceptive because you've got some bonds in there that have

Starting point is 00:25:42 low volatility, some of the other markets. The notional values don't tell you very much. If you look at the risk contribution, it's about equal, though. Volatility contribution, co-variants adjusted, you're going to see about equal risk contribution from stocks and futures. What are the benefits of running this? So you run this inside of a mutual fund. The ticker is BLN-DX. Why a mutual fund instead of a different wrapper, an ETF, for example. So the mutual fund was a great wrapper in order to do this. And I've done, I've managed three different mutual funds over the years.

Starting point is 00:26:17 I've also done hedge funds and managed accounts. I haven't done an ETF. There's a good reason for that. And I'll share that in a minute. But the mutual fund with the passage of the SEC section 18F-4, the leverage rules, they clarified what you can and can't do. And they've been kicking this around, I think, since 2014. And when I saw the draft of the rules that came.

Starting point is 00:26:38 out a few years ago, I looked at it and said, our optimal strategy that we want to run will fit nicely into that. So that was nice to finally get some clarity on what the guardrails are and the mutual fund with respect to exposures and leverage and risk and whatnot. So a mutual fund wrapper allows us to do all of the trading to see the inflows and outflows and to control like the executions. That way we're responsible for what we're accountable for. And same thing with a hedge fund. You know, like I controlled all the trading in the prior hedge funds. And so I know what's going on.

Starting point is 00:27:12 And it's my ass on the line if we're screwing up trade. So I know that. In an ETF wrapper, I'm less clear on who's doing the trading. You've got market makers involved. They don't answer to me. They kind of answer to me, but they don't really. They don't work for me. I can't do their job.

Starting point is 00:27:29 So I worry about that. I mean, I'm not saying I'm justified in worrying about that. But that is what crossed my mind when I thought about, I don't want to give up the control. like I'm trading at night. I'm trading in Tokyo, Auckland, Sydney, other places. Are those market makers up at night? Are they doing it? You know, and then also, you know, half our portfolio is closed right now. You know, Europe is just closed. Asia's been closed. So if I've got all these futures, these global futures contracts in an ETF and you guys are trying to buy $10 million worth of the ETF and the market makers are thinking to themselves, well, half the portfolios closed, how am I supposed to lay off my risk, you know? So that was my concern about it into an ETF structure, which really was designed for common stocks, you know, back in the 90s and 2000s. And I'm not saying it won't work. And I hope those guys do, I hope it's working really good for them. But when I had to make the decision about standpoint, I was comfortable

Starting point is 00:28:24 with the mutual fund wrapper and not relying on market makers that I don't know and don't have control over. Timing is everything in this business. And every strategy has periods where it's in favorite. It's out of favor. I don't care if it's in all weather or long only or whatever. Everything goes, everything goes in and out of favor. Since the inception of the strategy, which was, I guess, very beginning of 2020, maybe technically end of 2019. This thing has absolutely kicked ass. During COVID, very little volatility, downward, downward volatility, actually down sideways to positive. And then when the market rolled over and the market as well. It got doubly railed in 2022. Very little, if any, price decline on your end.

Starting point is 00:29:14 You've got the annualized return of 11.7 percent, annualized volatility, 11.5, max decline of 9%. I mean, those are really kick-ass numbers. How do you view the performance of this fund since inception? Yeah, I would say that the drawdown number is the only one that's a little surprising. the rest of them are completely consistent with an all-weather portfolio that combines managed features with global equities. Which part of the drawdown is surprising

Starting point is 00:29:40 that it's been so shallow or the opposite? Yeah. I mean, there's some luck. Drawdown is a very tricky metric, right? It's like a one-day difference can be an extra 4%, you know, if one more firm hits a margin call, maybe that 9% drawdown turns into a 13. It matters a lot and I'm happy with it.

Starting point is 00:29:59 I mean, obviously that's, you know, a single-digit drawdown during COVID was pretty good, but I could have done everything the same, and that could have been 14%. It just depends on what the markets do and stuff. So I would say to people, don't expect a 9% max drawdown in the future. I think that that's, you know, that could be double. The rest of the numbers are all consistent with 50 years of research into, those are my expectations. You know, it's 10 to 12 on the upside, you know, 10 to 12 volatility. And the drawdown. You know, 12 to 18, something like that, I think is realistic.

Starting point is 00:30:36 And so far we've gotten those numbers, and the drawdown's been better than expected. So no big shock yet. If you're talking to an advisor about this product, how do you talk about them in terms of portfolio management where a fund like this can fit? You know, I used the word experiment earlier to describe what we do. A couple things. We've had thousands of conversations with advisors all over America. going back to the early 2000s. And we're an alternative investment.

Starting point is 00:31:12 That's what people look at us. And they say, oh, this is an alternative. You're not an equity shop. You're not a bond shop. I'm not an expert on bonds or value or any of that stuff. So we're an alternative. So when people describe what it is they want from an alternative, what's the common thread across all of them?

Starting point is 00:31:29 And if I just basically get rid of the outliers and say, We're the bulk of the money. What do people actually want? Non-correlation in a bare market. Yes. So they want a low beta and a bare market, but they want a high beta in a bull market. So obviously, what they want is something that makes 20% returns a year with no downside. So ignore that for a minute because no one can do that.

