Animal Spirits Podcast - Talk Your Book: Trend Following with Eric Crittenden

Starting point is 00:00:00 Today's Animal Spirits Talk Your Book is brought to you by Standpoint Funds. Go to Standpoint Funds.com to learn more about their standpoint multi-asset fund, which we're going to talk about today. That's Standpoint Funds.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben 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 Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may

Starting point is 00:00:35 maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. On today's show, we spoke with Eric Quintititin. Eric is the CIO of the multi-asset fund at standpoint funds. This is a great conversation about trend following, systematic investing, why a lot of the aughts have come and went. It's about survival. And one of the things about his strategy that I think has resonated, though the performance has been really solid,

Starting point is 00:01:05 so that doesn't hurt. But he's developed a strategy that people can stick with. And that's the most important thing in this asset management business. There's a lot of strategies that might be optimized better or have the highest sharp ratio.

Starting point is 00:01:21 Guess what? If somebody can't stick with it, through thick or thin. It doesn't matter. I love how he said the word simple a dozen times in our talk probably. And that to me is like, is like, is a, whatever the opposite of a red flag is a green flag. Like it's a good thing. With systematic investing, how many different indicators do you need to tell you that you should be long or short a market based on trend following? I don't know if it's three singles, but it's certainly not 175 per market. Right. And you and I have talked before about managed futures and how that was a difficult asset class to have in your portfolio

Starting point is 00:01:57 in the 2010s. I think it's done better recently. But he was like, listen, we like managed features, but we knew that that wasn't a strategy people could stick with and had to think of the behavioral. So we have a stock piece and a cash piece. And then the futures are on top of it. The trend stuff is on top of it. And that was really smart because you have to give people what they're going to invest and not what you think they should invest in an optimized world. If you could give somebody, I don't know, let's make it up, a 60-40 portfolio, put 85% of that in the 60-40, put 15% of managed futures, but they can't see what's inside their actual portfolio.

Starting point is 00:02:33 Would that smooth the ride over a 30-year period? Yeah, probably would. Would an investor be better off on that ride? Yeah, perhaps they would. But guess what? That's not how investors behave. Right. They look at the line at him.

Starting point is 00:02:46 They say, hey, how come this thing is underperforming? Right. And so it's just, it just becomes a, becomes a tricky thing to stick with. It's not a commentary on the asset class or the managers there. It's just from an investor behavior point of view, it's, it's not easy. So I think what, what Eric has done over at standpoint, with the multi asset fund, so far has seemed to really resonate with, with its investors. It started from, from nothing. And it's about to cross a billion dollars. So. And the fund went through a bare market already. So you can, you could, you know, it's not just like a back test you can look at. It's, is this, this fund held up in the midst of a 25% to bear markets. It started

Starting point is 00:03:27 right before COVID. Oh, you're right. And then the 22 bear market. So it's, it's, it's not a long period of time, but it's certainly been battled tested. So anyway, I think you're going to enjoy this conversation with Eric Quintington. We'll see you on the other side. All right, Eric Crittenden, welcome back to the show. Thanks, glad to be here. So I was looking at your website and you have listed for your multi-asset fund, your investment universe, and it includes fixed income equities, industrial commodities, and agricultural commodities. And there's this huge, currencies, there's a huge long list of assets under each of these. I don't know how many there are. Eyeballing it 50 or 60. Am I in the ballpark? Yeah, 70. Okay. How do you come up

Starting point is 00:04:08 with this list? Like, what is your, what are your, what are your guidelines here? Is it, is it all based on liquidity? What do you, how do you come up with all these different assets to track. So what I do once a year is I scan the globe. I have databases that connect to all the different futures exchanges and equity exchanges around the world. And like you mentioned, we rank and sort them based on liquidity. And then we try to pick the 70, 75 most liquid futures markets in the world. And then our ETFs follow a different methodology. We're just trying to get market cap weight of global equities on the equity side. But for the future side, we want the 70 to 75 most liquid futures markets.

Starting point is 00:04:47 So, Eric, I know that you're not a fundamental expert on all these things, although I know you can talk to the long guilt all day long, but that's not how you guys manage money. Before we get into the strategy and where the rules come from and all that sort of good stuff, maybe just like a quick background on how you got to where you are today. Sure. I was one of those weirdos that was in college for a long time and kept changing my major. So my background is things like meteorology, geography, public health, and ultimately settled in on finance and computer science. My first job out of college, or first paying job, was working for a big family office in Kansas and helping them manage their money.

