How To Navigate The Market Downturn Like A Pro (Episode 32)

Yeah, that's a great question. So yeah, so I did cut my teeth at Goldman Sachs. I was there for about eight years, right out of undergrad. And I worked in the prime brokerage business, which is largely, you know, working with the hedge fund clientele of Goldman Sachs, which led me to interact with a lot of the investors that invest in hedge funds. So to your point, institutions such as family offices, endowments, foundations, pension funds, and the like, and what struck me after a while was that these institutions had a very different approach than what was available to most individuals. And the approach involved to your earlier question, asset allocation, that included alternative assets and alternative strategies. So not just your kind of cookie cutter mix of stocks and bonds, but things that were portfolio diversifiers, for lack of a better term that led to a higher quality overall return. And so after many years of exposure to this, both at Goldman and then on the buy side for the last decade or so, I decided to do something about it. And so the idea for center fin was to replicate that approach as closely as possible, that very institutional approach, we sometimes refer to it as an endowment style approach, but offer it, you know, make it accessible to individuals broadly.

Yes. Uh, it's a good point. So I think the idea of asset allocation has caught on, but I think it is still early. I think, you know, if you still talk to most people that have money invested in the market, whether it be retirement accounts and 401ks and whatnot, the options are available that are available to them are still pretty cookie cutter, kind of 60, 40 portfolios. I think that in addition to asset allocation, I think it's the flexibility to go outside of the standard asset classes. And very importantly, the access to certain strategies that are not widely available. So we believe very strongly that active management makes sense in certain parts of the market. And we put kind of alternative investing as an active management style broadly speaking. And so we were actually just, my whole team was on the phone with an emerging markets, investment manager, because that is one area where we feel like those markets are inefficient.

And so a good quality active manager in emerging markets makes all the sense in the world for us. And so we believe that, you know, in a balanced approach, you have some part of your portfolio that's, you know, passively kind of gets exposure to risk assets, but some parts of the portfolio where you want to use active management. And it could be kind of long, only as it's described in the kind of mutual fund world, but it could be also alternative, which in our view, we look at as absolute return. And so kind of one of the other areas of focus in something that just kind of near and dear to my heart is kind of the world of distress credit. That's something where we are working on a more customized approach for an allocation in that space. That's gonna be very unique to us. That's not widely available. So the idea kind of is to start with asset allocation, but then in certain parts of that process where we use external investment management firms, where we believe we can actually get a higher quality long term return that will also lead to a higher quality portfolio return over long periods of time. You

Yeah, we're exactly coming from that place. So, you know, one of our core values at center is balance and we think that that's something that's just lacking, not just in investment world in the world in general. So when we kind of look at the approach of, you know, how should most individuals manage their money for the long term, we do think the most appropriate approach is, you know, some sort of beta to the market, right. And that could be done very cheaply passively. And then, you know, again like areas where we think there's inefficiencies, where active management makes sense. And the, the, the thing we have going for us is our CIO of CFO, myself. We've all spent decades in the hedge fund industry. And so we're very much informed by that experience and those relationships. And I think that's something, you know, when we talk to people it's really hard to kind of replicate that experience and those relationships. And so not only will we lean on that in order to create, you know, very unique access for our clients, but we also lean in on that experience and those relationships to inform our views on the actual asset allocation. So for instance, you know, we think we're today in a very macro oriented world, and this is actually a change. This is kind of a change since COVID started in early 2020, where macro kind of leading up to COVID, um, you know, macro as an investment strategy, let's say, uh, was not,

Yeah, absolutely. Sorry to take a step back what macro is a particular alternative investment strategy. That's basically looking at the macroeconomic picture in order to make investment decisions and largely managers that use this strategy. And these are largely hedge fund managers. This is actually how the hedge fund business started back in the day. It was very macro oriented. They largely make bets in, in asset classes. So, you know, government, securities, foreign exchange, you know, kind of big markets, so where they can, you know, move around and, and change their exposures fairly quickly. And so they're not determining as opposed to kind of a fundamental bottoms up strategy, which is maybe, you know, in the kind of traditional long, you know, equity value strategy where you're looking at all value stocks in the market, and you're kind of picking your top 10 20, 30 names. It's kind of the opposite end of that.

