The Derivative - Trend Following Asset Allocations with Jon Robinson of Blueprint

Starting point is 00:00:00 Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Hello there. Sorry we missed you last week. I was up peeping the fall colors in Wisconsin or in town and doing hours and hours of portfolio work. Take your pick. Draw your own picture.

Starting point is 00:00:30 Anyway, we're back with this fun episode talking to John Robinson, who I knew from way back when, when he had a bit more hair and ran his own CTA program. He's since graduated out of the sordid commodity space into a bona fide investment advisor now. And we dig into what that unique perspective, having been on both sides of the sorted commodity space into a bona fide investment advisor now. And we dig into what that unique perspective, having been on both sides of the game, getting allocated to and choosing whom to allocate to, plus what it's like educating clients these days and how he thinks about trend following asset allocation decisions and exposures. Something I dabble in personally. Send it.

Starting point is 00:01:33 This episode is brought to you by RCM's Clearing and Execution Group, which helps ETFs like Send it. All right, we're here with John. John, how are you? Hey, Jeff, I'm doing well. Thank you. So we got to give the listeners a quick little background that we used to know each other. We were just trying to off camera decide whether it was 10, 20, somewhere in between 10 and 20 years ago. Yeah. Yeah. I'm thinking 10 to 15 years ago. I mean, you kindly identified that back then I had hair. It's really nice of you.

Starting point is 00:01:59 You look good without the hair. You wear it well. Thank you. Thanks. I have no choice, so I sort of have to do that. And where in the world are you? You're still down in Southeast somewhere? Yep. North Carolina. Greensboro is Blueprints HQ. Perfect. Greensboro. And that's grown probably as much as you've lost hair.

Starting point is 00:02:21 That's grown an equivalent amount, right? I would say it's a one correlation. Yeah. And what is all that just general industry or specific industries? Yeah, I mean, it's I would say more general. I mean, we've had a lot of companies. We haven't had it in North Carolina as much as Texas and Florida have, but there's been a pretty large migration to the, to the South,

Starting point is 00:02:50 Southeast and a lot of company headquarters. Honda jets has moved into Greensboro and manufactures jets from here. So that added, you know, a lot to the local economy. It certainly helped bolster real estate prices. prices. Toyota's building a battery factory here. So yeah, I mean, it's grown, but not too much, which is why I like it. And who's your college team in Greensboro? You're sort of a little west of all that, of Tobacco Road, right? Yeah, we're a little west. I mean, I pull for Carolina. I went to UNC Greensboro, but I grew up a Tar Heel fan, so I still maintain that allegiance.

Starting point is 00:03:32 There you go. They're pretty good this year, right? In football, that quarterback might get drafted. Yeah, yeah. May is the quarterback. They're pretty good. I mean, Mack Brown coached in the 90s, right? In the in early 2000s left for a long time he went to texas went to um espn and then he came back as coach and he's rejuvenated the program to the extent it needed to be rejuvenated he's right what was he 80 he's got to be up there he's definitely up there yeah and then i gotta ask because i can just barely read it with my rapidly decreasing vision uh behind you man in the arena what what does it say yeah so man in the arena is a is a basically a

Starting point is 00:04:13 quote from a Teddy Roosevelt speech my wife gave me that and uh to be honest with you I didn't intentionally put it in the way of the camera it just so happened yeah it's in that room that it's it's there but i do like the message and i don't know if right that's been a little co-opted by uh chamath who did all the scam uh spacks and whatnot and he was saying hey leave me alone i know i lost you billions of dollars but i'm in the arena i'm doing it but i think i like teddy's roosevelt's version better yeah i think i do too and uh i think we've seen a lot in the past five years how many things can actually get co-opted yeah that's for damn sure moving on we touched on a little bit but so you're in a previous life

Starting point is 00:05:04 uh blueprint now you're an ra but in a previous life, Blueprint now, you're an RA, but in a previous life, you were a CTA, which is near and dear to our heart. So tell us, you can start even before that, how you kind of became, when you were young, got through college, first started out in the business world, became a CTA. Give us a little quick backstory there. Sure, yeah. Well, you know, I am from the South.

Starting point is 00:05:25 So giving a quick backstory for me. Quick for a Southerner. Yeah. Yeah. Quick for a Southerner. I'll do my best. So yeah, when I graduated college in 2003, I started working for Bear Stearns and their floor trading operations on the New York stock exchange. So we, it was a subsidiary bear Wagner. And I basically, you know,

Starting point is 00:05:48 two weeks after I graduated, started work there as a market maker. When I did that for, you know, a tour of duty there. And, you know, my thinking was, okay, I want to be a portfolio manager. So I want to try to get as much experience, as well-rounded an experience as I can. So I left the floor and got into equity research, covering infrastructure software for Prudential Equity Group. Which is going from a sprint to a marathon. And that really doesn't even cover half of it. Nine to four on the floor and

Starting point is 00:06:26 you really don't take anything except some emotional wounds home. And then, you know, equity research, you're sleeping under your desk. So it was very different. But along the way, Brandon Langley, who's one of the co-founders of Blueprint and is the Langley and Robinson Langley, he and I met in college and we were doing trading and started to get into system design for a lot of reasons, but mainly because I in equity research started to see the disconnect between fundamental analysis and actual stock prices. So I just started to ask the question of, okay, wait a minute, what's going on here? First of all, why is the market ignoring what we're saying where the stock price should be? What are the drivers behind that? And probably more importantly, what are the most successful investors in the world doing. So probably as a lot of stories go, I ended up stumbling upon market wizards and a lot of Jack Schwager's writing. And I was really, I see it as, you know, a Damascus road type moment where the scales fell off my eyes and, you know, I can sort of see