Starting point is 00:05:32 So, and I was mostly research. So I, you know, eight, ten hours a day, just banging away on data. I guess data scientist before it was a popular phrase was kind of my job back then. So I learned a lot about investing and trading without being in the industry. You know, I've never worked on the cell side. I didn't work on Wall Street. So I was kind of this peripheral player that had flexibility and freedom to do creative stuff. Ultimately, got tired of the weather in Kansas, came out to Arizona, started a hedge fund, started a mutual fund company, left that

Starting point is 00:06:09 company started standpoint. Now, you know, the goal is I want a product that is going to be how I would want my money managed personally. So the standpoint is my final job. This is where I'll retire. But I came up through the hedge fund industry, did a lot of work in long short equity, managed futures, spread trading, things of that nature. And then ultimately, now I'm trying to pull together the best lessons I learned and my best ideas into one fund structure. And that's why I refer to it as kind of all weather. How would you summarize that in terms of like how you want your personal money to be managed? What are the top level things you're looking for? Well, at the highest level of what I'm trying to do is maximize the compounded return after fees, taxes, and

Starting point is 00:06:53 inflation. So what's left over after everyone gets paid? And I want to do that with the least amount of risk that I have to absorb possible. And we can get into how we do that. But that's really high level. I just want to maximize the geometric growth of my true wealth over time. Before we get into like the nuts and bolts of the strategy, this is kind of a in the weeds question for investing people. But you mentioned that you, you look at the historical data and every year you update your, your data on this stuff. What are your like rules for data sources and how you are willing to look at data and backtested data and all that stuff? Because there's plenty of different providers. And how do you, how do you think about that?

Starting point is 00:07:33 because a lot of this has to come from back-tested data, obviously. Yeah, right. So garbage in, garbage out. You really need to understand survivorship bias and how databases work and how one group of people can collect data and show you one version of history and another group can purportedly collect the same data and show you a completely different view of history. My job is to be impartial and reconstruct history as it actually unfolded.

Starting point is 00:07:58 And that's a lot more cumbersome than just the convenient data packages that are available for purchase for, say, $5,000 on the internet. That could be a three-hour conversation. My job is to collect the data, clean it so that it looks or structure it so that it looks as if it would have looked in real time historically. So you can't use the conveniently clean data after the fact because it's not what he would have been trading on.

Starting point is 00:08:24 So it's pretty involved to do proper back testing. You know, that's why we have a rule that says 98% of all back tests are garbage. should just go in the trash. So it's a completely different discipline to accurately model historical financial time series data. And that's something that I take pretty seriously. It is funny you mention that. I worked with a guy who was a big quant back in 2008. And he had this whole earnings-driven model that looked amazing in the back test. And then all the financial companies totally threw earnings out the window, right? In the 2008 crisis, and his whole model blew up because he didn't think of a world in which the earnings from AIG and city and whatever

Starting point is 00:09:04 could go to zero or negative or whatever and totally skew the S&P 500. So you're so right that the garbage in scenario and garbage out is such a big part of it. Eric, after Ben mentioned the GFC, after that period in time, global macro became like the thing, the sexy thing that everybody wanted to become. And it was a lot of, it was a lot of like chin scratching and master of the universe, uber intellectual type mental masturbation, if you would forgive me for using that phrase in terms of like, well, if this happens, that happens. And like they were trying to like solve like a 40, four dimensional puzzle and just masters of universe type nonsense. And a lot of those people have struggled to adapt to a new world because as you know better than anyone, the world of

Starting point is 00:09:52 financial markets is so incredibly complex. It's a biological living thing. I forget who said this, who said this quote, but it's so true that once you think you've got the keys to the market, somebody changes to the locks. And so what you do and the discipline that you come from is pretty antithetical to thinking, not that you're not a smart person, but you're not thinking around corners. What does the next six to 12 months look like? What are the odds of a recession? how do I want to be positioned? What about the yen? What about the carry trade? What about this? What your thing is, and I'd love to hear you expound on this, is all of what we think, it's in the price. And the price is going to tell me where I want to be long, where I want to be short. And my opinion, your

Starting point is 00:10:41 opinion, who cares? It's all in the price. Can you talk about how you got there? I'm sure that you did some thinking back in the day and said, okay, I can't out smart everybody always. This is really hard. Yeah. Can we get you to join our marketing team? Yes, 100% agree with everything you just said. And I'll give you an example. Let's say that you have some really good critical thinkers that are extremely knowledgeable. And they're 90% right on every prediction they make. But they still fail in this game.

