Operations As a Vehicle for Business Success

By Brian Durbin, Managing Director of Operations

All investment advisers have an asset target in mind. In order to reach that finish line, you need to have a solid vehicle. Having a qualified portfolio manager (i.e. the driver) is a large part of the race, but it is certainly harder to accomplish without efficient and effective systems and processes in place. A streamlined and prepared operations department will help take you the extra mile.

These days, there is no shortage of new regulation and technology to keep the operations departments of investment advisers on their toes. In order to fluidly maneuver through a changing landscape, it might be helpful to think of operations as a rally car. Here are five points to help visualize this reference.

Wear protective gear

Race car drivers know the importance of wearing helmets and harnesses to prevent injury in the event of a crash. The unexpected can happen. In investment operations, a technology glitch can create a trade error or an inattentive worker can input the wrong data. Risk controls and flags should be present in any adviser operations. Insurance products such as Errors & Omissions (E&O) can help provide financial protection.

 Remove unnecessary weight

In order to maximize speed, race cars are stripped down to be as light as possible while maintaining safety and function. Operations departments should be lean as well. However, there is a fine line. Too light and you might tip over if you need to adjust quickly. You want to be nimble in case you need to build up. The key is designing systems and processes that are easily scalable so the addition or removal of an employee, group of accounts, etc. does not disrupt workflow.

Inspect and know your vehicle

Racers know their cars inside and out. Similarly, in investment operations a thorough review of systems and processes should be conducted at least annually. Dismantle each process and walk through it step-by-step to determine the weak points. If you do not have the headcount to complete this review, find a qualified consultant. Drivers may have to conduct small repairs or inspections themselves but a mechanic is often on hand as well. Similarly, third-parties provide additional value to the review of operations by removing bias and familiarity which can cause you to miss crucial gaps in processes. By knowing where risks lie and the capabilities of the systems, you will know what protective gear to use as mentioned above.

Use a co-driver

Rally car drivers often have a co-driver sitting in the passenger seat. The co-driver is part navigator, part handyman, and part safety (they counter-balance the weight distribution). For investment operations, compliance, legal, and portfolio management personnel should be integrated into operations to provide information on upcoming regulatory or industry changes that will impact operational processes. Given that the investment industry is ever-changing, being provided with information on the road ahead is valuable.

Prepare for the conditions

Heavy rain, mud, gravel, and other factors can determine the types of tires used during a race. Similarly, different market conditions and business channels can change how an investment adviser views operations. Using the proper systems for the current conditions is important, but preparing for upcoming changes is equally important. If a driver knows the first quarter of a race is in rain, but the rest will be dry, the decision may be to sacrifice better rain tires due to the limited amount of time they would be needed. Likewise, an investment adviser may forego the purchase of an order management system due to expected changes in account type (e.g. moving from discretionary management to model delivery).

Whether you compare operations to a rally car or construct it using another visualization, the key is to see the larger picture and shape processes according to the path your business is on.

 

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

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Revisiting Active Investing: Is the Trend in Passive Over?

Over the past few years, financial advisors and their clients, in search of low-cost ways to capture market performance, have piled into passive investment strategies. As the Wall Street Journal reported recently, for the three years ended Aug. 31, 2016, nearly $1.3 trillion flowed into passive mutual funds and ETFs. For investors, it seemed like a “no-brainer” move in a low-risk, low-volatility environment, with an upward trend for equities.

For years, I’ve been advising investors not to pay up for “beta”—that is, market exposure that is far easier and cheaper to capture with an ETF that seeks to replicate the S&P 500 or another index. But the rush to jump into passive and dump active may have thrown out the proverbial baby with the bathwater. There is growing evidence that active investing is coming back into favor. As Barron’s reported, since July 1, 60% of actively managed funds are beating the S&P 500, the highest level in nearly two decades.

At Astor, we believe now may be the opportune time to revisit active strategies that might not be the lowest cost, but may be meaningful in helping investors achieve their portfolio goals. For example, the Astor Dynamic Asset Allocation Strategy (formerly known as Long/Short Balanced) has outperformed the HFRI Total Macro Index for every year but one, and has posted a higher cumulative performance, such as for the past 3, 5 and 10 years (See Exhibit 4: Performance )

Not an ‘Either-Or’ Choice

To be clear, I’m not suggesting that passive’s time has passed; however, it appears to be getting long in the tooth, with signs of becoming a “crowded trade,” given the amount of money piling into passive funds, as the chart below indicates. (Source: The Wall Street Journal)

actively-departing

While investors may still benefit from having a portion of their portfolios dedicated to cheap beta, we believe active investing has a role to play in overall portfolio strategies. In fact, active investing, in our view, could very well be an answer to the essential question for investors (one that has become muted in the rush to passive investing): What is my long-term portfolio objective?

