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Meet a Strategist: Adaptive Investments

by Evan Harp
Meet a Strategist: Adaptive Investments

Evan Harp: What’s keeping your clients up at night?

Greg Rutherford: Our clients are the financial advisor community, investment advisors. I think what’s keeping them up is just market direction, right? Where’s this market going?

Obviously, we’ve seen more volatility in the last year versus the last ten years, although we’ve had some corrections here. They’ve always been these sharp, V-shaped, down and rebounds up, but that’s not the case here in 2022. We’ve had a rebound since October, the market is showing a little sign of life finally, it appears that inflation is waning with the Fed’s tightening. The next question is “how does that impact the economy and recession and so forth?”

I think that’s probably the biggest fear right now is trying to determine what direction are we really heading. Is this a false bullish move? Or are we on a path to a recovery?

Harp: Do you have any recent changes in your allocations?

Rutherford: When the S&P hit that 3600 level back in October, some of our holdings had been playing some defense with cash and puts and so forth. At 3600, we felt like we needed to become cautiously bullish.

We redeployed that cash, moved it back into the market because we didn’t want to be sitting on the sideline if we got the rebound that we expected. The big picture was we went back into the market. Whether it was in our equity products, or the fixed income products, we positioned everything back in.

Harp: What do you think of the market right now?

Rutherford: I think we’re sitting on a teeter totter. Who’s going to have more weight? Who’s the bigger person on the end of the teeter totter? Is it the recessionary piece and slower growth?

It looks like inflation starting to calm, it looks like we’ve peaked, and that’s great news. But then, with the Fed tightening and interest rates around 4%, how much impact or fear will that cause? How are the equity markets going to handle that going forward?

So we’re really just in this position right now, where we’re trying to determine, longer term, what direction the market goes. If you think about inflation, we still have rising interest rates, we still believe the Fed is going to raise rates again in December. How will they go beyond that? Do we get the 50 BPS in December, and then maybe they slow down or even stop?

Then you’ve got the growth outlook question, got the recession question. We’ve got, going into winter, global energy concerns — maybe not as much in the U.S., but certainly in Europe.

Then you’ve got the war in Ukraine. You’ve got a lot of global instability out in the marketplace and markets generally don’t like that. They like things that are more predictable. So, kind of an interesting place where we sit, right?

Harp: Are there any ETFs you want to highlight?

Rutherford: With all those things said, I think one that I would certainly highlight would be our . The reason I say it is because it’s a truly a global, go anywhere strategy. It’s not constrained by style boxes. The manager has the ability to really go and capture performance wherever they may find that performance. It’s been a five star fund by Morningstar for many, many months and it’s a really good solution in this type of a market because it can adjust, it can adapt.

I’ll give you an example from early in the COVID period. The way the strategy works, it’s looking and identifying up-down capture performance on a daily basis and then looking at that data over rolling periods of time to try to determine winners from the losers. So it’s a truly active ETF. In COVID, it became heavily weighted in technology and healthcare. If you think about a downturn in the market, normally, as advisors, we’ve been taught, “well, gosh, when we play defense, where do you go?” You go to consumer staples, you go to utilities, you go what has been historically those defensive type of areas. But during COVID, that wasn’t the case. In fact, had you moved there, you would have really gotten beat up. On good days, technology and healthcare were by far the leaders, but even on down-market days investors were tending to hold on to technology and healthcare more so than other securities. And so, the strategy had a really good year in 2020.

But by November, as Biden came into control and there was a big infrastructure push, the strategy started to move — based on its quant model, again, up down capture — it started to really incorporate industrials, some energy, and financials. The portfolio became a little more balanced and even tilted a little bit to some of those areas that would be more infrastructure related. We called it “the Biden portfolio.” [Laughs.]

Then, interesting enough, by last December of 2021, it became an inflation portfolio where, again, energy was really important, financials again, but then even commodities. I think the portfolio got as heavy as maybe 15-16% commodities — and we had not own commodities in that portfolio for probably the life of the strategy.

So it will move around. It can also add cash, it can use puts to help protect on the downside, if we see a significant down market scenario continue, if we were seeing growth and liquidity dry up. I think it provides a lot of solutions to advisors and the beauty of ETF, we’ve had so many ETFs over the years that have been index oriented, but the beauty of the ETF, when you have an adaptive product or a product that really can shift, all those allocation moves can happen within that ETF without creating capital gain exposure. So it puts the advisor in a great position to control the tax aspect for the client, without the client paying big capital gains taxes each year.

Harp: What’s one thing that sets your firm apart?

Rutherford: We’re still a small boutique, you know, a lot of access to us and the managers, but I think we’re adaptive, right? Every one of our products has some tactical scheme.  I always say, “look, we just want to capture benchmark returns and up markets.” If we overperformed the benchmark, that’s even better. But then we certainly want to mitigate losses in down markets. And whether we use cash to do that, whether we use puts, whether we maybe even use some type of an inverse solution here or there, we think that the end client, the retail client, they want good returns. They want fair returns, but they don’t want big drawdowns, big losses. I think that’s what they want from their advisors. That’s the mission of all of our product line and what we try to do. That sets us apart from the typical asset driven, long-only type of strategies that that are out there in the marketplace.

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