Starting point is 00:11:16 And normally when you see that, it's really simple. What's happening is joint, the laws of joint probability kick in. So let's say that you calibrate a portfolio or a series of bets where four things have, you have to be right on four things and you have a 90% chance of being right. Well, the cumulative probability is 0.9 times 0.9 times 0.9 times 0.9. It doesn't take long for that to fall below, for the product of that to fall below 50%. Right.

Starting point is 00:11:47 So it's the more variables, the more moving parts, the more nuance, the more you're looking out, you can't win this chess game. The cumulative probability or the joint probability is simply not on your side. So whereas I would like to play chess, I would like to think eight, ten steps ahead. But your winning percentage, you have to be right almost 100% of the time for that fragile approach to work. So what works is just pure Darwinism, and that is protect yourself at all times and ruthlessly cut risk when it's not going in your favor. only think one or two steps ahead and just be prepared. I can't tell you, I mean, I'm 52.

Starting point is 00:12:28 I've been in the business, I think 27 years now. How many people I've come across that are, they have a higher IQ than me, they're more educated than me, they're more networked than me, but they're not still in the business. And all they had to do was get it wrong once or twice to get taken out. So this is a game for the humble and the discipline, this marathon, and you don't need to have an IQ of 150 to pull that off. Yeah. And then furthermore, and like, yeah, these are very intelligent people.

Starting point is 00:12:55 You don't get to have that job without having a monster IQ. But there's also like the execution part of it. You could be right but early or directionally right but get stopped out or get scared or have the emotions start second guessing yourself or digging your heels or whatever, whatever, whatever. Talk about the way that you actually implement certain systems and rules to help you. help you before you get into a trade how you manage trade at a high level how does all that work yeah so full disclosure i wouldn't have been a very effective discretionary trader because you know what people

Starting point is 00:13:32 refer to me as pretty robotic and unemotional i still they're still human and there are times where i think this can't possibly go any further or this has to turn around um and i write those down and i check back you know six months later one year later three year later and it's just it goes so much further than you ever would have initially guessed and it drags on for so much longer so but what we do is systematic and we implement rules that we test historically on all kinds of different markets and stress test and implement rules that were good historically at keeping you on the right side of big trends and not allowing you to be on the to stay on the wrong side of big

Starting point is 00:14:12 trends and then calibrating your risk to where it needs to be based upon how diversified your portfolio is your assets under management so on and so forth. It's actually quite simple. The only real complexity is that we use multiple systems because any one system can, it can be good over 50 years, but it can go out of favor for three, five, seven years. And then your investors lose confidence. So you want other systems that tend not to go out of favor at the same time as your first system. And that way you can diversify across systems, not just markets, not just asset classes. So when you say diversify across systems, you mean you're looking at different ways of defining trend, essentially? That's one way to

Starting point is 00:14:50 do it. Yes. In our case, we're looking at different tranches. So short-term trends, medium-term trends, and long-term trends. How do you define those periods? Like what is, what is considered long-term for you? I'm curious. A long-term is one year. Okay. Yeah, medium term is nine months. Short-term is six months. We tested everything from one day to 5,000 days. And you can look at all the results and you can plot them in a chart. And then you can look at their variance over time, like how volatile are they? There are some systems that are very short term that are lights out for five years, but they're just a license to lose money for three years after that. We're not interested. We want durability and robustness. So we chose

Starting point is 00:15:27 the three settings that were the most durable over the last 50 years that also are not redundant with one another. Have you noticed changes in the way you execute certain trades over your time in the market? Do markets function differently today? Is there less liquidity? Is there, I don't know, do things happen quicker, like any substantial changes that have forced you to change your strategy? Or is it the exact opposite? Okay. So this is an interesting topic that I need to be concise about because it's one of my favorite topics. And I don't want to drone on for hours here. Markets are always evolving and changing. Generally, they're getting more liquid. They're getting more soggy and soppy. You know, like the signal to noise ratio generally gets

