Institutional Process For The Masses
Boston Advisors is betting on process over performance with its model ETF portfolio.
The retail investment market is a tough nut to crack. Just ask Boston Advisors.
The firm has already built its reputation with the institutional community, managing more than $2 billion in pensions, high-net- worth clients and insurance firms. Having established itself as an asset-allocation house that's committed to investment discipline, the firm is now ready to bring that expertise to the retail advisory world as well.
Amid the rising sea of firms offering global tactical asset allocation (GTAA) using ETFs, Boston Advisors has one of the most in-depth processes: one built on repeatable inputs, risk control and careful stewardship.
But selling that to the retail crowd, notorious for chasing returns, is a challenge.
"We want this to be something that never truly blows up," said Mike Vogelzang, Boston Advisor's chief investment officer. "We're never going to be at the bottom of the pile, and we'll never be at the top of the pile as a result of that. That's our opportunity and our challenge in terms of sales."
So while firms like Good Harbor—with aggressive, if well-managed, tactical strategies—have grown assets by more than 1,000% per year, Boston Advisors has had to content itself with only $100 million of new assets in its ETF strategies since 2009. However, 2013 could bring increased inflows as the firm continues to push its institutional-caliber ETF portfolio toward the masses.
Build & Analyze
That portfolio, called the Broad Allocation Strategy, was developed because Vogelzang's clients wanted a different risk/reward pattern. The firm engaged in heavy diversification studies, examining growing correlations between global and U.S. equities, which helped shape its ETF strategy.
The Broad Allocation Strategy allocates assets across 12 asset classes that may be categorized into four buckets:
- U.S. and international equities, including developed and emerging markets.
- Global fixed income, using sovereign, municipal and corporate debt.
- Futures-based commodities exposures, including energy, agriculture and precious metals
- Smaller segments of the investable markets, such as global real estate, currency investments, VIX and hedging tools, and cash.
Finding the right levers to pull in the portfolio's structure comes down to what Boston Advisors considers its biggest strength: quantitative analysis.
Vogelzang's team runs a multilayered model that evaluates 10-year asset return forecasts, risk levels through six to 24 months, and a market stress indicator through a shorter one-to-six-month time frame. The model then combines the results with the firm's models for each asset class, tracking fundamental analysis with investor sentiment and price momentum. As you can imagine, the data can often be conflicting: One test may indicate a long-term bear market, while another may suggest that market stress is declining—all while prices climb above the mean.
Which is why, rather than following the data blindly, Boston Advisor's investment board rigorously debates the results and applies an active-selection process for its ETF choices. "If the model says, 'Don't buy European equities,' we don't say the model is wrong," said Vogelzang. Instead, the firm re-evaluates how its current European exposure will affect the rest of the portfolio, and adjusts accordingly. Every ETF is up for consideration and debate, which has led the portfolio to include some funds that most investors shy away from.
Vogelzang rattles off ETFs he has used, including a number of high-dividend funds, and low-volatility strategies such as the iShares MSCI EAFE Minimum Volatility Index Fund (EFAV).
In the short-term tactical sleeve, Vogelzang has also made use of some of the market-neutral funds from QuantShares as low-volatility replacements for cash, and he reckons the iPath S&P Dynamic VIX ETN (XVZ) is an interesting approach to managing tail risk.
Vogelzang considers exchange-traded funds as one of the great sea changes in the money management business. He hopes ETF innovation continues apace so he can keep finding new ways to exploit pockets of the investment universe with relative ease. When it comes to ETF selection, Vogelzang feels that too many asset management firms today align themselves with specific ETF providers and, as a result, leave opportunities—and sometimes fees—on the table.
Boston Advisors' proprietary ETF database drives recommendations, and then the team discusses the best ETF given the investment thesis. Vogelzang feels ETF providers have become increasingly more forthcoming as to the underlying investments within these vehicles, which is enormously helpful to decision-making.
This came into play recently, when Vogelzang and his team were evaluating two agricultural ETFs. When they looked under the hood at the components of each fund, they found that one product, the iPath Dow Jones UBS Agriculture Total Return ETN (JJA), was what they good-naturedly called "vegan"—meaning there was no cattle/livestock in the fund. The other ETF, the PowerShares DB Agriculture ETF (DBA), contained both livestock and crops (they labeled this option the "omnivore" ETF). "Understanding this difference was critical to us because, at the time, drought conditions were driving crop prices up and livestock prices down," explained Vogelzang. "This insight helped us determine which fund best fit our investment thesis and market environment at that time."
In all this, one thing is certain: Investing has never looked more difficult, and convincing investors that there are opportunities to exploit is a tough row to hoe.
"As investors, we're all looking at the macro-fundamental story, and it's the 'peak and shriek.' You look at it and say: 'I'm not going to invest at all,'" Vogelzang added.
Specifically, he's concerned that technological advancements, impressive as they are, are slowly eroding the vitality of the global jobs market.
"All the technology that's coming is going to take away people's jobs. I think, structurally, jobs are going to be a political issue for as long as we can see," said Vogelzang.
The other issue is the large and growing debt loads in developed countries.
"If we as a country—or as a globe, frankly—don't get our debt under control, I don't think there's any hope for any significant economic growth," he noted.
But for now, financial markets are being spurred on by the easy-money policies of the Federal Reserve and other big central banks, which Vogelzang argues has distorted the markets, making the work of GTAA shops like Boston Advisors more challenging.
"It's never been more difficult to be an asset manager than today, because you have very diametrically opposed fundamentals and monetary policy. You've got this real huge tug of war, and time will tell how it plays out," said Vogelzang. "Maybe the fundamentals gradually get better, and the Fed can gradually take its foot off the gas pedal a little bit."
Does Process Sell?
While the average retail advisor—the core audience of the Broad Allocation Strategy—focuses on market-beating performance now, the firm is positioning its ETF offering for a more sophisticated audience. Boston Advisors says the portfolio's focus on process comes from the firm's institutional background and is geared for clients who seek more discipline and consistency.
"Some people don't want to jump back into the stock market yet, and bond yields are just really quite poor," Vogelzang said. "Investors are getting pinched from both sides, which is why we developed a strategy designed to shoot for 7-8% returns, but with volatility, that looks more like a bond portfolio than a stock portfolio."
So Boston Advisors is pitching itself, in part, as a GTAA shop that can fit right into a pre-existing array of other money managers by helping clients tilt a portfolio to better manage risk or squeeze out some extra income.
In the traditional institutional marketplace, the firm has ongoing active discussions with about half a dozen institutional consultants, who can and do put the firm in front of potential clients.
It's also opened a new business development initiative: directly prospecting insurance companies and pitching the broad allocation portfolios to them as a complement to what they're doing in a fixed-income space, which is serving up paltry streams of payments.
To expand its profile among the retail community, Boston Advisors is reaching out to the world of registered investment advisors and registered representatives by talking to broker/dealers such as LPL, Commonwealth and Envestnet to gain access to their armies of advisors.
Still, the firm admits that the path to retail investors' hearts (and dollars) is an uphill climb. But it welcomes the challenge. "How do you get above the noise? It's really guerilla marketing; it's guerilla tactics; it's relationship building; it's finding the right people to represent you and the right leverage points in the industry," Vogelzang said.
"We think this business is a little bit like the Wild West right now," he explained, "with a lot of retail advisors chasing returns instead of process." But as the industry matures and the frontier gets tamed, Vogelzang believes his firm's focus on institutional discipline will be the new sheriff in town.