Mark Eicker, CIO of Sterling Global Strategies, explains his firm’s use of tactical rotation.
Sterling Global Strategies, a strictly ETF asset manager based in Carlsbad, Calif., doesn’t believe in emotional investing. The firm’s algorithm-based investing is designed to flex between market environments. And according to Chief Investment Officer Mark Eicker, their flagship strategy—the Sterling Tactical Rotation strategy—has that down to a science. Literally. After outperforming its benchmark consistently since its inception, the Sterling Tactical Rotation strategy has earned Morningstar’s coveted five-star rating. Eicker spoke to IndexUniverse staff writer Hannah Tool about what that rating means, as well as which of Sterling’s portfolios is likely to be the next “big dog,” and hinted that the firm’s traction in launching its own fund is gaining ground.
IndexUniverse: To begin with, does Sterling only use ETFs in its portfolios?
Eicker: Yes. The main reason we use ETFs is because of cost. Most of the ETFs we use are very-low-cost options. For instance, the SPDR S&P 500 fund (SPY | A-99) costs just 6 basis points.
IU: What do your ETF portfolios look like?
Eicker: We have five strategies. Our flagship strategy is the Sterling Tactical Rotation strategy. It’s actually part of the Morningstar-managed ETF strategy space. We’re one of only nine managing at five stars in the space, out of 630-plus that they cover.
IU: Last October, you spoke to IndexUniverse reporter Cinthia Murphy; you mentioned then that a Sterling mutual fund or ETF was possibly in the pipeline. Is that something we should keep an eye out for?
Eicker: Yes. In fact, we got hot and heavy again here in the last couple of weeks of October, because one of the big wire houses reached out to us to create a fund for them. I remember that, in the conversation with Cinthia, I mentioned that we’d have something done within a year. It’s been a year.
However, we’ve got a lot of interest with mutual fund companies, so much so that a big wire is asking for it. In the next six or eight months, I think you’ll see a Sterling mutual fund.
IU: Let’s dive into that flagship portfolio, the Sterling Tactical Rotation strategy. What makes it work?
Eicker: We are a high-conviction, broad asset-based shop. We’ve got a lot of asset classes at play within this portfolio: commodities, REITs, U.S. equities, international equities, bonds and cash.
IU: “High conviction”; what do you mean by that?
Eicker: “High conviction” means that we’re always going to hold the two asset classes that are experiencing the most strength, based on our algorithm.
IU: How does this algorithm allow the Tactical Allocation strategy to perform in different market environments?
Eicker: If we go into an inflationary environment, we’ve got commodities and REITs that we can rotate to. We should have significant outperformance to that type of environment.
If we go through a deflationary environment, we can rotate to bonds, which should perform well. More than likely, our currency is going to get picked. This environment could also call for international equities; the iShares MSCI EAFE (EFA | A-90) is our international component.
Then, there are the two different kinds of bear markets I think we have covered as well: In a 2008-style market, we can move to cash. And if the environment were to shift to a 2000-2002 bear market—when U.S. equities were dropping, but other things were showing strength—we can rotate toward that strength.
This portfolio can therefore perform well in a lot of different market cycles.
IU: Which two asset classes are you overweighted to at the moment?
Eicker: International equities and U.S. equities.
IU: What are the market scenarios that this portfolio could potentially struggle within?
Eicker: The market cycle we’re in right now, a U.S.-equity-led bull market, is our most difficult market environment. We’re very proud to have received five stars from Morningstar in this environment since, by definition, we can only have an overweight to two asset classes at any given point in time. So my belief is that this is our most difficult period of time.
IU: What does your firm have under its belt at the moment, in terms of AUM?
Eicker: At the end of the quarter, we were at $205 million. That’s both AUM and AUA.
IU: How much of that is allocated to your flagship portfolio?
Eicker: Passive rotation is up to $105 million.
IU: Are any of your other portfolios fostering the same attention as the tactical allocation? Or is that your “big dog”?
Eicker: That’s our big dog, but only because of the period of time we have been live. We’ve got almost a four-year GIPS [Global Investment Performance Standards] track record on the tactical allocation strategy, while the other strategies have less time.
IU: Which portfolio would you say is your next “big dog”?
Eicker: I'm really excited about our alternative bond strategy, because it’s the same algorithm as the tactical portfolio. In the alternative bond strategy, we’ve got low-correlated bond ETFs that we rotate between, and we also have a seventh asset class, the inverse 20-year Treasury.
I feel like this is a portfolio that in a typical bond bear market could perform as well.
IU: How old is that portfolio?
Eicker: We went live on that around June 2012.
IU: Is there a rule of thumb when it comes to life span of a portfolio before it can get your blessing?
Eicker: Yes. Almost everything that comes through, in terms of new AUA/AUM, is advisor driven. Most advisors are looking at three-year numbers. In about another year and a half, we’ll be able to focus a little bit more attention on the alternative bond portfolio.