They're kind of looking at the geopolitical macroeconomic picture. They're trying to figure out what's happening next and trying to position their portfolios in that way. And so for us, we have a lot of connectivity with, again, kind of the hedge fund community. We're talking to these macro managers all the time. We noticed a shift in, you know, during COVID, because all of a sudden you had the federal reserve, the federal government globally started to kind of step in and provide liquidity into the markets in order to be able to, you know, kind of help with the situation that we were dealing with this global pandemic that shut down the global economy. And so all of a sudden the actions of the fed, the actions of the federal governments, not just in the us, but globally became very, very relevant to what was gonna happen in markets. And so we leaned very heavily on our kind of relationships in that space to help inform our views because it is what we think primarily is driving, where markets are going. And as we sit here today, I'm trying not to look at my screen because we're hitting new lows on June 13th to year to date. And, you know, it's very liquidity driven at this point. You know, the fundamentals don't matter so much when you get into these inflection points in the market.

, that's a great point. So, you know, taking a step back, I think one of the other reasons we started center fin was because we felt like a lot of the traditional wall street, uh, institutions that manage money for individuals, the incentives are not always aligned, right? So there's oftentimes, you know, they're incentivized to sell products and whatnot and we didn't want to do that. Right. We really wanted to start with, let us bring something that we think is better to individuals, including our friends and family. Because you know, for many, many years when friends and family would come to me asking me for advice, what to do with their money, I didn't really have a good solution for them. And so that was kind of, you know, one of the things that I wanted to do was be able to help them when they came to me.

And so as part of that, we want to empower and kind of educate these individuals. And we truly mean that we're not trying to, again, it's not for the purpose of selling them something. We really want people to get comfortable with what is going on in the world. And to your point, you know, oftentimes individuals that are not following the market day by day, tick by tick, you know, they will get a hunch like you said, and they will want to make a decision based on that hunch. And hopefully what we can do is give them enough information and support that information with data, obviously to help them make better decisions and to your point, and this is what we, we manage money on a 10, 20, 30 year time horizon, cuz our client base is relatively kind of our age in their, you know, thirties and forties.

And you know, we tell clients all the time, you still want to have a lot of equities exposure because equities are in asset class. That long term will compound, you know, at a higher rate of return than, than a lot of other asset classes. But we can kind of help tweak that along the way and be tactical. And I actually heard an interview that you had where you talked about, you know, being tactical. We think it's very, very important in this market because you don't wanna make, you know, macro offensive bets, but you want to be defensive in this kind of environment.

Yeah, that's a great question. So we document everything that we do so that we can be held to our account. And so late last year we were getting fairly concerned that this inflationary situation that we find ourselves in 2022 was going to be more permanent than transitory, which was what the kind of the very prevalent narrative was from the federal reserve and from the federal government. And so we sat down to think about what are the, if there's one scenario where inflation actually is not transitory and it sticks around what is the easiest way to get hurt and the easiest way to get hurt in an inflation energy environment. If you go back and you study other periods, which we haven't seen in, you know, as you know, in many, many decades is being long fixed income assets, right? And so, you know, and fixed income is a portion of our client portfolios just broadly speaking because it does create a nice balance to, you know, some of the other type of risks that we take.

And so we decided on a kind of a wholesale basis to largely get rid of any traditional fixed income exposure. And the reason being is because if you think about, and we wrote about this, but if you think about what fixed income is, right fixed income is a debt instrument that pays you a fixed coupon. And that coupon is generally based off of the risk free rate, which is the us treasury obligation. And so where the us treasuries have been at such low rates for such a long period of time, you know, traditional fixed income obligations of corporate issuers or trading at, you know, very low yields. And so if you take a look at the real yield, meaning the yield that you get on that fixed income security minus the inflation rate, they were trading at negative real yields. So you're losing money by holding those securities.

