VettaFi’s Evan Harp sat down with Helios Quantitative CIO Joe Mallan and director of research Jason Van Thiel at Future Proof.
Evan Harp: This is a unique conference, it’s entirely outside on the beach instead of inside a hotel conference room. I’m curious what you have both learned here and if there’s anything that you guys see as being able to apply to the work that you do?
Joe Mallan: Yeah, it’s been fun — it’s probably the first conference I’ve been to in the post-COVID world that feels back to normal. A lot of good content, it’s busy, a lot of people have sponsors, good food, good entertainment. It’s actually more exciting just to get back out into the world. I think the content has been really good. We just saw a session about direct indexing, which we continue to see gaining more and more momentum. And what I take from that is mostly not just direct indexing as a product, but the concepts they’re hitting, and trends that we’re trying to capture as a firm at Helios — and that is customization that the advisor level. Learning that you don’t have to have one-size-fits-all for every single client, that you can actually hyper customize not only individual account for ESG desires, but do things from a trading perspective that makes more sense with factors inside of an individual SMA account.
We’re trying to apply that same notion to model portfolios for license, allowing them to customize a model portfolio, make a model portfolio ESG, if they so choose, and be able to offer a hyper customized or personalized portfolio for their clients.
Jason Van Thiel: Yeah, it’s interesting seeing the different exhibitors or vendors here and how it’s focused on technology and advisors being able to scale up their practices or do something different than they used to be doing. They might feel stuck in their old ways of business, looking for ways to kind of break out of that cycle, that inertia.
So you’re seeing a lot in client engagement, direct indexing, like Joe mentioned, and where do we fit within that so-called tech stack of advisor contacts and how does that allow them to grow their book, move up market, or whatever it is. So it’s interesting to focus on that and then where we can fit in to personalize that for the advisor in their practice and help them offload some of those repetitive tasks that they might not want to be doing, and might not be to their competitive advantage; so they can go do higher value-add things for their practice and their clients.
Evan Harp: Going beyond Future Proof a little bit, what do you think of the current market, and what do you see as the most important things to track in the next 18 months?
Joe Mallan: Unfortunately, we can’t stop talking about the Fed inflation. It’s getting so boring! But it’s just the reality of the world right now. That’s what a lot of our advisors are concerned with, and this is where I think, for us, it’s been a really good 2022. Because a lot of what we do in our models is tactical positioning based upon current themes and trends within the market.
So creating a mechanism for advisors to de-risk if the clients are getting nervous, or overweighting things like value, or going really short duration. Those are all themes that we’ve seen across most of our models that we’ve built with advisors so far this year. And I think it really plays into a lot of their concerns. We stress a lot in our relationship with advisors not just on focusing on performance, but rather creating a really good experience for the client. This year has really tested that story quite a bit because 2020 and 2021 were so strong, everything just went straight up. Here, we’ve now seen volatility, we’ve seen drawdowns, and being able to manage your clients’ experience through trades, positioning, but also the content that we deliver to advisors has been incredibly powerful.
Jason Van Thiel: Yeah, the overall focus on the economic performance and were we going to be in recession for the first half of this year or is the Fed going to eventually kick us into recession at some point over the next six to 12 months, it’s been interesting to see how that narrative has played out. The fervor of those concerns ramp up and then starts to cool down. We’ve got some good jobs numbers over the past few months, it seems inevitable that the Fed inflation is going to be top of mind and in the headlines for the next however long, but whenever there’s that strong a consensus, something usually comes in and steals the show.
So what’s still out there lurking is always the interesting part of being in this industry. You never really know, but I can almost guarantee 12 months from now, we’re not going to look back and say we were talking about inflation for 24 months straight. Something else is going to come in and steal the show.
Evan Harp: Inflation has obviously been high for a while, but as we’re going to the end of earnings season, it’s important to note that there’s been surprisingly good earnings. Something in the ballpark of 75% of companies have put up solid earnings numbers, and yet the markets feel fragile and uncertain. What do you make of that?
Joe Mallan: That feels a little bit like a planted question, because we’re doing a webinar later this month on recessions, and do they even matter? To your question, yes. Are we potentially in this definition of a recession? Sure. Maybe. Does it matter? No.