Starting point is 00:07:40 clearly. And for me, it was the things I started to see clearly were being systematic and employing a trend following process, really ignoring the fundamentals or just assuming that they're baked in and following price. So we started designing, specifically designing trend following systems. And then in 2006, I moved back to North Carolina and we started Robinson Langley, which was a CTA. Now, as the story goes and evolves and we being trend followers trading every market that we could, we had no Rolodex at all. I don't even know if people say that anymore, Rolodex. Yeah, I do. I tell people, they're like, should I start a fund? I'm like, if you have a golden Rolodex, yes, start a fund. You can call people. And if you don't, you got to go the managed account

Starting point is 00:08:36 route and go through brokers and talk to people and try and get accounts. Yeah, exactly. So we did both, but we did start a fund and we started it with 60,000 under management day one. And you know, you know, as well as anybody, when you're trying to trade a lot of markets, that leaves you with two choices. Don't trade a lot of markets or do it with a lot of leverage. And I'm convinced we could not do that today. But you know, just with compliance costs, all the hard costs are 10x what they were. But we started with 60,000 day one, and we had a great 07 because I believe that's the first time oil went above 100. And if you're doing it with a lot of leverage like we were then, it kind of doesn't matter where you buy oil as

Starting point is 00:09:25 long as you buy it and ride it up. So we had a great 07 and then we had an even better 08 because again, dutiful trend followers, a lot of leverage, we're long and short the right things. But back in that 07, 08 period, there weren't a lot of great 40-act options for accessing managed futures. So a few RIAs came to us and said, hey, look, we want this exposure, but we don't like what we see in the public arena. What if we start our own limited partnership, you run it and we split the fees, which again, I'm not even sure you could do today with pre-08 generated compliance. So we did that. And after 08, two of these firms came to us and said, look, you're the only thing that made money in the portfolio, but we're only putting qualified investors in this fund. So that's like

Starting point is 00:10:26 5% of 5% of their rest. It's not worth their time. And not to mention you're in the wild west of futures. And it's really hard to explain to our clients what it is that you're doing and why they can't keep their money at Schwab. We're spending, we used to say we're spending 30% of our time explaining something that's going to be 5% of the portfolio. That's bad math for an RA. Exactly. Yeah. So they were upside, Pareto principle, you know, was just upside down. And, but they said, look, if you can domesticate what you're doing to things that people actually hold in a Schwab or TD or Fidelity account. And you can prove that to us. And largely keep your principles and the fundamentals by which you're managing the assets the same.

Starting point is 00:11:13 We would consider outsourcing our whole book to you. And then as an IA and a planner, we'll go do the things that we're good at and that actually make us money like prospecting and serving clients. So for us, that was somewhat of a godfather offer at the time because in the space we were operating in, in futures, it still seemed like it was day over day performance driven. You know, if somebody was putting a managed account with us, and let's say they wanted, you know, they were notionalizing it, you know, three or four acts, in some cases, daily performance really mattered to them. And it didn't matter as much to us, it only mattered to us to the extent it mattered to them. Right? We're thinking 10, 20 years, and they're thinking 10, 20 minutes. So we started developing those systems in 09 and after about 18 months of just making the R&D process, which really isn't that thick,

Starting point is 00:12:15 but just making sure we're taking into account the practical realities of managing client assets for an RIA. We started managing those assets on a white label basis. So we're managing, we're executing, we're doing all the reporting and they're just putting their brand on top. And then demand for what we were doing in that respect kept, continued to grow. And so we started Blueprint in 13

Starting point is 00:12:42 to take advantage of those opportunities we were getting and we made the original relationships, sub-advisory relationships and they still are today. Perfect. A few background questions. So what did you study in college that led you down that systematic path? Were you an engineer or something like that or it just made sense to you? Well, it made sense to me. I studied, I got a degree in finance and I got a degree in economics and I largely credit Brandon with the economics degree because I sat beside of him and he studied and I didn't. But yeah, I'd always had an interest in markets. You know, my family is very entrepreneurial, you know, not to some, no one's gone public, but they've always run their own businesses. So I was attracted, I saw that and just thought it was normal, you know?

Starting point is 00:13:35 And so I always knew, at least I thought I knew that I wanted to be an entrepreneur. The market interest sort of evolved over time. And then, you know, Ed Sakota has this thing about, you know, finding a system that you're emotionally compatible with. And so when I found systematic and something that was rules-based and really, you know, once you have the rules and they, you know, they evolve over time as well, really the discipline to stick with the process over time,

Starting point is 00:14:06 that resonated with me the most. And then an interesting time to go into equity research and to be, right, you went to the place that was almost anti-entrepreneur, right? Big Wall Street bank. But at the same time, that was 03s right after dot com and all the research had been faked essentially, right? To make sure the IPOs got a good reaction. And so were you right in the midst of that of like, hey, this research has to be real, right? Of all the Chinese walls and all that stuff of like research is separate. Yes, yes. 100%. Yeah, that was, I think WorldCom had just gone down. Enron was, of course, propped up by some analysts as well. So yeah, that was right after dot com. And right before we found out that the bond ratings agencies were doing the same thing. Yeah, right. For mortgages. And then was that hard to be like, okay, this is my job, but my passion is systematic, right? Because the equity research is totally 180 degrees opposite of systematic. Yeah. You could care less what the fundamental research says. It's either I'm buying

Starting point is 00:15:18 because it made new highs, I'm selling because it made new lows. Well, I was the guy that carried around,. Well, I was the guy that carried around, well, maybe I was the nerd that carried around the intelligent investor. Yeah. A lot of value books. And I still, Buffett and Munger are still some of my investing heroes. I just, I love the rationality. Any discussion around rationality is one I typically enjoy. But the switch for me was pretty easy, honestly. I mean, look, I had to become an entrepreneur because I'm the world's worst employee. That was easy. And then once I was skeptical of the data that I was seeing between mostly anecdotal a lot of systematic managers, thanks to Michael Covell and his work and his research at the beginning,