This question has become more relevant because, as we have observed, investors are taking on more risk with less professional input and guidance. In our view, this is reminiscent of the herd stampeding into tech stocks in the late 1990s, just before the 2001 recession—a time when a diversified portfolio of anything other than tech stocks would have weathered the storm.

To be clear, the current spotlight on active investing is not due to the surprising outcome of the U.S. presidential election and increased volatility of global equity markets. However, greater uncertainties and perceptions of increased political risk in the US and abroad are raising questions in investors’ minds, especially about potential changes in economic and political policies. At Astor, we have heard from many investors who are asking such questions. As we’ve found, investors who had piled into low-volatility and passive strategies wanted guidance and interaction with professional managers. And robo-advisors with their static portfolios don’t call you up to discuss long-term trends that may be impacted by a new president or changes in policies, interest rates, and so forth.

Our message to investors echoes our fundamentally-driven approach. At Astor, we use our proprietary Astor Economic Index® to identify the current economic trend and then make portfolio allocation decisions accordingly. We augment equity holdings with fixed income as we dial risk up and down. Furthermore, we allocate to additional non-equity assets that we believe will benefit from long-term market trends that are often hard to capitalize on with static or passive strategies.

Taking a dynamic approach allows investors to be more mindful of opportunities among asset classes or sectors. We do not advocate market timing, trying to pick tops and bottoms; however, we do believe that greater flexibility may be key to identifying those sectors that are more likely to perform favorably over the next several quarters or years. In fact, we believe there could be significant differences in performance from sector to sector.

Already we are seeing divergence in performance among styles and sectors. Small cap stocks are having a good run of late, while technology stocks are lagging. International markets are moving with in line with developed economies, while emerging economies are struggling. Risk premiums are changing around the world and among asset classes. Non-equity assets such as gold, currencies, and high-yield bonds are behaving in potentially diversifying and accretive ways. Investors holding fixed income investments should be mindful of rising interest rates, higher inflation, and yield curve fluctuations. Opportunities in metals, currencies, and international holdings should be considered for both diversification and the potential to generate a positive return through dynamic asset allocation.

While passive investing still has its place, in our view the time has come, once again, for taking a more dynamic approach to asset allocation as part of overall diversified portfolio solutions.

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.

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Analysis: The 2016 Presidential Election

In light of Donald Trump’s win and the GOP hold of all three branches of government, the question on most minds today is, what is the outlook for the US economy? My short answer is that it is too early to tell. At Astor, our philosophy is to be guided by actual economic data rather than forecasts. Nevertheless, it is important to think about possible implications for the U.S. economy.

The economy came into the election on an extremely stable path. Our Astor Economic Index®– a proprietary index that evaluates selected employment and output trends in an effort to gauge the current pace of US economic growth–has been steadily showing modest, but positive, growth all year. Indeed, it has been in an unusually narrow range recently suggesting to us that fundamental dynamics of the US economy are stable.

In the next days to weeks the heightened uncertainty caused by both the unexpected outcome and the unknown policies of a Trump presidency seem likely and the stock market tends to dislike uncertainty.

The nontraditional nature of Trump’s campaign means that there are few coherent, detailed policy commitments to game out. Trump has held a variety of opinions on most matters and will have to work with Congress, which may feel emboldened by his political inexperience.

Discontent over the US trade position has been Trump’s consistent theme. Much trade power has been focused in the executive branch, leaving the new President some leeway to act without Congress, subject to court review over an extended period of time. Given what Trump has said about his negotiating style, it would not be surprising to certainly see some eye-catching headlines about withdrawing from NAFTA. Trump has repeatedly called for a 35% tariff on Mexico and 45% on China, which he may be able to impose at least for a few years unilaterally.  This will reduce trade broadly and disrupt international supply chains.

For more on Trump’s views on trade see this article from the Peterson Institute. The authors point out that using standard economic models, a full trade war (where the US raises tariffs on other countries that can then retaliate in kind) could on its own cause GDP growth to be as much as 2.9 percent lower per year for several years. his same paper estimates that an aborted trade war, which they operationalize by saying tariffs are imposed only for year before reverting to previous levels, could have a small stimulative effect on the economy. The future may be somewhere in between.

In my opinion, the reality of substantively reduced trade would likely also be a weaker dollar and higher inflation in the medium term in addition to lower GDP growth. It seems that the broader multilateral free trade deals such as the Trans Pacific Partnership will not be brought to Congress.

Early on it is possible that repudiation of as much of the Obama legacy as possible could be the GOP first order of business. As observers have noted, that may mean repealing Obamacare and reducing financial regulation such as Dodd-Frank and the Consumer Financial Protection bureau.