I think if you look under the hood, the data is very polarized. You have very strong earnings, like you mentioned. Historically, companies beat earnings. There were a lot of concerns in Q2 of this year that that might not be the case. But it was the opposite. I mean, they continue to beat earnings on both the top and bottom line. We have a very strong labor market, people are still employed, low unemployment, we have negative things like sentiment waning, we have, obviously, the dynamics with interest rates putting a bit of a crimp on car sales, anything debt-related — home sales start in home data starting to really become negative. But there is some very good signs of data that this isn’t a traditional type recession.
Jason Van Thiel: It’s been interesting with the ending of the earnings season, and you saw maybe slightly less beats than normal, but still three quarters of companies are beating their earnings and revenues, and they’re growing even in this environment.
But even in market performance, you’ve seen the 60/40 portfolio has had one of its worst years to date, in recent memory, decades. So, you’re seeing this kind of dichotomy, there’s a lot of concern about the overall economy with companies still being able to perform. Some of that comes with a lot of the good performance and growth that they were able to do last year and early this year, where you have expanding profit margins throughout 2021. Some of that gives them a little bit more cushion to absorb those higher wage costs that we’ve seen absorb some of the supply chain stresses that we’ve seen. There’s still knock-on effects, but they’ve had just a little bit more cushion, a little bit more wiggle room to continue to operate within a negative, difficult environment.
Evan Harp: The supply chain is an interesting thing to bring up. I wonder what your take is in terms of how quickly we can pivot out of a situation where the supply chain is in this state of duress. Obviously, we’ve got a lot of things going on. There’s the Russian invasion of Ukraine. There seems to be an abnormal amount of ships that get stuck in the Suez Canal these days. There seems to, in general, be a lot of change underway in supply chains. What do you foresee in the short and long term?
Jason Van Thiel: The last 24 months is going to completely reinvent how companies look at building out their supply chains and how durable they think those supply chains are. I mean, we are almost a full two years out of the pandemic, and we’re still having supply chain pressures and supply change and stress.
There’s always seems to be something coming out of left field like the Russian invasion of Ukraine, the food scarcity issue coming, as well as just the overall energy issue. I think companies are going to reevaluate their supply chain because it’s two years in and we’re still in this weird stress environment. That’s not going to be the go-forward strategy for a lot of companies or for the overall economy. Once we get out to ascendancy, with that light at the end of the tunnel — we keep seeing it, we keep not getting to it. It’s all these big and little events.
Joe Mallan: Yeah, I think everything now is still weird from early 2020. COVID threw a wrench in the entire system, and you look at so many data points in March of 2020, April 2020, we’re at like six sigma levels, and they don’t just readjust back to normal quickly. Some people are really trying to navigate and figure it out. I mean, I agree with everything Jason said. I would just add that you’re going to see, potentially, a reversal of a trend from globalization to people building things more in-house, given geopolitical conflicts as well as what happened with COVID and varying levels of lockdowns across the world. You can’t be reliant on trade partnerships as much as we could previously. And it’s built on, I think, a little more tension between adversarial type countries in terms of who you’re going to trade and sentiments about Europe and Russia, and the whole energy crisis.
Evan Harp: I want to ask a fun question that might also be a dangerous trap. Let’s imagine for a second that you are in charge of the Fed. What would you do? Would you be tracking the same course that Powell has been tracking with 75 basis point rate hikes and continuing rate hikes? Or would you do something completely different? And if so, what?
Joe Mallan: It’s a good question. I will say this, I’ve given them a lot of credit. I think the general consensus is that they’ve been doing a pretty good job. They were put in a very tough spot, right? You have easy monetary policy for as long as we did, substantial government spending, we’re in a high inflationary environment. They were in a predicament. I think little damage has been done to the economy so far, with the amount of interest rate hikes that they’ve done. And with the qualitative and with the quantitative tightening, I think they’ve done a good job.
With hindsight, I would have probably increased rates at a faster pace, but who knows what damage that would have caused? So, I really wouldn’t change much. I think they’re doing a really good job with guidance in terms of how fast they moved and letting the markets really kind of plan and figure this out. I think the results have been good given how bad they could have really.