Starting point is 00:16:11 worse over time as a market becomes more liquid, pulling in more spread traders, more hedgers, more speculators, more government intervention, so on and so forth. That's intraday generally, or intra-week. For long-term trends, things, statistically speaking, they haven't changed very much since the 1970s. Sure, it's a lot easier to execute now because there's liquidity, the depth in the markets is much larger. But for what's important to us, they're not meaningfully different. They're just a lot more liquid. This is certainly not the end of deal. This is not a mic drop. But if you were to look at, say, something as simple as a 30-day rolling rate of return for the S&P 500 growing back, as far back as it can go or even further back than the index exists,

Starting point is 00:16:52 it looks, it goes like this, up and up and up and down and up and down. Like you, there's not a period on that chart where you would say, this is where mutual funds went away. This is where index is picked up. This is where whatever, whatever, whatever. But are there other things that you would say, well, actually, there are certain things that are just fundamentally different. The intraday liquidity is fundamentally different, but the signal to noise ratio hasn't changed as much as people imply with their comments about this topic. In fact, we run our operations the same way we would have run them in 1970. That's actually very important to me because you don't know what you're going to get in the future. And I don't trust a back test that looks good in the

Starting point is 00:17:33 1970s and 80s if I know that I couldn't have actually implemented it back then. So it's not valid. So it was important for us that the methods that we used to execute the strategy in real life could have worked exactly as we're testing them on the historical data. So you wanted to make sure that these futures contracts have had a long enough history that you trust it, basically. Well, that too, yes. But I mean, there's a lot of people will backtest something on microcap stocks or, you know, some smaller market like the VIX and assume that they could get a fill at the tick. price, the instant, you know, the signal was received. And that may be true today, but it wouldn't have been true in the 1980s. But still, they're looking at their test results from the 80s and thinking that would have been awesome. I was trading in the early 90s and I can

Starting point is 00:18:24 tell you that, you know, your slippage costs were five times higher. I was trading when there were fractions and there were fixed commissions of $60 at trade. So, and now it's a dollar a trade, you know, with a 0.01, you know, bid-ask spread. So you have to back for that. So for So for anybody that pines for the long days or the good old days of trading and less intervention and less index funds and more price discovery and more this more that, what would you say? It's a tradeoff, right? And if necessary, you need to evolve with the changing circumstances or you need to have a system that is outside the scope of all that madness, which is where I think we're at. Do you fall under the managed futures umbrella? Is that that's a category that you're in?

Starting point is 00:19:04 We're not in that category. So what we're doing is we, so I have a, My history is managed futures in long, short equity, and a little bit of spread trading. What we did in our pursuit of an all-weather kind of absolute return fund is we took the attributes from managed futures that we wanted and implemented them in our own macro program. But no, we're not considered a managed futures fund and we're not in that category. So what's the biggest difference there? The biggest difference between what we do, I'd say scalability. You know, a lot of these managed futures programs are going to be more special. specialized, shorter term. They're going to have more rules. They're a bit more fragile, in my

Starting point is 00:19:44 opinion. There's some good ones out there. Don't get me wrong. Like, this guys have been doing it for a long time. They know what they're doing. But we wanted a simplified version that was more durable. And again, it's a trade-off, right? If you want higher returns, you want something that's more focused on certain markets, well, there's a cost to that. There's a little bit more fragility. We wanted to minimize fragility, maximize durability. A good contrast would be managed futures did unbelievably well during the 2008 crisis and one of the few strategies that worked. And then for almost the whole 2010's, managed futurist funds basically sucked, right? A lot of them did if you look at the track records.

Starting point is 00:20:23 And now it seems like it's come back a little bit. So your strategy started in, what, 2019? So we don't know how you did it in 2010s, but is it true that just trend following itself is working better this decade? It is. Yeah. I mean, we've segueed into a macro environment that's conducive to trend following for sure. That was a tough period of time from, I think, 2011 to about 2018. That was a below average period of time for managed futures. But every asset class has its lost decade. Yeah, no, it's true. And how much of that at play is just cash rates are higher? Because if you're going shorting and longing, the cash involved, does that increase in the baseline rate increase your return as well? Yeah, because, you know, a macro program or a managed

Starting point is 00:21:08 futures program generally has, you know, 80 to 90 percent of its money sitting in cash that you can just roll into T bills. And if you're getting 550 on your T bills, that's a nice tailwind. But one thing people don't realize is that risk-free rate of return also gets priced into the futures curve. So into the term structure, the futures curve. So for medium and long-term trend followers that are collecting, you know, either backwardation or contango, depending on whether they're long or short, those risk-free rates inflate those numbers. So that's another potential kind of indirect source of return for those strategies. So it's twofold. You're getting the T-bills, but also if you're long-term enough, you're probably getting the term structure as well. Eric, I'm not going to lie. I still can't

