A trend that I’ve been particularly interested in over the past few years is the market for liquid alternatives. To delve into this topic further, as well as systematic investing in asset management, I sat down with Jon Robinson and Tommy Mayes of Blueprint Investment Partners, a Greensboro, NC-based RIA.
Peter Hans: How did you guys meet and what’s the story behind Blueprint?
Jon Robinson: The history of the strategy really goes back to the early 2000’s when my college buddy, now partner Brandon (Langley), and I, began developing systematic trading strategies as a bit of hobby. After college, I was then in New York working in equity research while Brandon was finishing up his grad degree in Economics and starting a career in risk management. The passion for what we started in undergrad continued to grow, so after researching our techniques and refining our processes over a few years, we launched a Commodity Trading Advisor (CTA) and Commodity Pool Operator (CPO) at the end of 2006.
Tommy Mayes: I have been in the private wealth industry for almost 30 years, and have been advising family offices for over 10 years. In 2013 I met Jon and Brandon and became convinced that their strategies were at the cross-section of several industry trends. Most importantly, the indexation of everything allowing the deployment of efficient risk-managed strategies at a very low total cost. I also saw the power of the strategies from my family office perspective and realized we could democratize what have historically been techniques only available to high net worth investors.
JR: After performing well during the financial crisis, in 2009 one of our early RIA clients asked us to launch a single manager fund. Shortly thereafter, we began researching how to apply our trading techniques to ETFs and Mutual Funds. In 2011, we launched our first ETF strategy on a white label basis for that same RIA. In 2013, we met Tommy and made the decision to launch Blueprint to serve financial advisors and institutions. We now have over $200 million in AUM and a compelling six-year GIPS compliant track record upon which to build future success. In many respects, we owe our success to the financial crisis; our ability to do well during that period was a major catalyst in uncovering the value of downside protection and systematic asset management.
PH: So going from launch to over $200 million in less than five years is pretty impressive. Who is your core client and how do you explain your value proposition?
TM: Today our core client is the independent financial advisor and/or financial planner. Our strategies provide two unique benefits to our clients. First, we offer a dependable, cost-effective, and tax-friendly core allocation to which they can add satellite investments according to their expertise. In addition, our strategies serve as a liquid alternative replacement with favorable characteristics like low drag in bull markets and non-correlation when it truly matters.
PH: So at a high level, how do you go about executing a strategy like that?
JR: We believe the three greatest risks to investors are behavior biases, the loss of compounding from large losses, and the opportunity cost of being too conservative. As numerous studies show, the average investor underperforms the market by aggressively buying at the highs and selling at the lows. Our process slowly reduces exposure in the early stages of bear markets and steadily increases before bull markets pick up steam. These actions solve for all three of those risks by having a calming effect on clients, reducing drawdowns, and capturing favorable return environments.
PH: Interesting, and for what it’s worth I completely agree. That said, human behavior is a tough problem to solve. How do you look at a successful client relationship?
TM: First and foremost, the success of our clients is our success, and nothing can substitute for an advisor who is pleased with our work. We believe that our strategies are well suited for goals-based advisors and financial planners. As alluded to before, we designed our processes to be advisor and client friendly. In the context of achieving goals, our strategies are also behaviorally sound and assist the advisor in managing client expectations during periods of market volatility.
PH: Well we’ve definitely had some market volatility of late. Do you think that this is the start of a larger trend, and is it accurate to assume that would be favorable for your systematic approach?
TM: Given that both of my partners are self-described ‘data nerds’, we have studied everything, including what the data says about market crashes. Market volatility is good for financial media, so the image is difficult to escape. The ironic thing is that just a few weeks ago volatility was near historic lows, we’re simply coming off of a very low base.
JR: Fortunately, the data shows that price shocks are not necessarily something to fear–they are not the catalysts for bear markets. They either represent routine bull market behavior or happen so deeply into bear markets that a robust systematic investment strategy would have avoided them almost entirely. It is a sustained decline in value, which occurs slowly and lasts for many months, or even years, that advisors should be focusing on as it pertains to a client’s terms downside protection. These are precisely the types of markets that we target with our process.
PH: So in some ways, the volatility is good for your strategy?
JR: We are not hoping for a market crash, but we do believe that we can recognize the characteristics when they appear. Most importantly, we think we know how to step aside of a correction in the most effective and efficient manner.
PH: That makes sense. Given all of this, can you break down your core investment philosophy for me?
JR: Our philosophy is summed up in four key tenets. First, is a focus on asset prices rather than making predictions. We believe there is tremendous latent value in that single data point. We like to say that price represents the transformation of “could” into “did”. What better indication is there of what a market is going to do, both good and bad, besides what it’s doing? And what other factor matters more to our clients and their account values? Second, we believe in the importance of preserving compounding by avoiding large losses. We like to make more by first losing less. Third, we think emotions generally have detrimental effects on an investment strategy and, therefore, seek to mitigate this.