Starting point is 00:16:37 it wasn't hard for me to migrate over to the dark side, so to speak. Right. Which is technically on this podcast, the light side, right? The light side, there you go. Those equity guys are the dark side. So then started Blueprint with Brandon and said, hey, let's take this to the masses with this public facing equity. So dig into that a little bit more. It was a little confusing of you're putting your trend following models on top of things they could trade in their Schwab account. So that was like sector ETFs or what did that look like? Yeah. Mainly at the beginning was a lot of sector ETFs. Again, those portfolios have evolved as

Starting point is 00:17:19 well. We still at the very, very beginning of managing, let's say, assets at Schwab for somebody's Roth or one of their more mainstream accounts. We still had our CTA hats on when we first started. So we had commodity ETFs. We had, you know. And it was a portfolio of 40 different ETFs. And we would use inverse exposure when we would get a short signal in stocks. And that was a painful lesson for us to learn. And I'm not saying that if people choose to do that, that they're doing the wrong thing. I'm just saying for us, what we realized was that how much investor behavior really mattered for the end client. And so what we really focused on from the get-go at Blueprint is trying to make and preserve and enhance the relationship between the advisor and their client. Because as an asset manager, we see the advisor and the client are the star of the

Starting point is 00:18:37 show. And we are infrastructure to help them get to where they want to go to. And that's either the advisor's business and or where the client wants to get to from a goal perspective. So we don't have any preconceived notions or hubris about we're the star because they can pick any asset manager. They don't have to pick Blueprint. Nobody has to to pick blueprint. So we wanted to win more on the basis of, okay, let's design systems and therefore deliver strategies that keep the investors in their seats during the hard times. And for us, that means avoiding those periods where they're bad behaviors likely to show up the most. And that's in large drawdowns. You stole my question I had written down here.

Starting point is 00:19:29 How much of your job is picking out great investments versus how much is just trying to keep the investors disciplined? So you just answered it there, right? It's 90% keeping them disciplined. But to do that, you need the other piece, which is the great investments that allow you to do that. you need the other piece, which is the great investments that allow you to do that. Yes. Yeah, exactly. And we in our portfolios, we don't really use anything that's. Esoteric, you know, we try to keep it the portfolio simple.

Starting point is 00:19:58 We try to keep it. Pretty commonsensical by thinking about that interaction between the advisor and the client. So what, what is, you know, it's like using the inversion principle. We don't say, you know, what could enhance that relationship? We say, what could kill that relationship? Right. And tough conversations about costs, tough conversations about taxes, about turnover, you know, all those things make for a tough conversation for the advisor and the client. So we try to design things to just avoid those. And so what did that look like over time? So it was initially you had your CTA hat on a little bit, and maybe you were having a lot of those tough conversations of why are we in this high cost inverse ETF that has lost 90% over time. I remember a blog post I did of the, I think it was 2x net gas ETF and the inverse minus 2x net gas ETF. They had both lost 94, 96% over time.

Starting point is 00:20:57 They were supposed to be the exact opposite thing, but because of the rebalancing and leverage, they were killing themselves with the leverage cost. So all that to say, so you had that CTA hat on, you had all those commodity focus. So compare and contrast what that was like then versus five years later versus now. Yeah. So the tough conversations we were having then were what we realized is the, how short an investor's memory is relative on a relative performance basis. So I guess what I mean is specifically in 2011, that was,

Starting point is 00:21:39 I believe the first debt ceiling, you know, or in recent memory, that was the, in the government, almost the government almost shut down. It was that whole debate that they seem to have in every four years perpetually. So we, the trend following models that we were employing had us scaling out of equities, let's say June, July of 11. And using inverse, you know, we got net short some of those in some accounts, which was fantastic because the S&P had a 19% drawdown roughly, you know, during that period of time. Yeah. That's what we thought. When you're not getting any calls,

Starting point is 00:22:37 you're probably doing okay as a money manager. So no one was calling. But then you see this bounce, which inevitably happens. And there's the lag, before we cover the short or, or increase exposure, the trend following models have to catch up. So we didn't end up, you know, the S&P closes, I think down a little bit for the year calendar year of 11. And we're basically, our performance was about right with it because of the big bounce back in November, December. But we did so with far less risk. So we thought, hey, this is great. But the only feedback we got from advisors and clients at the time was, why didn't you re-engage stocks earlier? this long to like, we missed out on the run from mid-October forward without paying attention to the bypassing of a lot of downside risk. So, you know, after we sort of let our egos get caught up in that feedback that we disagreed with, we took it seriously and we started looking at,

Starting point is 00:23:41 okay, what are the things that are most appreciated about what we do and what are some things that we can never, or are less likely to overcome in human nature? Cause we, we think we're pretty good, but we're not good enough to overcome human nature, right? Human nature is undefeated. So, you know, one of those was to institute some fairly passive long only exposure in our strategies. So first get rid of the inverse stuff. Yeah. Because you are a hundred. I think it's fair to say, let's, I don't know if I can say a hundred, let's say 99% of the time, if you're short, you're going to have some really bad days because volatility begets volatility. It clusters.

Starting point is 00:24:30 And as the market's moving down, it's going to move up by the same rate. And you're going to have some days where you underperform a lot, even if you're outperforming all around it. There's not a lot of dedicated short hedge funds still around. Exactly. Exactly. Yeah, we could have just known that and not done it to begin with. But, you know, we had to be, you know, go through the process and the pain of learning it in real time. So we just become an asset allocation, efficient market cap them type shop and set you up with a 60, 40. And then just model portfolio, everybody. Yeah.

