A Letter To The Editor, March 2013…
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| Financial Advisor, March 2013 |
I felt a reply was needed as there is much confusion on trend following and how it can be used to reduce risk in an investing strategy. The full text is written below, OR just click the URL to be redirected to Financial Advisor’s home page to read the article there.
The February 2012 issue of FA included an article entitled: “Avoiding the Next Train Wreck.”. While I found portions of the article quite insightful, I walked away feeling that Financial Advisor did a disservice to its readers by publishing the article.
For full disclosure, our firm, Resnn Investments LLC, uses trend following techniques in our client’s portfolios and have been quite successful (for our clients) as a result. In fact, I am personally so convinced of our strategies’ long-term performance that I have invested literally all of my 401(k), IRAs and taxable accounts in the exact strategies our client’ portfolios are invested in. I am a firm believer in trend following and am not afraid to put my money where my mouth is as a result.
I have greatly enjoyed the author’s articles in the past and hope he keeps writing them, as I have always found them to be informative and educational, but this article had many portions that were misguided. In the beginning of the article, he admits his lack of knowledge on the topic. and his inexperience in technical analysis and trend following were apparent.
Trend following is not “market timing,” and comparing the two is like comparing value investing to distressed asset investing. They have similarities in that both strategies focus on undervalued securities/assets, but that is really where the similarity ends. The entire style, valuation techniques, liquidity concerns and purchase implementation are completely different, and in fact, taking the same approach from one style to the other would potentially have disastrous results.
I can only assume that as a result of this lack of knowledge, the article came across with a very skeptical tone on the use of trend following techniques in a portfolio, and borderline implying misleading activity on the part of trend following money managers. As a fiduciary, we all are expected to put our clients’ interests first and hold ourselves to a higher standard. There are, unfortunately, bad apples in every bushel, but to imply that trend following techniques are hocus-pocus or that advisors that employ TF techniques do not take their fiduciary responsibility seriously is simply inappropriate.
Many of the “buyer beware” comments expressed in the article are quite good to consider when performing due diligence on an investment, although they have nothing to do with trend following strategies specifically. They would apply to any investment, regardless of the style. I would hope that an advisor who is shopping for a new investment style for his or her client would “read the fine print” on performance results, know the assets under management, investigate the firm and key personnel, and have a strong understanding of how the strategy works. I also would hope that these standard due-diligence practices are all quite obvious to a discerning advisor.
Trend following is a risk-management strategy that, when used correctly, can be quite effective in producing alpha. Most important though, its focus is (as the author identified) on protecting a portfolio from strong declines, reducing the correlation with a traditional buy-and-hold style. In fact, our flagship fund, “The One,” only lost 1.89 percent in 2008 vs. the S&P 500 losing over 38 percent, a sizable difference for sure!
Making light of this “one-time fluke” as he implies is just improper, considering it has taken over five years for the S&P 500 to just get back to break even after the tremendous decline of 2008 (which it still hasn’t done). So while a buy-and-hold strategy has been steadily chugging along to get a client back to $0.00, a trend following strategy missed the large drop and since then has been taking part in the gains. In our case, we have returned 153 percent from January 2008 vs. almost breaking even. So, by controlling risk, you outperform over time. It is an odd concept to wrestle with, that taking a defensive role actually creates more alpha, but clearly at our firm it works.
In my opinion, of utmost importance to a fiduciary should be capital preservation, over and above market-beating performance in up years. Risk control is why all of our clients hire us; they expect that we will be there in volatile times to protect their investment from decline. 2008 wasn’t a fluke. Sharp declines happen every few years, whether they be 20 percent or over 90 percent (such as after the dotcom bubble), and our role is very clear in these cases.
There is so much distrust and dissatisfaction out there in the investing world and most of it has been created by our industry’s greed and laziness. Our focus needs to be on repairing that distrust with the public, and we do that by not only providing a quality service at a reasonable price, but also by not bad mouthing hard-working people that are helping our industry by protecting their clients and growing their net worth over time. We can look at each other as competition, or we can look at each other as having a common goal toward helping the mainstream public achieve their financial goals and protecting their assets during times of turmoil. We all have the same goal here, and as a result, we should work together to further our industry and repair the damage that has taken so long to create. There is so much retail money sitting out of the market as a result of this greed, and all of us working together to create value for our customers will over time result in these clients to trust the industry again.
Our industry is constantly evolving, and being on top of emerging technologies and available options (not that trend following is emerging, it has been around since the early 1900s) that can help our clients is an important part of this magazine’s purpose. As a result, I hope it will present ideas factually and with no bias so that the audience can make an informed decision as to how a particular strategy or technology can fit into their current infrastructure. This article fell short of that, in my opinion.
Oh and by the way, October 1987, two weeks before the big crash our strategy was in cash. We moved fully to cash on October 8, eight trading days before the dramatic decline. The signs WERE there and a well-developed system would have identified it and prevented the dramatic losses that most retail investors experienced. You say balderdash; I saw happy customers.
Randall Mauro, RIA
Resnn Investments, LLC
Denver, Colo.