One of the major benefits of a systematic process is the ability to counter the results that emotional investing and behavioral biases can have. Fourth, we believe successful advisors (our clients) focus on the needs of their clients rather than market research. With declining investment costs and the rise of indexing and robos, advisors cannot compete on investment performance alone. However, they maintain their edge in the human element and thus should focus their time accordingly.
PH: Earlier you mentioned the fact that you are self-proclaimed ‘data nerds.’ I wouldn’t be representing Harvest very well if I didn’t ask you to elaborate on that. What are some trends in data and the related technologies that you feel are underappreciated?
TM: I heard an MIT data scientist speak at a conference recently, and he reported that much of the low hanging fruit available from machine learning and AI has been captured and is now being deployed. We are closely watching implementation in platforms such as Blackrock’s Aladdin. For investment managers, we believe the most important use of big data is to improve the efficacy of marketing for both the buyer and the seller. The delivery of relevant insights and thought leadership to the right prospective client at the right time is critical. The use of marketing automation to curate prospects and cultivate relationships is a big part of our process. I also see a huge application to the behavioral data that you guys focus on at Harvest. That’s going to be a huge focus for both asset managers and financial planners as the emotional quotient surpasses the IQ in the value chain.
PH: I like that a lot, and agree that the EQ focus represents a really differentiated opportunity.
More broadly, what secular trends do you see as having the most profound impact on investors in the next 10 years? How do you think investors can position themselves accordingly?
TM: A recent CFA Institute study entitled Investment Firm of the Future: Distribution Model Shifts, identified a number of trends in the investment management business. Of course, we took note of the narrative that systematic investing would become mainstream. For us, this entails utilizing the vast array of passive, inexpensive investment instruments as a means for creating sustainable yet competitively priced alpha in a way that is transparent and easy for advisors to convey to their clients. We think systematic strategies can serve as a core component of investment portfolios to combat what we call the “60/40 Problem” or can be an Alternative to Liquid Alts. As we talked about earlier, investors need access to high efficacy alternatives but are becoming much more sensitive to cost and transparency. Technology, low trading costs, and risk management have provided by a disciplined approach to our models will meet this trend towards systematic investment management head-on.
PH: Let’s shift gears slightly. I read a recent Bloomberg article where Cliff Asness attributed a significant portion of AQR’s success to the thought leadership that put out. What is your reaction to that given that there is also a fair amount of market education that your strategy requires?
JR: Well it’s certainly hard to argue with AQR’s success. However, given Blueprint’s objective and somewhat unique place in our space, we see the landscape and thus our success factors through a slightly different lens. We are completely focused, almost fanatical, about the advisor-client experience. This is both in terms of our relationship with the advisor and the advisor’s relationship with their client. As a result, our focus takes shape around three core concepts – transparency, costs, and the delivery of behaviorally-sound investment strategies. So, in that sense, to draw from the great Yogi Berra, our success is ninety-percent relationships and the other half is education.
PH: Building upon investor education, how do you respond to questions or pushback surrounding the underperformance of alternatives and liquid alts – at least when benchmarked against the S&P?
JR: To be fair, anything that was underweight the FAANGs over the last few years suffered on a relative basis. So that story is not unique to liquid alts. What is unique, however, is that the use of alternatives has historically meant a black box investment process and enormous fees. We believe those days are over because it creates friction for investors; they—justifiably—don’t understand the underpinnings of the investments, the investments themselves are expensive and, yet, they’re underperforming Google—really, what could go wrong?!
So, yes, this recipe can distort how people view alternatives during a top-heavy bull market. Still, it’s important to recognize that alternatives are designed to deliver uncorrelated returns. It is our view that when investors begin seeking more portfolio diversification via non-traditional asset classes, their preference and selection criteria will be very different than in the past. To date, only a very small percentage of investors have had the benefit of alternatives due to limited access and excessive complexity. We offer strategies that are liquid, cost-effective and tax sensitive. In essence, we believe this delivers the benefits of alternatives without the costs and complexities.
PH: Thanks guys, this has been really interesting and I’ve really enjoyed getting to know you both a little more. Your overall philosophy really speaks to one of constant growth and improvement. Finally, what would you tell a 20-year-old version of yourself?
TM: I am by far the oldest partner and in fact, I have a 20-year-old name-sake that gets this advice regularly. First, if you keep God, family, and company in that order, life will go well for you. Second, do not be in a big hurry. I was in a mad sprint from high school to career to kids and candidly should have paced myself better. Today’s 20-year-olds are going to live to over 100! What’s the rush? Third, treat everyone with respect and gratitude. Everyone–no exceptions! Living by the Golden Rule will take you far in life. Thanks for asking!
JR: This is an interesting question. Two pieces of advice come to mind. First, I would encourage my younger self to follow the courage of his convictions. To realize that once the work has been done to develop those convictions to start running in that direction–that without fear there is no courage. Secondly, I would tell him to find a mentor–both spiritually and professionally. I am blessed to now have both. It’s been a tremendous impact on my growth as a leader in all aspects of my life.