Starting point is 00:25:20 I mean, first of all, you can get that for virtually nothing. Right. And that's probably still overpriced. So we took the stance of, okay, our first principle is to use trend following, not only for a potential risk reducer by avoiding large drops, but also one that allows us to do that, shift our allocation systematically. So from that point, the portfolios pretty much evolved from, let's say 30 to 40 ETFs down to about 15. And we started to do some research on, okay, what are these endowments like Yale, for example, when David Swenson was running Yale, they have unlimited resources, virtually unlimited resources. So what do they do? You know, just asking these questions, trying to think laterally and look laterally. And after reading a lot of their research and David Swenson's books, we realized that he set up a trust that effectively

Starting point is 00:26:27 invests in the eight major asset classes in low-cost ETFs. So when he passes on... Are you saying what do they do personally? Yeah. Yeah, yeah. Versus for the university. Yeah, because I want to know what you know, what they do personally is what probably what they really believe. And then everything else is PR and or what they can access with less than a billion dollars. Right. Yeah, exactly. So that was the next piece when we came up with this construct of, of okay we want to have access we want to have exposure to these eight asset classes but we want to do it in a systematic way the next question was okay well

Starting point is 00:27:12 how do they outperform and you nailed it they outperform because they can basically close a fund before it opens with an allocation right so to the extent that the manager can generate alpha and that's how they outperform through scale. Well, we didn't have that. So that's where the trend following piece comes in. So we feel like trend following gives us that edge, but it does so without a two and 20. Yeah. A lot to unpack there. First, I want to ask what the eight asset classes are. Yeah. So put you on the spot if you know those off the top of your head. Hopefully I don't have a Rick Perry moment here. Yeah, exactly. One. You've got U.S. US fixed income, and then alternatives.

Starting point is 00:28:12 Okay. I didn't count them, but it sounded around eight. It's close enough. Yeah. And then another piece of what you said was great. Basically, you were providing a better Sharpe ratio or a better Marr ratio to the clients and they had less drawdown. But they're like, I can't eat a Sharpe ratio, right? It's the old line. So they were kind of saying, great, but I don't care, which I've always laughed at. If you do an efficient frontier, like, look, and I just got some unnamed mutual fund.

Starting point is 00:28:44 I won't bring them up but they their pr was your return went from like 8.4 percent to 8.45 percent and your volatility went from like 6.8 to 6.6 percent or something right in your sharp jump and i'm like but still who's gonna move for that right nobody's gonna move off the like i'm going to sell 20 percent, put 20 percent into this alternatives mutual fund to get this point zero zero two percent gain. So those were some of those conversations like, great, but it's hard for me to understand. And it's not in this business, I guess if you're on the outside looking in, it's your worst enemy. And if you're on the inside, it's your best friend, because movement is less likely both ways. Do you think it was easier for you to come from that alts world down to that understanding,

Starting point is 00:29:42 versus it seems like most advisors doing the opposite coming from the traditional model based up to trying to understand alts so it's almost easier it seems to me to be like cool i understand the alts piece now i'm going to basically remove a bunch of those bells and whistles that people don't really care all that much about to incorporate into the traditional stuff that's's right on. I mean, for us, it was easier in everything but the marketing. I can come back to that. But starting from the more complex space, and then again, it's all about grieving your ego, you know, because we had the most, we, we tried to develop the most

Starting point is 00:30:26 complex systems. Now we were keeping an eye on, you know, of course, you know, parameter sensitivity and, you know, all the stuff you're supposed to do as systems designers. But when you compare what we do now to what we did then, I mean, it's night and day difference. Yes, it's based on trend following principles, but the implementation is nowhere near as complex now as it was then. So we have spent 15 years simplifying. And some of that confidence, you know, that, okay, no, all the physicists that say, keep things simple, they're actually right. You know, it's crazy to think all these billion dollar shops are getting more complex more quantity right they're adding

Starting point is 00:31:11 more ai and machine learning all this stuff and you're like hey time out let's take it the other way yeah and build a business which is super cool um it's like the old uh creative i'm gonna forget the acronym right but there was like reverse merge there were all these things to do of like okay roller blades um i won't remember all of them right now but so and then my third point on all that was it seems in this journey inherent in that is like okay i want to simplify i need these couple of etfs it almost creates the need for very specific etfs to meet your needs right of like okay oh i'm having to pull these three out if i had one that did what those three did that would be great right or if i had one that gave this unique type of exposure I'm missing, that would be great. Which is my segue into

Starting point is 00:32:05 your partnership with Jerry Parker, well-known in the trend following world, Chesapeake. So dig into that a little bit of, did that come out of that need for a specific type of strategy inside of the model? We definitely wanted it. No question. It was their idea. But we have an alternatives allocation in pretty much everything we do on the SMA side of the asset management business. And we've used various funds. One of those was a Chesapeake's mutual fund. We used that for a long time, but yeah, I think for us, it filled a need that we had, which was to include that ETF in, in, in our allocations, um, and do so with a long track record, uh, with Jerry at the helm, um, you know, going back to something you mentioned earlier, which is, you know, a long track record with Jerry at the helm.

Starting point is 00:33:08 You know, going back to something you mentioned earlier, which is, you know, the selection of the ETFs. And this, I promise it won't take long for me to dovetail these two ideas, but we like index funds in that respect because they're legally bound to have no tracking error. You know, I mean, they have to deliver. It doesn't mean we always like what they deliver, but they have to deliver what they say they're going to do. So we will use index funds to express as much as we can from U.S. stocks or foreign stocks or emerging or real estate or what have you.