Starting point is 00:21:44 explain backwardation and contango. I get a mixed up every time. You have 50-shot. That's true. There's no such thing as an easy loss decade for any asset class. I really don't care if it's corner stocks. However, because investors will will bail, very understandably so. But I think that, at least on a go-forward basis, I think that investors generally ascribe to the idea that stocks go up over time because the earnings power of companies goes up over time. And of course, that is a general statement. There will be a loss taken at some point in the future. Investors will get frustrated and bail and sell at the bottom, et cetera, et cetera. But with something like,

Starting point is 00:22:31 With a strategy like what you're running, I know you're very in tune with the behavioral side of it, if there's a lost decade for managed futures, people get really uncomfortable. Why am I short natural gas? Why my long sugar? Like, how does that help me at all? So from a behavioral standpoint, how do you position or how, I guess this is not a managed future strategy. Maybe it's not a fair question.

Starting point is 00:22:52 But how would you talk to investors about a category where it's more trading and less a fundamental belief that like managed futures goes up over time? Well, you don't. I got out of that industry because there's simply no way to win. The cognitive psychology makes it almost impossible to, I mean, there are some people. You can just show them the math and they'll go, yeah, they'll look at it as a tradeoff and they'll say, yeah, that belongs in the portfolio. But generally speaking, you've got to get through multiple layers of bureaucracy. You've got compliance. You've got marketing. You've got advisors. You've got their clients. It's It's just a losing proposition and that's why, you know, the Dow bar in alternatives is so bad

Starting point is 00:23:36 that people, you know, buy the high and sell the low over and over and over again. So, I mean, our strategy is to pick the best alts that we believe in, do them in-house so we're not paying fees on them and integrate them into an equity in Tebow portfolio in order to provide an all-weather experience. And then we're making the bet that people will like that all-weather experience and they'll view that as their alternative investment or a core investment and they'll bring it in. And so I gave, we gave up on the managed futures industry simply because, and it's not fair to the managed features industry.

Starting point is 00:24:05 Managed futures has been the best diversifier for many, many decades, but people just won't stick with it. So what about your strategy allows investors to stick with it then? Well, the fact that we're actually delivering the diversification benefit encapsulated in one fund. So let me say it this way. If I took my fund and I broke it into its three pieces, the equity piece, the cash piece, the T-Bill piece, and then the macro piece, and I offered them as three separate vehicles,

Starting point is 00:24:32 we might have $100 million under management. But because we merge all three of them together, we end up with a much higher sharp ratio, much higher risk-adjusted returns, a stress-free equity curve, and we have a billion dollars under management. So that's the difference. It's kind of like the Rhesus peanut butter cup. You could sell the chocolate. You could sell the peanut butter.

Starting point is 00:24:48 If you mix the two together, you have much higher margins and people are happy. So you have a static allocation to each of those pieces. What is it, is it static? What's the allocation there? So we start with a 50% allocation to global equities, market cap way to global equities, and we leave that alone for the most part because we don't want to generate taxes. And we allow that to fluctuate. And that's just the strategy.

Starting point is 00:25:08 It can go as high as 67%. And it can go as low as 33%. But we won't let it get beyond those numbers. And then we generally have 28 to 33% of our money in a laddered treasury bill portfolio. And then the balance, there's plenty of cash left over, is used to fund the macro program that makes investments in those 70 to 75 global future. markets. So on the global equity piece, what determines, I'm guessing it's trend, but how high or how low you'll go? So that would be the relative performance inside the portfolio

Starting point is 00:25:39 against the T-bills and the macro program. So you let it run basically, right? Yes. Put that allocation and you let the stocks go. And so the other piece you said, whatever, the 10% was the leftover for futures, that's just essentially using the leverage that's involved in futures contracts. Yeah, all futures contracts are inherently leveraged by design. That's, that's their purpose in life. So you can fund them, make your margin deposits, and then manage the risk accordingly. We're not a particularly, when people look at our program under the hood, they don't walk away saying, well, these guys are using a lot of leverage. We're pretty tame in that regard. But all futures contracts are inherently leveraged by design. And then within that leverage in the

Starting point is 00:26:17 futures, do you have different gross and net exposures? Because obviously sometimes almost everything is going up together maybe. Sometimes there's nothing to short. There's something's nothing to go long. So how do you handle that piece of it? You have set gross and net exposures that you try to set to? Well, there's no, we don't. That's top down. We actually go more bottom up. So we have a target limit for each market that's a function of that market's open interest, which is kind of like float, but it's just the number of contracts outstanding. So we don't want to concentrate too much in any one futures market. Then we have a risk budget that we have. apply. So we have a 10% risk budget that we apply at all times for all macro positions.