Jason Van Thiel: Yeah, I would broadly agree, I think in hindsight you would have when you saw so many people taking out money out of — or adding liquidity and capital to the overall economy, maybe start to dial that back early in the recovery post pandemic. But now that the horse has left the barn on that, there’s not really much they could do without the benefit of hindsight. So you continue that the current track, although it’s going to be difficult, especially with Europe, because we’re going to presumably increase at a faster rate than the ECB, given the Ukraine crisis and the overall economic damage that’s going to have, and that’s going to make dollar more attractive. More money has been flowing to the dollar, and that’s going to offset some of their ratings. They’re in a really tough spot.
I don’t think there’s a perfect way out. Although I think a lot of the narrative of the Fed is going to have a hard landing for the economy, still might end up being the case. But I think that glimmer of hope of them being able to somehow navigate a soft landing, even though it’s near impossible, is at least visible at this point.
Evan Harp: I have thrown a couple of things at you, and you’re both on the same page so far. I’m curious, where are your biggest economic and philosophic disagreements and how do you navigate them?
Joe Mallan: [Laughing] We’ve been friends for a long time. We were actually in the same fraternity in college. We started our career at the same place, then went our separate ways, and now we’re back together, so we go back a long way. I can tell you some things we disagree on that probably aren’t appropriate. Politically, we’re very different, but civil, and that makes for fun conversations. But from like an investment standpoint…
Evan Harp: You’re pretty copacetic, investment-wise?
Jason Van Thiel: Yeah, we think about things, at least from a market or economic lens, relatively similarly. We don’t have verbal disagreements on philosophy. But, to your point, should we go further on some sort of strategy? Or should we research this topic or that topic? We’ll disagree sometimes good natured — and that makes for better ideas. That makes for better research and content. But philosophically, we’re aligned. I think that kind of push and pull works where philosophically we’re aligned, but the tactics and how we want to get there — that could be something different, so we can come to a better solution.
Joe Mallan: He’s very cynical. [Laughter all around.] So, if he says something is “okay,” you know that it’s among the top 5% of ideas.
We have a good dynamic, the two of us and our CEO, Chris. He’s the forward thinker, optimist, and James and I share more of the cynical, analytical brain at the firm. Math and analytics are a more cynical brain that like, “Yeah, it sounds like a good idea, but let’s really test it out and make sure it’s a viable idea for advisors and their clients.”
So we’re all about giving advisors quantitative techniques that make sense within their portfolio. But we don’t want to just back test things. We want to make sure there’s actually a viable reason and story for including things that are strategies that are proven and documented in research. A lot of the stuff we do, it’s highly researched and we try to provide that evidence and work to our advisors.
Evan Harp: My final question is — why Helios at this moment? Why should advisors get in touch with you and look at your thought leadership in this specific environment?
Joe Mallan: I think we’re very unique in the industry right now, because we provide advisors the ability to get all the value of both insourcing and outsourcing investment management for your practice. I think that’s too umbrella of a term, but we build models for advisors, give them all of the content, give them frequent reporting, do research on funds, all of these things that make them look good, and manage a great portfolio for their client; and we do it for the cost of less than hiring employees. And we’re not a basis point, we’re trying to flip the script on how people get access to good investment strategies. No longer should it be paying someone else 10 to 20 basis points a year to hand over your clients’ assets to their brand. Keep those assets within your brand. Give them a really high-quality investment management experience, and we’ll be the partner to help you make really good decisions for your firm.
Jason Van Thiel: I truly believe this is evergreen statement, but in this environment I think it’s doubly true that having a disciplined, systematic process will help advisors and their clients do better and focus on more higher value-added things and be able to point to, we made this decision or that decision because of X,Y, and Z reasons. We have the research to back up what drove that decision, and we have the content and collateral to support that.
So whether they’re able to do that in-house or utilize a service like ours, I truly believe that that serves advisors and practices the best in terms of setting how we’re going to make decisions, making a systematic process to make those decisions, and then using discipline to execute that over time — makes those practices more valuable and client relationships more valuable and just gives them an extra leg to stand up in terms of delivering value and content.
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