Starting point is 00:33:39 And you can do that at a very low cost, which is going back to the relationship between the advisor and the client, you know, usually a very easy conversation. To the extent we don't use something that's that we're actively managing, but it's passive, like this partnership with with Chesapeake, we want to make sure that whoever we partner with or in the fund that we select, they're going to do what they say they're going to do. You've heard Jerry say, or I've heard Jerry say many times, I'm going to be the last guy. If trend following ever dies, I'm going to be the last guy on the ship. Yeah, he's going to be on top of the hill with the flag, with the enemies all around him. Exactly. And I believe him when he says that. And, um, you know,

Starting point is 00:34:32 not only his, his, the, his opinion about things or his public messaging about them, but he, he has a 30 year track record of, of honoring that commitment. So that's really important for us because we do believe that, look, if you can get to a spot where you're comfortable implementing simple systems, then on the investment side, your only job day-to-day roughly is implementing those systems over and over and over, right? So Jerry's systems are more complex than the ones we use at Blueprint by necessity to a large degree because they're using derivatives, you know, and we're not. But I do trust that he's going to be disciplined. He does what he says he's going to do. He's got a lot of skin in the game

Starting point is 00:35:25 and he has for years and just all of those things, not to mention they're great people, but yeah, we couldn't be more excited about that partnership. Quick aside, have you heard, I keep hearing people say it does what it says on the tin, which I've never heard that expression, but I guess that means like it tastes, it's a coffee tin. I don't get what it's trying to say. You heard that expression but I guess that means like it tastes it's a coffee tin I don't get what it's trying to say you know that expression I roughly roughly right I think but I think he does what what he says is on the tin 100 yeah and if I can butcher that a little bit um cool and we'll put in the show notes we did did a, we've done a couple of podcasts with Jerry Parker and one a couple of weeks

Starting point is 00:36:09 ago that was talking about this new program that he's running. So we'll put that in the show notes for people to go listen to. But for you, that's just helped round out the portfolio, round out what you're doing. Each of your clients, do they get to pick and choose they get to take their own lane or is most all inside this right because that's got to be hard for an ra if you let every single client have unlimited i want to be 90 in this i want to be negative 20 in this like how do you manage that process if you said the client the advisor the important, how do you keep them inside a structure? It's a good question. What we've done is we've designed a spectrum of strategies. And we are pretty agnostic to where they go on that spectrum. Now, we do stuff off the spectrum, one-offs occasionally, particularly

Starting point is 00:37:05 for larger relationships, institutional relationships will change some things up. But by and large, we have three different vectors to access the strategies. We call them strategic, dynamic, and tactical. And basically the portfolios look nearly identical. The speed in which the trend following shifts asset allocation is exactly the same. It's only the degree of how much trend following has over the allocation that changes so that by its name, the tactical strategies have trend following has more influence over the tactical strategies than the strategic strategies, for example, because, you know, our stance is we don't, the advisor has the relationship with the client and there's, you know, we'll help them develop suitability to try to get at, okay, a more accurate reading of where they should be on that continuum. But at the end of the day, we allow the advisor to choose where they need to go on that spectrum. But the goal being they're in the stay rich business instead of get rich business for the most part, these clients, or there's like, what's the appetite for growth versus protection? Yeah. So what we often see is,

Starting point is 00:38:31 and again, as a general statement, if somebody's nearing retirement or in retirement, particularly if they're taking a distribution, they'll go for our more tactical strategies because that has the tighter, you know, the higher capital preservation stance. If they're young- Which essentially means it'll get out of long equities quicker. So you're not waiting for a two-year drawdown to signal the trend, hey, we should lighten up on equities. And when we move, we move by more than the other strategies.

Starting point is 00:39:01 Not only do they go defensive in the case of equities falling. So if the trend signals a downtrend, they'll all react at the same time, but the tactical strategies will move a lot more to the sideline. So that's a, you know, the tactical strategies, they don't necessarily have to be like this because we have a tactical growth strategy, for example, that when it's fully engaged with equities is if it's, you know, benchmark is an 80-20, it'll be more aggressive than an 80-20 because we have important to them and it factors into their livelihood. They may go not only in a conservatively postured strategy, but one that has more tactics. Now, if they're in the accumulation phase and they're younger and they don't want the in some cases, the headwind of the risk management to kick in. And behaviorally, they can handle a little bit larger drawdown. They'll go into our more aggressive strategic strategies, which again, the same tactics, but when they move, it's more around the edges.

Starting point is 00:40:19 And then I've got a technical wonky question. So the trend following of the asset allocation is based on the stock market right because or i'll ask it a different way have you messed around with kind of trend following trend following right and i've gotten into that with some with jerry and some others over the years of like very hard to do right because if you could avoid those right everyone hates the extended drawdown periods and trend. Why can't you trend follow it and step aside on those? It's pretty awful to trend follow a trend follower. Right. But in a way you're trying to kind of do the same thing, but you're saying, no, we're trying to trend follow the broad asset allocations.

Starting point is 00:40:58 Yeah. So each of those eight asset classes is trend followed. Now, because of in our alternative allocation, because we allocate to a trend following ETF, that's held statically and we allow the trend following to occur inside of that fund. But anything that we hold passively, we are going to trend follow it and we're going to use multiple timeframes to trend follow it to reduce our dependency and change speeds, so to speak. And so that's on the bonds too. So has that been helpful over the last couple of years, right? As bonds have, nobody wanted to be in bonds, but you sort of had to be in bonds. Yeah, it's helped tremendously. I mean, the gearing for our fixed income is pretty high on the duration scale because we like the historical hedging properties of government bonds relative to stocks.