Starting point is 00:31:54 Of the realistic expectations, what are they looking for? They're looking for a high single-digit return. They're looking for volatility that's not meaningfully higher than 10%. You know, 8 to 12% vol. And they don't need any more 30% drawdowns. They don't need anything else in their portfolio that can go down 30, 40, 50%. They've already got that in the portfolio. So they'd love to have sub 10% drawdowns, but let's be realistic.

Starting point is 00:32:19 If you want a real rate of return in excess of inflation, your drawdowns are going to be more than 10%. So they want like a reasonable beta, you know, high. single digit, reasonable returns, reasonable vol, reasonable drawdowns, something that's not highly correlated with stocks during bad times. And now, today, what is this, September

Starting point is 00:32:41 25th of 2023, they want something that's not highly correlated with bonds when bonds are going down. So you truly have to be independent. So what they're describing, as I was synthesizing all of this, what they want is a good absolute return, multi-asset global

Starting point is 00:32:57 fund. That's what they're describing, just the slow moving, grinding, very diversified thing. And then on top of that, they don't want something with crazy fees. They don't want 3% management fees. They don't want two and 20 fee structures. Simple fair fee. And they don't want to get obliterated with taxes. So they know they're going to have to pay some taxes that is an alternative. They don't want these horrifying 30% distributions at the end of the year when you're up 5% for the year. So collectively, I look at all that and say, oh, well, you want basically an all-weather multi-asset fund that's globally diversified. So I'm going to build that because I already do that for my own money.

Starting point is 00:33:32 So it's no extra work for me to roll that out to other people. So the experiment is, if I'm right, if a standpoint we're right, and that is what people want, that's in our wheelhouse to deliver. So we're going to give it a shot and see if we're right in the marketplace says, yeah, I'll buy that. Now, where they put it in their portfolio, some people are saying it's in the other bucket. Some people are saying it's in the alts bucket. Some people are saying it's an equity replacement because you guys are 50 to 60 percent long equities. I've got some people replacing bonds with it, which I don't think is the greatest

Starting point is 00:34:03 idea, but they're doing it anyway. So we're still, that's going to shake out. So that's the dependent variable in this equation where we don't have any control over that, where people are going to fit us into their sleeves, because they define their sleeves. So my question to you guys is, where would this fit? Well, I guess it depends. If you're running just a 6040 portfolio, I think that this would be something of a split the baby. I don't know if it's, yeah. I think it would probably be, well, it has characteristics of both. I'm not sure exactly where this, you know, if it would be, if you would take 15%, 10 from stocks, five from bonds, I don't know, but I think it wouldn't be all one or all the other. The question that we've got most for advisors in the last

Starting point is 00:34:43 10 years in terms of like portfolio management is they want something in between stocks and bonds. And it is hard to carve out that sleep, but I want a 10% allocation or 15 or whatever it is to, yeah, something that's not the drawdown risk of stocks. And it was. before it was I want some more yield than I'm getting my bonds. Now that's not the worry. Now the worry is I want something that's not going to kill me, like interest rates going higher. So I think that's where advisors are looking from our conversations. I think about the guy that invented or put wheels on luggage. I think that was in the mid-70s. Some genius said, looked at all these people with their aching backs, you know, carrying their

Starting point is 00:35:21 luggage around, slap some wheels on the bottom of it. So where did it go? When you went home to store it, did you put it with the suitcase? or did you put it with the hand cart, you know, on the patio? You got to figure out where to put this thing. So I view us kind of a similar thing. And it's like, well, it's going to be your choice. I'm not sure. You wanted a compounding machine that was broadly diversified and had some risk

Starting point is 00:35:43 controls in place. We built it. You tell me where we can help you put it. It's like, Michael, with his fanny pack. Does he put it with his wallets or does he put it with his backpacks? Right. That's great point, Ben. So listen, Eric, congrats on the success.

Starting point is 00:35:55 The proof is in the pudding. The performance has been stellar as far as I'm concerned. And there's $640-some million in this. So obviously there is demand, and you're hitting the sweet spot. For people that are interested in learning more about getting access to this all-weather strategy, where do we send them? Are you taking conversation with the advisor? Not you personally is your team.

Starting point is 00:36:16 Is there a website? Where do we send these people? Yeah, we have a much more interesting guy at standpoint named Matt Kaplan who talks to the advisors. And I'm always happy to get on, but they've got to go through Matt first because he's much more personable than I am. But a great way to meet standpoints. Just go to our website, scroll down a little bit, type your email address into our monthly update,

Starting point is 00:36:36 and you'll get everything you ever wanted and nothing more. So there's a bunch of good stuff that we send out each month. And it's just the data and the facts that you can make an informed decision. And then we also have a content page on our website where pretty much every piece of literature I put out and all the podcasts, they're all there. And I can't stand to go there because I don't like watching myself. but other people have found it useful to find out if my message has changed over the last, you know, five years or if I've been consistent.

Starting point is 00:37:04 So it's all there. I appreciate it. We'll link to that in the show notes. Thanks, Eric. Okay. Thank you to Eric. Again, check out standpointfonds.com to learn more and send us an email, Amelspirthpod at gmail.com.

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