The Case for a Healthy 10-15% Market Pullback

Nadig: Edison Byzyka, Credent Wealth Management, thanks so much for joining us. Look, you guys are a little bit different as a TAMP and as a provider of asset management services for your own advisors, in that you're pretty active. You're looking at individual stocks, but you also use ETFs. Give us that perspective because that's a little unique.

Byzyka: Well, pleasure to be here. Thank you, and great conference so far. We are about a 4 and a half billion dollar RIA, fee only, where we do have our own TAMP, a very actively managed strategy backdrop. What's unique about that process is the ability to construct those strategies in-house, the ability to run internal SMAs with think, kind of our own internal UMA function, unified managed account function. 

The ability to have a GIPS compliance backdrop within that, and offer all those services on the TAMP side has been a very unique offering for us in this space. What we have found out from that standpoint, advisors, broadly speaking, are gravitating more so to active strategies as markets get to higher peaks, right? Downside protection tends to be more of a desired factor during such market cycles. Active strategies for us have been a benefit in that process.

"The Market Is Looking for a Catalyst for a Pullback"

Nadig: I can't pass up the opportunity to talk to an actual active manager on a week like this. We've had a few hiccups, a little bit of, you know, is this the top of the bubble? Are we pulling some froth off the top of the milk here? What's your call?

Byzyka: So, here's the thing. Investors cannot tolerate valuations at these levels for a long period of time. So, valuations of themselves are a terrible market timing indicator, but we're teetering now to this longer period of higher valuations. Missing earnings expectations, even to a marginal degree, where maybe 12 months ago would have been a slap on the wrist, is now treated with notably more downside. 

Couple that with the fact that we still have a shutdown happening, as well as maybe the tariff rhetoric still alive, I think the market is looking for a catalyst for a pullback. And that 10 to 15% pullback is actually going to be a very healthy occurrence. I think we need to get there faster than we're actually going to right now.

Nadig: So, you're positioned that way. You're positioned for a 10, 15% pullback on the frothiest Mag 7 AI bubble-type stocks. How are you positioned?

Byzyka: Yeah, absolutely. So, market in general is top heavy, right? I think that story's been alive very very, you know, very much alive for the past three to four years. By being an active manager, we are having an active allocation risk away from the big tech right now. We're not going to ignore it, right? The AI boom isn't going anywhere.

Nadig: So, your investors still have a little Nvidia.

Byzyka: They still have a little Nvidia, but they don't have eight or nine or 10% Nvidia from that standpoint. Being very careful in that allocation structure, and then coupling that with very very strategic structured no downside capture exposure within those portfolios gives us an expected return profile that has – should hopefully have and would have – a lower downside capture than the broad market.

The Value of Custom Structured Products

Nadig: All right. So, now you've opened up another can of worms. So, you mentioned structured products. We've talked to a bunch of folks here about that. How are you using structured products? Are you using traditional autocallable type notes to generate income? Are you doing fancier things to deal with downside left tail risk? What are you using?

Byzyka: Love it. So, one of the things that we've been doing very strategically is going directly to the global capital markets desks of these banks, whether it's Goldman or JP Morgan or CitiGroup, you name it, and underwriting with them directly.

Nadig: So, specific notes for your clients.

Byzyka: Specific notes for our TAMP clients. These are not off-the-shelf. These are custom notes. The vast majority of the usage, think of replacing interest rate risk with equity market risk, but doing so in a principal protected structure. So, for bond investors in general, right? I do think bonds have higher risk than stocks over the next 12 months. I know I may be going against the grain on that one. 

I think there's too much baked in for interest rate cuts. Swapping some fixed income exposure for a principal protected note with a seven or 8% cap to the S&P 500 gives us that equity market like return profile expectation with a similar risk as owning a bond, but removing the interest rate risk in the process. It's been a great story for our clients.

Nadig: So, how… if I'm a standard middle of the road TAMP client here, I'm neither, you know, 27 years old with $20 million of dot-com money, nor am I, you know, 80 and just about to hand this off. If I'm a normal, you know, slightly pre-retiree wealthy client, how much of my exposure is to something like that?

Byzyka: Typically 15 to 20% across various structures, not just on fixed income, but also on the equity side, is tremendous. I'll give you an example. Swapping out volatility for consistency is what structured notes are really powerful in. So, if I were to say, “Dave, how about we structure a probability of a 95% payout of a 10% income profile over the next three years for a piece of your portfolio”, we've now generated a more consistent, lower expected volatility profile than simply building an income structure.

Nadig: So, is that a lot of the story here, just smoothing the ride as opposed to chasing a particular amount of yield or a particular amount of exposure?

Byzyka: Absolutely smoothing the ride, because as you get near that retirement or when you're in retirement, a smoother ride and a more consistent ride tends to outpace the desire for beating the S&P every year.

Nadig: Obviously, a behavioral hack for clients as well. It's much easier to talk to your client about why you're behind the market by 2% than why you're down 12. Yeah. I get that. Yeah.

Byzyka: But for those clients that do want the added exposure, certainly the structures exist where you can get 2 or 3x that exposure. So, you do juice up the risk. 