Starting point is 00:41:52 But again, for us, it's about managing risk. So we're not just going to statically hold anything, really. We, starting in about, I don't know, August 21, what occurs inside our model is, okay, we want to hold the default setting as longer duration bonds. But as we get a downtrend in those, we're just going to follow the yield curve down. As we get downtrends, we're just going to keep reducing duration, reducing duration. So we've been at less than a year duration for a long time, less than 30 days for probably as long. So it's been pretty boring. Yeah. Hey, boring is good. That cash line item has been, the T-bill rate is pretty attractive these days. No doubt. So let's switch gears for a second and talk a little bit about, you've been on all sides of this, privates

Starting point is 00:42:48 and what are the clients that you've come across feel about like private hedge funds and CTAs versus ETFs versus mutual funds? Or are you saying they don't really care as long as they get what they want and there's easy conversation? I think that people say that, but they actually do care. I think if it leaves their custodian, I think getting somebody to invest in, you know, a client to invest in something where the assets have to leave Schwab or TD or whatever is a hard thing to do. And look, private funds certainly can add value. But I think that the hurdle for that, specifically for an advisor to recommend

Starting point is 00:43:35 a private fund to a client where they may even lose the ability to fee on that. And I'm not saying that's a driver, but it's a practical reality. I mean, they have to take a look at this and say, okay, from a business perspective, I may spend five additional units of labor to move that, do all the paperwork, facilitate all of that, even facilitate transparency to the thing and reporting to the private fund. They're going to look at that and say, okay, well, to your point earlier about the incremental return on that efficient frontier, let's say, okay, I'm going to carve out 5% to go over here. For what? So the bar is super high. Yeah. I'll put in a pitch for Attain Portfolio Advisors, our company, which helps advisors do all that.

Starting point is 00:44:24 Like, hey, you can get access to the private fund at schwab still shows above the line to get your fee on it uh everyone's happy with electronic forms as well so no paperwork but um yeah but that was a bear to get done right like years of work to get to that point where you can even figure that out but so that's more advisor driven than client driven, it sounds like. So the client, right, or clients like I must be an ETF or we'll switch a little bit of mutual funds versus ETFs. Are you seeing that fee pressure to clients only want the ETFs or is that advisor driven? I think it's still advisor driven. I think there are some clients that have an opinion, but I think all the client really wants is they want a, you know, we've actually noticed that clients have a little more, it's counterintuitive, but they have a little bit more reasonable expectations than advisors do.

Starting point is 00:45:20 Yeah. So, you know, the clients want a reasonable return. You know, they're shooting for one that matches the goal in their financial plan. Right. To meet their goals for how many every year is out to have the number they need to safely that they feel will allow them to safely retire. So the implementation of the boots on the ground of what's actually in their account, as long as it remains fairly mainstream and not esoteric, I don't think many, at least the feedback we've gotten is that not many people care whether that's delivered through a mutual fund or an ETF. Not to mention most, at least in our experience, most 401k platforms are still in mutual fund form. So how bad could they be if it's the only thing they could get? This is the

Starting point is 00:46:14 thinking at least. Some care about costs. Some advisors highlight costs more than others. So to those that do, an ETF portfolio is probably more appropriate. But I mean, the data says if you're buying one total stock market index in an ETF form or a mutual fund form, the lines are just going to sit on top of each other with the only difference being the difference in the expense ratio. Wow. And then my next question will be for a specific listener I have for the podcast. So what about an interval mutual fund? Right? Like a little different. This is getting into the weeds, but allows you to do a lot more alternatives inside of it. The trade off being you might not be able to get your money out for three to six months. Who dislikes that the most? I'm glad you're asking me this and not our trading team. Maybe they would have a more entertaining answer. I think it's really,

Starting point is 00:47:14 in our experience, the clients don't really know it's an interval fund. And they don't find out typically, it's a short vol trade for an advisor. Yeah. Because the client doesn't find out it's an interval fund until they want cash and can't get it. And then they have to have the conversation and explain it. Yeah, exactly. And performance can, you know, put a salve on that wound in some respects. But typically, if you can't get your money out, it's not because things are going particularly well in that environment. We've seen that in a

Starting point is 00:47:53 lot of real estate interval funds. They're like, look, you can get 60% of your money back 20% of the time. And so it's like, all right, where do you end up selling the thing over a two? And I'm not challenging the efficacy of those funds and their strategies and whether they make money or not has nothing to do with that. It's just, you know, a client's expectation, whether they're told this a thousand times or zero times is when I want my money, I can get it. And it presents a unique set of constraints for the advisor. So we've kind of touched on all these different pieces of the RA business, clients, advisors. What's your view of the future, right? Do we keep going to RA world

Starting point is 00:48:46 20 years ago, right? They were stockbrokers and do we go full on? Is there no more fee-based, there are no more commission-based, there are no more mutual fund buyers by advisors? What's your view of the future of the advisory space? Well, I hope that it's really good. We do think about this a lot. I mean, I think it depends on your timeframe for the future. We'll say 10 years and then give me a hundred years. you are still going to see this migration from, I think, from the hybrid world over to the IA world. I think you're just going to see that for a lot of reasons. I don't think a lot's going to change other than that. Now, you're going to see a lot of turnover in terms of, I mean, I think I saw a stat recently that 40% of financial advisors are going to retire

Starting point is 00:49:45 in the next 10 years. So succession is a huge deal. Yeah. And a lot of the successful firms I know are rolling up shops, bringing guys in that are going to retire, things of that nature versus getting new clients the old fashioned way. Yep. Yep. I mean, you're seeing that in you're seeing that show up in a lot of places. You know, the roll up strategy, you're seeing valuations for firms go up. You've seen private equity enter in and a huge way over the past five or 10 years to fund those deals. And it makes sense because they look attractive. Proformas, you know, they look really attractive. Of course, every proforma looks attractive at the outset. But I think in 100 years, it will look very different. I think some of that is

Starting point is 00:50:35 going to be driven by blockchain. I think some of it's going to be driven by AI in terms of how advice is delivered and how digital advice is trusted. I think that's going to take a while, but I think the tools and the software, they could probably be there largely now or within the next five years, but adoption of that by, you know, I think about my dad going to some, you know, chat GPT and getting financial advice is a joke. There's no way he's going to do that. And it doesn't, there's nothing anybody can say that would cause him to trust that he wants a person to person interaction. Right. So, but I do think. Many young people these days don't want, like actually don't want the personal interaction. They feel uncomfortable and they want it on the phone or want it in an email. Well, one major force I've noticed changes that behavior somewhat, which is the behavior around only wanting digital advice, you know, what recommendations, guidance, whatever. And that's bear markets.