And so we said, well, that's not gonna last, right? That may last for some period of time, but if it persists, people are gonna start to exit fixed income securities. And so we kind of decided to get ahead of that. The other thing that we did very consciously and we've done more of this in 2022 so far, is we believe very strongly that, you know, having commodity exposure in client portfolios is very important. You know, if you lived through the period of kind of 2000, 2010, if you lived through the 1970s, if you did not have commodity exposure, those are very hard periods of time. You know, a lot of people don't realize, but you know, 2002, 2010, if you were just kind of long stocks or long 60, 40 portfolio, you ended up making no money for a whole decade. And so we believe that having commodities as part of the client portfolios is very important. So we came into the year with, with commodity exposure. We increased it over the course of 20, 22. We continue to believe it's a very important part of, you know, to have exposure in client portfolios right now. And look, if things changed, we'll change also. But for right now, that's how we view things.

Yeah. I think you need to be in this environment. I think you really need to be cognizant of, you know, not to go back to the macros, but you need to be cognizant of what's going on and make adjustments along the way, not too often, but where appropriate. And I think that, you know, the problem with a lot of the approaches that we see out there today is that the industry has moved into this place where, you know, I'm sure you're familiar with this term of robo advisors, right. And we actually think, we don't think that's a good idea in this environment. It was, it worked for, you know, the last decade or so because markets were conducive to it. But this automatic kind of rebalancing and kind of just using a standard model that's based on modern portfolio theory, which is ironically was, you know, designed in the fifties is just not going to work in this environment. In our view.

Yeah. So that's a great question. So at Goldman, I covered a lot of credit hedge funds. I don't know why I was kind of given this, you know, over indexed allocation of coverage for credit funds, but I tended to, I think like those funds a little bit better, particularly in distress credit. What I really like about that space is that it is also an inefficient area of the market. There's a lot of markets that are very efficient, where it's very hard to generate, you know, as they refer to it as alpha or returns that are better than a benchmark or an index, but distress credit is one of those areas, right? Because you have an OPIC market, you have uneconomic sellers quite often, particularly in periods like this, you know, again, as volatility has picked up in 2022, things get pretty interesting. And so that's an area like I said, we are, you know, we know very well and where we hope to create very unique exposure for clients to be able to access that market. And it's a very, it's much less correlated to other asset classes and strategies. And that's, that's something we like about it a lot, cuz it's a natural portfolio return enhancer

No something different. So we we're, can't talk in too many specifics at this stage, but we're working on something where it'll be kind of a proprietary vehicle that's only available for our clients.

There? Isn't a ton, you know, we've looked at kind of what's off on the shelf out there and there's, you know, for what I'm talking about. There isn't a ton. I mean there is, there are high yield bond, ETFs and high yield mutual funds in the like we don't really like that approach. We think being, you know, strictly long high yield, fixed income is actually in this environment is a pretty risky proposition. Same thing as being long, just any fixed income, right. And you know, high yield offers you a little bit more yield, but it's got some significant downside potential. So off the shelf, frankly, it's hard to get the kind of exposure we're looking for.

Yeah, that's another market. And you know, like I was saying, we were on with an investment manager right before and, and I don't wanna mention their name, but we do think that that's a market where you can find quality active management because it is a market that's less efficient. It's very interesting right now because obviously, you know, a big part of emerging market funds and ETFs is China and India. There's very different stories that are happening in both of those markets right now, if you follow the news, you know, China, you know, for the first time in a very long time has a very different stance towards the world. And so having a, an insight into that and being able to use that insight and, and this is why we would lean on a, an external manager because they're, you know, more boots on the ground, you know, they're much more plugged into what's actually going on on the ground. There is very valuable. India is a very good story right now. And we think, you know, potentially, you know, having exposure to India through an emerging markets manager is also very interesting. But again, I think it's very important to kind of do your research, you know, figure out, you know, that it's somebody who has an approach that you think makes sense. And that's kind of, you know, that's one of the things we look for as well.

So I am chiro K Y R I L L at center, fin.co. Uh, and you can obviously look up our website. I'm also on Twitter where I'm trying to get a little bit more active and engage with people. It's wall street, Hobbs wall S T Hobbs, H O B B E S on Twitter.

Thank you so much, Kate.