We believe that modern times demand more modern solutions. Investors need to move beyond traditional diversification. Our view is that diversification by investing methodology and strategy, as well as by manager and timeframe represents a modern take on portfolio design and diversification.
Hortz: In implementing your multi-manager approach, how do you determine the investment strategies and subadvisors needed for your portfolio construction?
Horter: There is a lot of science and math that goes into these decisions. But the basic premise is to understand that there is no single approach that works in all environments. All managers, strategies, methodologies, etc. can fall out of favor at times. Thus, the traditional approach to fund management is subject to what we call, “the singular failure.” The solution is to diversify that risk—among different investing methodologies, strategies, managers, and timeframes.
Getting back to your question, each of our funds has a specific objective. For example, we offer a series of tactically risk-managed asset allocation funds catering to various risk tolerance levels (conservative, moderate and growth). Each of these funds has multiple managers, which are chosen for their specific area of expertise.
The approach we employ is a bit like managing a baseball team. You need to find the right combination of good defenders and strong offense in order to win games. So, like the major league baseball managers, TFA’s job is to combine managers that can play great defense with others that can hit for power, so to speak. Only, we have a lot of computer power to help us analyze and identify the right combinations.
Hortz: What risk mitigation strategies are built into your portfolios and investment process?
Horter: We employ a plethora of strategies designed to reduce exposure to risk during times of market stress. Each manager brings their own approach to the fund. For example, some utilize trend following approaches. Others focus on volatility. One of our managers utilizes derivatives to provide a set risk/return profile. Another employs econometric factors. Yet another approach incorporates non-correlated asset class exposures. The key is to diversify the strategies employed so that if one approach struggles, there will be others to pick up the slack.
Then there is the subject of timeframes. We believe that utilizing multiple timeframes is mission critical to successful risk management. You see, there are times when a shorter-term approach will work well—such as during the Covid market crash as the market moved quickly in one direction, and then the other. The key in these environments is to be nimble and quick.
However, in more normalized environments, such as we’ve seen in 2021, a longer-term approach is preferred. In this instance, simply staying on the bull train is the way to go. And since it is tough to determine which of these strategies is going to work “best” (an approach that is also fraught with risk), we turn to the idea of good old-fashioned diversification, but in a more modern fashion.
Hortz: How exactly do you orchestrate these different investment components and timeframes involved into a cohesive and effective investment strategy?
Horter: We start with a lot of research on the various strategies available to us. We then determine an optimal allocation based on multiple criteria – incorporating measures, such as alpha, volatility, drawdown, Sharpe and Sortino ratios, among others.
We then stress test the allocations in order to get a general understanding of what to expect during various market environments. Think 2008’s bear. The 2009 rebound. The low-volatility bulls of 2013 and 2017. The difficult years like 2011. And more recently, the Covid Crash—and the ensuing economic re-opening.
We know that all the managers won’t hit the ball out of the park in all markets. But the idea is to create a combination of strategies that provides the “smoothest ride” possible over what can often be a very bumpy road.