Starting point is 00:51:57 Yeah, right. Bear markets, downside volatility causes things that happen in our nervous systems where. You need a psychologist, right? Your advisor job becomes psychologist. And I think it's half that anyway. Yeah. Yeah. Even in the good times. Yeah. So I think bear markets, which most people, let's say anybody that had no money prior to 08 and now has money, 22 was a glimpse, but it's not 08 or 01 or any of the past bear markets. If they live through an environment where their passive ETF drops by half, I think betting on human nature in that respect means that person-to-person advice and counseling and being an armchair psychologist is unlikely to go away at any point. A human advisor relies on AI tools to help push out in a broader way guidance or advice, but it's still available for handholding.

Starting point is 00:53:12 I don't mean that pejoratively. I just mean psychological piece. Well, and it seems versus 10 or 20 years ago that we've already moved a lot towards that way, right? In the old days, the guy you golfed with and liked and trusted also picked out the investments. And it seems that, well, what's your opinion? What percent of advisors are still acting like that? If they're actually doing the work and researching a stock and telling them to buy this and that versus, hey, I'm the guy you trust, your golfing buddy, the guy you can call. I'm going to give you this psychological help, this non-pejorative hand-holding. But all the heavy lifting is done by the investment team, which is smart and knows how to do that stuff. I'm a good golfer. I'm your buddy.

Starting point is 00:53:55 So it's like, what percent do you think of RAs are the golf plus investment advice versus the golf and that's separate with the investment committee? I mean, there are a lot fewer firms now that put their ability to pick stocks at the forefront. Yeah. Yeah. On the masthead. Yeah. 10 years ago, it was probably 50-50 and now it's maybe 10-15 percent and you're seeing that not only in the data around outsourcing the investment piece but I think one thing that's that a lot of people are paying attention to a lot of advisors are paying attention to is the fact that a lot of the data that shows that those that outsource the most grow the most in the advisory world. So, you know, and you just think about that on a day to day, they, they don't, an advisor

Starting point is 00:54:53 practically doesn't get paid any more or less for picking stocks or, you know, on a fee basis. It's the preservation of the relationship. It's the service. It's anything from a surprise and delight gift or round of golf or a pie. That's some Southern stuff there. I've never had an advisor give me a pie. Well, I know some advisors that would show up at your door with a pie around Thanksgiving. Done. I'm signing up. Yeah, we had an advisor who's a great friend of mine build his practice. One of the things he used to build his practice was delivering pies. And, you know, it says a lot about him.

Starting point is 00:55:42 He's an entrepreneur and he, you know, he's just like, look, I've seen data in other industries that really promote this being a good idea. And he did it and it's a great year of bi-weekly coffees to be convinced of trend following. And, you know, one of the reasons I love him is that he is skeptical, right? He challenges everything. But once he saw, okay, the data that, you know, everything he had, that maybe Warren Buffett is a little bit more trend following than people would like to believe. Just all of the tapes playing in his head of the things that he'd heard were right. Trend following is just a more optimal approach in many ways. So, yeah, I think going back to advisors and their ability to go to a client and say, OK, here's what we do really, really well. And here's why you want to do business with us. And by the way, we can't do everything top notch. So we've hired Blueprint or another firm to come along and we see them as part of our team. They're outsourced, but we see them as part of our team. So they're just as available to you and to us as they would be if they were down the hall. There's a lot of leverage in that

Starting point is 00:57:22 relationship. And that's what we've experienced. Plus you get some tasty pie. Well, exactly. I want someone, any listeners out there, I want pumpkin pie as we're coming into the season, but with a graham cracker crust. Anyone ever tried that? That seems like it'd be a better idea. I hate, I love pumpkin pie. I hate the crust.

Starting point is 00:57:43 And my second non sequitur is my brother is a realtor out in Boulder, Colorado. And he, this time of year, loads up his truck with pumpkins and goes around everyone who's bought a house from him or sold a house with him and says, hey, here's your pumpkin, right? How many you want? One, two, three. Because when you have little kids, that's great. You go out to the pumpkin patch. When you're older, I don't want to go lug those things home and set them up.

Starting point is 00:58:08 So go deliver pumpkins or pies to get clients. I want to finish with what's harder, getting a RA client or getting a private fund CTA client, since you've been on both sides of the fence? I would say it's by a factor of 50, getting a private fund client. By a factor of 50? Maybe more. Because of the structure, because of explaining the model, all of the above. Yes. The access. Right. Yeah. Just the the K1. Right. Just go down the list. Exactly. I mean, all of those things. And again, you know, we love running our private fund and we may do that again one day. So I'm not, you know, talking my book, so to speak, because most of the money we manage is in one of the major custodians, but it's so much easier to get.

Starting point is 00:59:17 If you just think about an individual to get an individual to, they likely already have a custodial account somewhere. So they've done it. So it's not scary, right? They maintain control. You're adding something and advisors adding something to that relationship. When you're going to them with, hey, we have this thing over here, and we need you to wire the money to this bank and sign this, you know, a tome of documents, right? I mean, it, and then you get, in some cases you get daily, daily, you know, reports, but usually it's monthly and maybe it's quarterly. And that doesn't even match up with the liquidity schedule of a lot of funds.