ETF Use Cases and What Investors Get Wrong About Leverage

Nadig: All right. So, that's the very custom end where you're definitely not playing the ETF market because you're going and getting individual issuance done. Talk about the other side of it, because you guys do also run ETF portfolios for your clients. What are you using in the ETF market? What's exciting to you, and what are you kind of skeptical about?

Byzyka: So, what's been interesting over the past, call it 12 months or so, the things that have popped up predominantly are these more narrow cast ETFs. These more niche exposures across various style classes and factors. And they've been getting a lot of interesting media coverage in the sense that they're too concentrated. 

But I think that the market's already been concentrated. And I think these ETFs that are coming out are providing an ability for investors to diversify across indices without actually owning the entire index. It's almost like an active management approach, but you're purchasing the top 10 or 20 or 30 names in a particular index, as opposed to just blindly owning the Russell 3000 or the S&P 500 at that point.

Nadig: So, are you using them exclusively in kind of core positions? Are you using some of these narrow cast ETFs? I mean, as an active stock picker, you got access to things like 2x everything now in an ETF wrapper. You know, the beta is the beta. I suppose if you've got a short-term call, I could see why you might use them. Where do you fall on that spectrum?

Byzyka: We are certainly using them for core and satellite positions, but I'll tell you this. Leverage in these ETFs I think is the most misunderstood risk for a lot of investors. The leverage tends to promote a lot of performance chasing, which we do not do. With the right diversification, I think investors can use them and should use them, but certainly not in our wheelhouse to put leverage ETFs like that for clients. The downside risk that could be associated with that would be just too much at that point, not worth it.

Nadig: So, not a big fan of like, you’re not signing up for the 5x ones that have been filed.

Byzyka: Absolutely not.

Commodities and Crypto

Nadig: All right, what about some of the alternative spaces? Because obviously things like crypto, commodities, these are now actually easier to access in an ETF wrapper than they are in their native markets. Where do you put those kinds of alternative strategies, and are ETF the right fit for your clients there?

Byzyka: So, we certainly run some thematic exposures in most portfolios where we try to capture maybe that one, one and a half percent max in some crypto type structure. When I say crypto, it's not just owning bitcoin or ethereum or things like that. It's also the technology, the blockchain technology backdrop. 

What we've done is we've separated those two, right? Blockchain technology versus cryptocurrencies. There's viability in investing in both of those. For us, it's been more so on the blockchain piece of it and trying to capture that technology, whether it's through semiconductors or whether it's through smaller companies that are suppliers to Nvidia or suppliers to AMD.

Nadig: So, a little bit more of a pick and shovel approach there.

Byzyka: Absolutely.

Nadig: And what about other forms of alternatives, whether it's commodities, managed futures, return stack portfolios, anything in there that you're finding interesting?

Byzyka: The commodity space has been interesting. We played the current administration that coming into office with the commodity space, right? The domestic energy independence piece of that. We actually played commodities via structured notes, ironically enough, directly betting that prices wouldn't increase as much. That actually was a fantastic play, knowing how the energy independence was going to play out. But other than that, that's been our vast majority in that exposure, Dave, not too much on that. 

Nadig: Gold? 

Byzyka: So, we owned a little bit of gold and it has been a very clients calling, saying, “Should we own more gold?” And what's funny is from 2021 to 2024, roughly gold didn't do much. This year has been a fantastic upside. And which is crazy because it's bucking the trend of how real yields are responding to the inverse of gold prices. We are not adding more to gold right now. I think gold is an overdone play for the particular moment. I think it will hover around that 3,500 to 4,000 mark for a while, but I do see gold coming back down. 

How Credent Approaches AI Integration

Nadig: All right. Couple last questions here. We talked a little bit briefly about AI and your positioning there, like sort of a little bit against the froth. How about how it's affecting your business and your day-to-day work? As somebody in an advisor firm, as somebody in the markets every day, where are you finding use cases, and where do you think AI is overhyped as a tool in the real world?

Byzyka: Yeah. I think AI for us has two kind of main decision points. Number one, how does it make our employees or firm more efficient, more productive? How does it benefit the client from that standpoint? And what's funny about that is there's this compliance umbrella that hangs over all of that, right? Because we want to be compliant, we want to do things the right way. 

For us, the implementation of AI has been in the form of a dedicated business intelligence team. We've brought on an amazing team of data scientists and the ability to actually use our data to tell us what we don't know, how are clients responding, what is client sentiment, how are we responding in that process? And then within that, try to get the vast majority of our processes that are very repetitive, say, from an operational standpoint, how can we actually get those to be automated over that same time frame? We're in that early stage right now. We want to be careful and very intentional in the AI adoption, but first and foremost, we want to be very compliant in that process, making sure that we're not overstepping anything that's not SEC regulated.

Nadig: So, that sounds like sort of two very focused buckets. One is, help make sure that our interhuman communication, we're learning as much as we can on that. And the other side, let's get on boarding down from 27 days to two days. 

Byzyka: No more not in good orders, right? Make everything perfect off the bat. 

Nadig: This has been great. Thanks so much. Cheers.