Sage Advisory – A Low-Cost Tactically Managed ETF Solution

June 28, 2016

by Robert Huebscher

Sage Advisory Services Ltd. Co., a Registered Investment Advisory firm, was founded in 1996 by Robert G. Smith, III and Mark C. MacQueen. Prior to forming Sage, Bob and Mark both spent many years in distinguished money management careers, working and living around the globe.

Sage was established with a simple mission: to better meet the unique investment management needs of institutions and individuals through industry-leading analytical services, innovative investment solutions and an unwavering focus on risk management. Sage is headquartered in Austin, Texas, which provides a physical environment consistent with the philosophical vision for Sage – the perfect landscape for independent thinking and purpose-driven investment management. Sage is 100% employee owned and currently manages money on behalf of institutional and private clients across the United States.

Performance information about Sage’s strategies can be found here. Over the last two years, volatility has been on the rise while global equity markets have offered little return. During that time, the Sage Tactical Allocation Strategies have added value relative to the benchmark and delivered strong risk adjusted returns (Sharpe ratio). The example shown is our All Cap Equity Plus Strategy, as well as the Moderate Growth (60/40) which is our most widely used ETF strategy.

I spoke with Bob Smith on June 20.

What led you to create the Sage Advisory, and how has the business evolved since its founding?

I began my career in the early 1970s on Wall Street, first as a bond analyst and then for Loeb Rhodes and Merrill Lynch, on both the equity and the fixed-income side. I worked in the Middle East as an advisor to central bank of Saudi Arabia for about five years, and another five years in London running the fixed-income office at Merrill Lynch.

That was where I met Mark MacQueen. In 1996 we decided to start Sage Advisory, having worked together since the early 1980s. Mark and I have worked together almost 30 years.

We started the firm primarily as a fixed-income shop because everybody else was buying equities in the late 1990s. Nobody wanted to talk fixed income. We were intently motivated by the fact that liability-driven investment management was very prevalent in the insurance business, but it wasn’t very dominant in pension funds and the retail space. We started out as liability-driven investment managers.

The second thing we wanted to do for our clients was to give them things that we thought were tried and true. We were traditional product-oriented with a very traditional process and philosophy that had been time-tested. By doing macro-driven top-down fixed-income actively managed portfolios, we were able to diversify across the yield curve and other dimensions.

What led you to start investing in ETFs?

Starting in the late 1990s, we wanted to do something different in the equity space. At that point in time, ETFs were in the very early stages. It was just SPY, MDY and DIA. We were captivated by the technology. It fit very well with what we did as macro top-down strategists in the equity space, and we felt that many of our decisions could be easily rolled over to other considerations, such as whether to allocate to stocks versus bonds. We weren’t stock pickers. We weren’t industry pickers. We didn’t have a raft of analysts to do that, but we did have some very good macro-decision capabilities that were well-demonstrated.

We started out, believe it or not, using ETFs in some of our balanced accounts that we ran for our institutional clients. We expanded that application progressively as the providers of ETFs grew and the availability of ETFs became greater. We quickly realized there was an opportunity for us to apply our expertise in a more dynamic form. We were also adherents to the works of Brinson, Hood and Beebower and other notable educators and members of the investment-intelligence community that said, from an attribution standpoint, all you have to do is focus on style, cap-size and perhaps some regional orientation. Those are the three big decisions that were driving returns.

Most people were not really applying that knowledge in an aggressive fashion. They certainly applied it, but it wasn’t “the” decision. Investors quickly went on to industries, sectors and stock picking and so forth. We decided we were fine with the big asset-allocation decision and getting the style and the cap decision more right than wrong. That fit well with our fixed income orientation and how we saw the world from a macro top-down perspective. It also fit well with our notion of being really careful with client money, not paying up a lot and getting very little. We found that the expenses associated with ETF investments were quite attractive relative to the mutual fund community. We felt that ETFs were going to continue to grow because of that.

Did you see other advantages in ETFs?

We liked the transparency. We were very well-known early on in fixed income for giving our clients 100% access to everything that we invested for them via the Internet. This was back in 1996-1998. We wanted to follow through with that on the equity side.

Mutual funds and a lot of separate account managers weren’t willing to do that on a day-to-day basis. But this is important because we are stewards of our clients’ money. It’s not our money. As a result of events like the Asian contagion, transparency became important as a commodity or feature to the investment-management process. That was something that drove our process.

Rob Williams, our director of research, joined our firm and helped us to refine further our investment process with regard to ETFs, but we had to wait for providers to catch up with us. We didn’t have all the components of the style box fleshed out. We didn’t have a lot of different choices for each component. We had to wait until we felt that there were appropriate vehicles from an analysis standpoint in terms of tracking errors, trading volumes and what kinds of investors were holding the securities.

The support by the ETF providers was vitally important in terms of the research content and the insight into the construction and maintenance of those ETFs. We don’t buy things just because we think that they are slick and they are interesting. We buy them because they are tried and true and they will be consistent in their ability to give the exposure over and over again that clients were wanting at that point in time.

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Sage Advisory

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