Starting point is 01:00:05 Anyway, it's night and day. As you mentioned the reporting there, and you mentioned private equity earlier, is private equity a part of your models? No, because it's a private fund, doesn't fit well into there. Correct. And then what are your thoughts on like cliff assness and it's volatility laundering? I don't know if you've seen any of that. Right. But I just as a trend follower, as a former CTA, like we have to mark the market every day, the position, the performance, the client seeing the performance every day, like you

Starting point is 01:00:42 said, private equity figured out way better of like, hey, we're going to tell you what this is worth, maybe monthly, but maybe quarterly. And if it's really against us, we're going to mark to our model and just everyone's happy. Right. And it's kind of like the investors, the pensions, the endowments, they know it's not real, but it keeps the volatility low. They don't have these big drawdowns. They're happy.

Starting point is 01:01:03 The managers are happy. It's like a win-win. Yeah. In some cases, I envy that. Right. Exactly. Because it's, I'm not saying it's easier, but certainly your day-to-day experience is easier. It's a different way to do what you're saying of help the investors' behavior.

Starting point is 01:01:26 Yeah. Protect them from themselves, right? Like, hey, you're only going to see this infrequently. And when you see it, it's typically going to go up. I think if you could ensure that there was a 0% chance that the individual would need any liquidity for that pocket, you know, that bucket of capital for 10 years or whatever the term of that particular fund is, because they're typically very long. It's probably, well, certainly behaviorally, it's a better experience. And, but actually doing that, you know, being able to say there's a 0% chance that I'll- Yeah, that's the trigger. Yeah.

Starting point is 01:02:10 Well, and that's the underlying theme there and what Cliff, everyone's hammering on of like, hey, what if you're marking it, but it keeps going down, keeps going down and there's bankruptcies and then there's all of a sudden it's this and just like, well, all right, we had to take a loss on that. Sorry. All those past marks weren't all that real. Yeah. A lot of those, I tend to look at things in terms of their profile. A lot of private equity, I don't know what percentage, but from what we've seen, right? Because we get a window into a lot of this stuff when we're trying to help an advisor either convert a business or an advisor gets a big client in and they've got four LPs that they're

Starting point is 01:02:53 trying to unwind or need advice on. We'll analyze it. A lot of them do have that short vol option writing profile to them. You know, you did the motion of the cliff and they look like that. And the answer can't be, well, just give it more time. But that happens to be the answer in almost every case where they're stuck with an asset that they can't move or if they move it, they have to mark and then they have to mark,

Starting point is 01:03:31 and then they admit to it being 80% of its value or whatever. So you can't get rid of the volatility. It's there. It's either under the surface or it's above the surface where you can see it and feel it. And I personally would rather have a little bit of volatility every day that I could feel versus no volatility. And then the mother of all volatilities at some point in the future, I would just rather experience it day to day and learn to cope. Right. And so bringing it back to your models, right? If we're basically saying you can't, right? Volatility is transmuted. Is that the word? You can't destroy it. It's just going to move to different pockets. So when you're trend following these different asset classes, you're sort of destroying it, right? You're sort of getting out of the way when that volatility

Starting point is 01:04:13 hits. But if we follow that theory, where is it going to in that example? Yeah. Well, hopefully away from us. Yeah. I guess volatility can't be removed. It just could be put to someone else. I'm getting it off my plate. It's on your plate now. That's right. And that risk transfer is,

Starting point is 01:04:35 in some cases, I think it shows up theoretically, at least as the economic rent by value investors to buy things that are going down. So from an ecological perspective, they should be rewarded for absorbing volatility from volatility sellers and their volatility buyers in that case. And trend followers inherently are going to do that when trends turn. Just like there's some theories about trend following, particularly in the commodity markets are making money based on hedgers.

Starting point is 01:05:09 Right. I think. Yeah. Non-economic activity. Right. Willing buyers and not unwilling buyers and sellers in some cases. But yeah, for us as trend followers, when we exit or reduce our exposure to US equities, somebody's stepping up to buy that. And if you think about your win rate, so to speak, I think that's part of, and we try to develop systems that are longer term in nature for a lot of reasons, but when we're selling and somebody else is buying, they're going to get rewarded more often than we are for doing that. But for every time they don't get rewarded, they get penalized by some factor. So that's okay with us.

Starting point is 01:06:01 Right. So that's the back to the, they might have a higher sharp, they might have a higher total return, but they're taking on more risk to do so. Exactly. Yeah. And then you're not getting those bad calls, like you said. I'll leave it with, you have Duke colors behind you. You said you're a Carolina fan, but you have that, right? It's kind of dark blue, black.

Starting point is 01:06:24 I really don't appreciate you mentioning that right it's kind of some dark blue black i really don't appreciate you mentioning that jeff but no this is more of like a turquoise oh okay my camera's not picking it up and yeah uh this has been fun john what else anything else you want to leave people with no i mean you can find more about Blueprint at BlueprintIP.com. This has been fun. Like you mentioned at the beginning, we haven't talked in several years. I do listen to your podcast more than the ones that are just Jerry's on. So I enjoy what you're doing.

Starting point is 01:06:56 I think you're doing a great job. Thank you. It's fun catching up. I'll look you up next time we're down that way. Do it. That'd be fun. Definitely. And when you're back in Chicago ever.

Starting point is 01:07:07 Yeah. Ditto. Awesome. Thanks so much, John. Yep. Thank you. Okay.

Starting point is 01:07:16 That's it for the show. Thanks to John. Thanks to blueprint. Thanks to RCM for sponsoring. Thanks Jeff Berger for producing. We'll see you hopefully next week, uh, working on a guest. If not the week after.

Starting point is 01:07:26 Happy fall. See you soon. Peace. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at rcmalts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM

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The Derivative - Trend Following Asset Allocations with Jon Robinson of Blueprint

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