One thing all Republicans agree on is tax cuts—and that, in our view, could be the single most likely outcome. Both Trump’s and speaker Ryan’s plans skew cuts toward the wealthy. Trump agreed with his opponent that increased infrastructure spending is necessary, but that may prove harder to get through Congress. It is not clear if Congress will make substantive spending cuts to pay for the increased fiscal spending.  This has the potential of being stimulating to the economy, but if unfunded could cause bond yields to move higher quickly.

Turning to the Fed, where is its promise to raise rates in December?  Much will depend on the reaction of markets between now and the next FOMC meeting in a month. Should markets recover and treasury prices stabilize the Fed may still raise rates a quarter point in December. Should the new administration’s plans crystalize to substantial fiscal spending the FOMC may see the need to raise rates preemptively.

Janet Yellen’s term as Chair of the FOMC expires January 2018. Trump has both praised and condemned Yellen this year, but it seems likely in our view that he would prefer  to install someone new as chair.  In addition, there are currently two open seats on the board of governors giving the new administration a chance to move the Fed. My sense is that the rest of the GOP would prefer a more hawkish Fed and without a strong campaign promise to fulfill Trump may accede to their wishes.

Overall, I expect no large changes in unemployment or output over the next few months as a result of the election, but the increased uncertainty may lead to a challenging time for all assets until some clear signals emerge from the new administration.  As always we will wait to see changes showing up in the economic numbers before adjusting client portfolios and will use our time-tested process to guide us whatever occurs.

 

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

 The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product.

 

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Politics and Economics: Linked—or Not?

A U.S. presidential outcome, one way or the other, likely will lead to some extrapolation of how economic policies might change—for example, higher/lower taxes or changes/continuation of trade policies—and, therefore, the impact on the stock market. But such policy changes take time; consider the agonizing on Capitol Hill over passage of major legislation, such as health care reform. Additionally, this involves a series of predictions: who will win, what policy changes may be made, and the outcome of such polices. So many places to get it wrong—I wouldn’t touch it.

According to conventional political and economic wisdom (there must be an oxymoron in there somewhere), the stock market presumably does better under Republicans than Democrats. Yet some studies suggest the inverse.

And because there is no shortage of opinion in politics or economics, there are some who say the economic benefits of one administration may not surface until a change in the Oval Office. Consider the theory touted in some circles that the expansion in the economy during the tenure of President Bill Clinton (1993-1997, 1997-2001) was due, at least in some degree, to the Reaganomic theories of the 1980s still trickling down through the economy. Whatever one’s view, there are plenty of data to back up either side.

More important, and the basis of our portfolio decisions at Astor, is the current state and the direction of the overall economy. “Now-casting” the current state of the economy, using our proprietary Astor Economic Index®, we feel, is more telling of the likely short-term direction of stocks than most data, including election results. While the index could be stronger, and has been stronger earlier this year, it is still decidedly positive.

Interesting to note is that the prevailing economic trend might have some role in who gets elected (versus who gets elected impacting shorter-term movements in stock prices), as indicated by election prediction models that consider some measure of how the economy is doing. The thought is that if the economy is going strong in the six months or so before the election, history suggests the party currently in the White House will win. If the economy is acting poorly, then the opposing party has a better shot. But it doesn’t work that way all the time, in the case of the Bush-Gore contest in 2000 when, according to one observer, “the economy favored Al Gore—but Bush won.”

What all of this leads us to believe is that while there may be some links, at least psychologically, between politics and the economy, the bigger and more impactful thing to watch is the $18 trillion U.S. economy.

As economists, we at Astor keep our finger on the economic pulse. Based on our study of the stock market over nearly 100 years, we believe the prevailing economic trend to be the best gauge of how and where to invest. Based on our research, we believe that periods of economic expansion tend to favor exposure to equities (beta), while periods when the economy is contracting or in recession do not favor equities and may be more appropriate periods for holding fixed income and/or even inverse equity positions. After determining the prevailing U.S. economic trend, we allocate assets accordingly, using exchange traded funds (ETFs) to take advantage of the transparency, liquidity, and variety of these investment instruments.

Any ebb and flow in the polls from now until Election Day (and even beyond, depending upon reaction to the outcome) could impact the stock market with its time-honored tradition of “climbing the wall of worry.” Worry pushes down asset prices, while euphoria sends them upward.

At Astor Investment Management, we are not in the business of forecasting presidential elections—nor do we focus on the worries/euphoria du jour. We keep our eye on the economic fundamentals, which we believe have far more impact on the market than who wins the election or any short-term fluctuation in opinions and emotions. And as of this writing, it still appears in our view that having exposure to stocks has a positive expected return.

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

 The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product.

An ETF is a type of Investment Company which attempts to achieve a return similar to a set benchmark or index. The value of an ETF is dependent on the value of the underlying assets held. ETFs are subject to investment advisory and other expenses which results in a layering of fees. ETFs may trade for less than their net asset value. Although ETFs are exchanged traded, a lack of demand can prevent daily pricing and liquidity from being available.

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