Starting point is 00:26:57 And then with some simple algebra, with those two parameters set, it tells you exactly how many contracts you should be short corn and how many contracts you should be long gold, so on and so forth. And we just manage that on a day-to-day basis if the software does. It's actually quite simple. And that has a scaling down positions that become too big or too hot and scaling up positions that become too low and reallocating when something gets kicked out of the portfolio. if it hits our closed discipline, then it frees up risk units and those get to be reallocated on a proportionally weighted basis to the rest of the positions. And how much trading is going on there? How much turnover is there in the fund?

Starting point is 00:27:31 It's pretty low. We're not very, we're not considered super active. It depends. I mean, there was a lot of turnover recently in the past month, you know, a lot of the metals and agricultural markets, those trends failed. But it's not a super high velocity program by any means. All right. So you mentioned, so it's 100% rules based. Correct me if I'm wrong. There's no, there's no, uh, Eric's discretion involved where you might think something's going to happen. You listen to the signals, but is it done via software? Like, can you leave or do you need to be at the screen monitoring what you're doing?

Starting point is 00:28:03 So twice a day, um, my staff or myself needs to review what the computer's coming up with. Um, so we have two processes. We have a, you know, a computer driven process that basically does the whole workload. But that's not allowed to communicate to the brokers. So when it's done, it produces a, series of reports that get pulled into like an Excel-based software and then a human being has to go down the checklist and say, yes, that makes sense. Yes, that makes sense. I understand that. So humans taking responsibility for every one of those decisions. And then once everything's been

Starting point is 00:28:33 approved, you know, you hit the checkmark and then it sends off to the brokers. How often do you see something where you say this is, this is not my discretion overriding it, but this is just not, the signal's not right? Like, how often does it happen? Or is that pretty rare? That's very rare. It's common if you have a complicated process. Our process, our process is quite simple. Maybe once every two years, something comes up and you're like, that's got to be a data error. And it gets red flagged because we have all these kind of like checks and balances in place that if it tells us to put on a billion dollars of yen or something, you know, that's going to get red flagged. It's not going to go through. Plus, even if we did send it through,

Starting point is 00:29:07 our brokers aren't going to execute it. They're not crazy. Very important question for Eric. You're tracking 70 different markets here. How many screens do you have in front of you right now? Two right now. Okay. You're not one of those like 12 screen guys? no I have three in the I'm in the podcast room the office is down the hall and there I have three but no you don't need that many it's just it's not as common everyone thinks it's so complicated and then when they come in and look at the cockpit they're like oh it's pretty cool it's actually a simple process you're running so you mentioned simple a few times and that's music to our ears we are definitely simple over complex but could you talk about why you don't need a million different

Starting point is 00:29:42 indicators for a market to determine whether or not it's trending and whether you want to be long or short you know it's because those indicators are measuring the same thing I mean, look, there's an infinite number. What do they call that indicator stacking? You know, Charlie Wright wrote a great book back in the 90s. I can remember what it was called. But it was all about, you know, here's the five stages of failure in becoming a trader, right? You have to get past indicator stacking.

Starting point is 00:30:04 You've got to get past buying, you know, doubling down. All these things you have to get past. But the indicator stacking chapter was interesting because it's just calculus, right? Or maybe a little bit of trick. You take a trend and you can decompose it, you know, potentially. an infinite number of ways and create all these different oscillators and channels and whatnot. And then if you just strip away the labels and look at it, that they're all measuring basically the same thing. Yeah. And you're in this, on your website here, it shows against

Starting point is 00:30:32 this as a benchmark of 6040 portfolio. How do you explain this to advisors or investors in terms of portfolio allocation decision? Do you look at this as like this is the alternative that you add on to a 6040 like portfolio? How do you, how do you view that in terms of portfolio construction? You know, I'm not sure that we have a great answer to that. We're kind of waiting for the marketplace to tell. We're just managing money the way we want it managed, right? This fund deserves to exist. I always wanted a fund like this.

