Insights from an ETF Strategist: Brad Thompson, CFA by Wesley R. Gray, Ph.D., Alpha Architect, and author of Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors
We’ve been interviewing various movers and shakers in the industry to help everyone understand the “inside baseball” in financial services.
Brad Thompson and I met last week. We were both on the Sirius XM radio show: Behind the Markets with Jeremy Schwartz and Jeremy Siegel.
Brad could be classified as an “ETF strategist,” or someone who constructs portfolios using ETFs. We do a lot of internal research on portfolio construction and asset allocation, so we thought it would be interesting to hear how Brad goes about his business.
Voss Capital is long Nintendo, Avid and Extreme Networks despite “Software bubble”
Voss Capital's Voss Value Fund was up 19.91% for the third quarter, while the firm's Voss Value Offshore Fund was up 19.88%. Both funds are now in the green for this year after erasing the damage that was done in March. Year to date, the Voss Value Fund is up 2.41%, while the Voss Value Read More
Brad Thompson, Stadion Money Management, CFA, Chief Investment Officer, Investment Committee member
Brad Thompson joined Stadion in 2006, bringing 20+ years of financial analysis, investment management, and fund management experience with him to Stadion, where he manages the Stadion Portfolio Management team.
Prior to joining Stadion, Brad served as the Chief Investment Officer and Chief Financial Analyst for Global Capital Advisors. Brad has a Bachelor of Business Administration Degree in Finance from the University of Georgia, and also holds the Chartered Financial Analyst designation. Brad is a member of the CFA Institute and the Bermuda Society of Financial Analysts and also holds the Chartered Retirement Plan Specialist Designation. Brad has served as a Director on the boards of numerous public companies and currently serves on the Board of Directors of Speedemissions, Inc. (“SPMI”-OTC:BB) as a member of the audit committee and the compensation committee. He has also served on the board of the Executive Leadership Council for the American Cancer Society and on the Board of Trustees for the University of Georgia Terry College of Business Student Managed Investment Fund.
Brad, tell us a bit about your firm. How did you get into the business?
Brad Thompson: Stadion was founded in the early 1990s with the idea that risk management and an emphasis on downside protection enables investors to avoid many of the behavioral mistakes that hinder their ability to reach their personal life long goals. Stadion has since grown from a mom and pop RIA to a full-fledged asset manager. Our roots are in trend-following, and over time we have grown the business by offering a full suite of non-traditional strategies with a defensive bias.
How do you think about asset allocation? What are the core asset classes? Stock/Bonds? Or something else? Are there 5 asset classes, 10? 20?
Brad Thompson: We believe that true non-correlated diversification is extremely important in any portfolio. This means that the correlation should not break down during periods of high stress in the markets, but rather non-correlation becomes more robust.
Currently we have three main investment models or strategies that drive our products, and they all have the characteristic of being non-correlated to other asset classes typically held in investors’ portfolios.
First and foremost are our Trend-Following strategies. They seek to align portfolios to be invested during healthy market trends which are fully supported by market internals and relative strength, while moving to cash or defensive positions when market risk elevates. As broad market strategies we mainly stick to well known, liquid asset classes: S&P 500, Nasdaq 100, Russell 2000, and sectors for domestic trend strategies and MSCI EAFE, Emerging Markets, Japan, and major regions for international trend strategies.
Our Tactical Growth model focuses on using Sharpe-ratio analysis over multiple periods with the objective to construct an optimal “least risky” portfolio. The strategy uses correlated and non-correlated buckets that can vary based upon how risk and returns are aligning across the spectrum of asset classes. As an allocation strategy, we will typically hold Stocks/Bonds, and at times currencies, commodities, and inverse funds.
Our Multi-Alternative strategies differ from our Trend and Sharpe strategies in that they think of volatility as an asset class.
What do you think will be the biggest surprise in the markets over the next 5 years? How are you guys positioned to deal with that surprise?
Brad Thompson: Fortunately, as an asset manager which follows strict disciplines of prudently implementing a model, we are reactive investors so we are not of the predictive kind. We certainly have our own opinions as Portfolio Managers but our bias and emotions are removed from the decision making process of money management.
One thing we know is markets do move in cycles. We are currently in the bull phase of a market cycle that is one of the largest bull market cyclical moves in history. With Fed stimulus as a fuel we don’t know how long this current bull move will continue, but at some point the cycle will complete itself. Historically that usually occurs when it is least expected, and I am sure that will come as a surprise to many. For our trend following strategies, our disciplined and objective process is designed to react quickly to market dislocations. Our Sharpe ratio based strategy is designed to try and identify the areas of the market that offer risk adjusted return potential such that as market risk becomes more prevalent the securities that offer better risk per unit of return metrics tend to find their way into the portfolio. Our Multi-Alternative strategies are designed to seek returns from diversified multiple sources that are at times independent from equity markets.
What are your thoughts on robo-advisors like Wealthfront or Betterment? Do these businesses pose a competitive threat to your business?
Brad Thompson: Robo-adivors have a good business model and are geared toward a new way of money management. Fortunately, Stadion does not view them as a threat as we have differing opinions on asset allocation and active verses passive investment management. They tend to employ low cost, buy and hold strategies, which are well suited for some type of investors. We generally appeal to investors who are more risk-averse, or are at or near retirement, and can’t “afford” to suffer significant losses during a bear market. We believe our strategies and the types of return streams they are designed to generate can also be a compliment to the traditional passive investment strategy.
Your firm has really embraced ETFs. You guys never look at mutual funds?
Brad Thompson: We moved from using no-load mutual funds to ETFs in the early 2000s and will not go back. As broad market, macro asset class investors, ETFs offer us the best vehicle to implement our strategies as they have the best structure for intraday trading, tax advantages, transparency, and protection of existing shareholders through the create/redeem process.
Any parting advice for investors?
Brad Thompson: Absolutely, investors really need to develop a financial plan with their personal goals in mind, and avoid the trap of performance chasing. If you need 6% to reach your long term goals then you have no business taking on the added risk of trying to catch a 25% return. They also need to maintain the discipline to stick to the strategy they have chosen. We often see investors and advisors like an investment strategy but ultimately employ it at the wrong time, basically chasing performance. There is “no free lunch” in investing, and every investment strategy has its strengths and weaknesses, therefore understand the weaknesses of strategies and ultimately try to build a portfolio to diversify away those risks.
Sounds like Brad shares on of our core beliefs: We believe in SYSTEMATIC DECISION-MAKING, not ad-hoc decision-making.
He is also fond of trend-following rules and the low-cost, transparent, tax-efficient ETF structure.
Sounds reasonable to me.
His comments on robo-advisors were also intriguing. I figured that might ruffle some feathers, but Brad reasonably believes they compete for different clients and offer different services. Curious to hear what people think on this subject…
If you liked this post, don’t forget to subscribe to Alpha Architect