© 2019 by ProForza Advisors LLC

  • Sunil K Pai, CFA

Adapt and Evolve or Risk it All

2019 was a great year for us and our investors. All products, new and old, generated pure alpha.


Successful, alpha-driven managers and investors are always looking to adapt and evolve. Re-think those allocations, managers, holdings, investment processes, get involved.


So, here are some key questions we are raising for 2020:


  1. Re-assess the ARBi optimization process to identify improvements

  2. Continue to push the mathematical framework to new dimensions

  3. Eliminate all stock-based ETFs from existing products


We wouldn't suggest that any of the above is outside of the norm of what any self-respecting investment manager should be doing. But, given the continued exodus of "active" investment managers, it's easy to conclude that the inability to adapt and evolve while the market is always adapting and evolving is the chief reason for the exodus. When these two get out of sync, then manager alpha goes negative and the market continues forward. So, always be adaptive and evolving alongside the market or risk getting left behind.


Getting rid of ETFs is a simple decision as our investment process works well on the underlying individual stock. The ETF structure basically eliminates much of the volatility our process can utilize to earn excess returns while reducing risk. Notwithstanding, the ETF underlying costs are also eating away at returns so the true cost is pretty high for using ETFs over that of simply buying/selling the individual stocks.


Right now ETFs are all the rage for investors. It's just a matter of time before this endemic performance-drag becomes clearer but, unfortunately, many investors may realize too late. Separately, we will still use ETFs for fixed income as we cannot easily trade bonds (yet).


Even mighty Blackrock, the world's largest investment manager, is now talking about gearing itself to a new dynamic: sustainable investing, aka Environmental, Social, and Governance (ESG). That sounds good in terms of bringing much greater awareness of the influence of climate change on investing but does little to help an investor actually invest in such an idea given that Blackrock chooses to focus on great marketing ideas, but, seems to have little to offer in novel active investment management where one can gain more and risk less. And, isn't that what it's really all about?


So, here's to the New Year, the decade and no stock ETFs; and stay tuned, we have a lot going on here, which we expect to unfold in 2020.


#AIBasedInvesting #BlackRock #QuantitativeFunds #ActiveManagement #ProForza #ActiveRiskBasedinvesting #ActivePassiveInvesting #PassiveIsTheNewActive

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