Starting point is 00:30:59 I can't believe no one's doing it. It's not hard to do. So we built it ourselves and did the best job we could, you know, bringing stuff in-house and so that we're not paying two and 20 to the trend following CTA types and whatnot. And then we manage the fixed income ourselves and minimize acquired fund fees. And it's just I look at it and say, well, it's an all. weather absolute return fund that deserves to exist. Now, will the marketplace please tell me where does this fit in your portfolio? Now, so far, early on, people looked at it as a satellite position

Starting point is 00:31:27 that they would stuff into their alts bucket. But now that we've been around for five years, some people are saying, you know, this is a core position. And other people are bringing it up from 2% allocation to 10% allocation, but they still think it's a satellite position in the alts bucket. So it remains to be seen how people are going to fit this in. And I don't control that part. So I'm not really sure. I don't have a great answer. So the proof is in the pudding in terms of, listen, you've had great numbers and the marketplace is clearly excited about it. You launched this thing back in, at end of 2019, early 2020? Yeah, December 30th of 2019. Okay. So you launched with, you know, obviously very little in assets and you're just about up to a billion. So

Starting point is 00:32:09 obviously you guys, you guys are doing something right. I guess I'm curious as we come, as we start to wrap this up. What are some of the things that you're hearing most often from clients today? Most often from clients, well, I mean, last year was a little challenging for us, you know, because the stock market went straight up and we had a humble return. So some people asked about that. We're getting less questions, though. It used to be like, you know, what's the market going to do? You know, what happens if the Fed does this? You know, what if Biden does this? So on and so forth, I think people have started to settle in and say, you know, you guys are just this disciplined, boring, stoic, grind your way towards, you know, win the marathon, not the

Starting point is 00:32:51 race. So, and you never give me any answers to my like political questions or, uh, and you won't make predictions. So they, they, they kind of stop asking. They talk to you once and they say, all right, boring. I, listen, investing, investing should be boring. So just looking at the returns, you guys have yet to have a 10% drawdown. I'm just guessing that that's going to happen eventually. And credit to you, it's been almost, it's, it's been like almost five years without a 10% drawdown. In terms of managing expectations, I can't imagine that it's not going to, that it would never get worse than the previous five years because it's been an incredible run. In terms of like a discomfort,

Starting point is 00:33:27 what do you tell investors to potentially prepare for? Like, what would a bad period look like for you guys? Yeah. So this is where the research that I can't show people comes into play. I can take, you know, various simulations of what we do back. time and then I can run, you know, simulations and scenario analysis and Monte Carlo simulations and try to ferret out what a, what a real drawdown is going to feel like. So with, when I look at it, I'm prepared for a 20% drawdown at some point. Of course, I could always get worse than that, but I'm saying to myself, look, you know, the max that I'm seeing is kind of, you know, 16 to 18%, but it can get worse for sure.

Starting point is 00:34:08 and the markets don't have to stop where they are. The stocks could do worse or there could be more whipsaws or whatnot. So I tell people, if you're going to be with us for this marathon, you know, expect a 20% drawdown at some point. And if that's too hot for you, then you probably need to look at T bills. And so for people who are interested, just explain where they can go to learn more and then give us a little bit on the fund structure. How is this structure?

Starting point is 00:34:29 You mentioned you have ETS as well, but this one's a mutual fund. Maybe go that down that road. Yeah, I mean, we're just a plain vanilla mutual fund from the outside observers perspective. You know, so we're on quite a few platforms now. Not on many of the wirehouses yet, but on most platforms, people have access to it. Standpoint Funds.com, if you're interested, you can scroll down and type in your email address and get our monthly updates. We're not selling your stuff to the hackers and we're not spamming you with junk. The mutual funds available, you can see all the metrics.

Starting point is 00:34:59 You just go to Morningstar, type in the ticker symbol, and you probably have all the information you want. All right, Eric, thank you for coming on. Congrats on all your success so far. and here's to another great five years. Awesome. Thanks, guys. Appreciate it. Thank you. Okay. Thanks again to Eric. One of our more subdued guests we've had,

Starting point is 00:35:17 but I think that's a good thing. In a good way, right? Absolutely. All right. Standpoint Funds.com to learn more. Email us, Animal Spirits at the Compoundews.com.

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Animal Spirits Podcast - Talk Your Book: Trend Following with Eric Crittenden

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