Sterling Global Strategies is staking its future on building ETF-only portfolios. It may one day wrap some of its creations into separate listed ETFs, but not quite yet. For now, the challenge is to build the brand, Mark Eicker, chief investment officer of the Carlsbad, Calif.-based firm, told IndexUniverse Correspondent Cinthia Murphy.
The most surprising takeaway from their visit? Clients don’t mind their portfolios being allocated to cash—nor do they mind paying for it—if they feel the manager in charge of the portfolio is in control.
Murphy: Sterling Global Strategies has created one index and manages four model all-ETF asset allocation portfolios that rotate allocation between six or seven ETFs. Can you tell me a little bit about those?
Eicker: Every one of them is an ETF portfolio, and all of them are based on the same algorithm—the only difference being the asset classes that we are using. We are trying to overweight the asset classes that are in uptrends and stay away from the asset classes that are in downtrends. We always talk about efficient and inefficient markets, and during efficient markets, some asset classes are going up and some are going down—if you own everything, then you are going to smooth out the ride.
Basically what we’ve said is that there’s a way, by using a relative-strength moving-average model, to predict fairly consistently which asset classes are in uptrends, and we want to overweight those and stay away from everything else. In inefficient markets—those where we see broad market collapses like what happened in 2008—everything correlates and drops in unison.
In those times, we apply a moving average overlay to our relative-strength model that tells us whether the two asset classes that we are choosing are actually in uptrends or are just the two best-performing asset classes in a broad market collapse. In that case, we can move to a 100 percent cash allocation. It doesn’t happen very often—to have all tied to cash—but it can happen.
Murphy: You see cash as another asset class.
Murphy: Is that unusual?
Eicker: It is, but there are more and more of us out there that see it that way. It’s growing. But if you look back at the past 10 years of our index, we are only taking cash about 8 percent of the time. It’s not very often. And the highest position we’ve ever had in cash was 50 percent for one of our indexes, STRR.
Murphy: In what type of market environment does a sizable cash allocation make sense? In a down market?
Eicker: Exactly. I’ll give you an example. In the third quarter of last year, we were in cash and bonds two out of the three months, and during that period we were down 1 percent while the S&P 500 was down 13 percent in that quarter. By the end of the third quarter, we were 5.7 percent higher year-to-date while the S&P 500 was down 8.7 percent. It was a short bear market, but by the end of 2011, we had beaten the S&P 500 by something like 380 basis points, and all that with only 0.23 beta, or 23 percent of the volatility of the S&P 500. We really reduce investors’ exposure to volatility.
Murphy: Is this current market environment we are in—where stocks have been running up on a thin audience and everyone is talking about the possibility of inflation ahead—a good time to allocate to cash?
Eicker: We think so. If you talk to economists, when the debt levels get as high as they are now, volatility picks up in the stock market, so until the U.S. gets the house in order, the volatility is going to be there. Our goal is not to get cash; our goal is to buy the two asset classes that are performing the best. It’s key to have good risk management tools to be able to potentially protect your portfolio from broad stock market collapses.
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