The excitements of the investment markets over the early part of this year saw long term managers New Frontier undertaking an unprecedented four rebalances of their portfolios in order to keep abreast of the rapidly changing market environment.
New Frontier, with USD4 billion under management, is run by father and son team, Dr Richard Michaud and his son, Robert Michaud. The portfolios are based entirely on ETFs and employ Michaud Optimization, a portfolio optimisation and statistical portfolio rebalancing technology invented by the pair.
In this interview, Robert Michaud explains the challenges of managing investments during the pandemic. To begin, the March rebalance came during a time of such volatility in the markets that the firm took extra caution to be sure the trades would go through as expected. The rebalancing didn’t end there, he says.
“Markets have gotten more normal since early days of the pandemic, but we’ve continued adapting our investment process with the market environment and rebalancing our portfolios when necessary. Keep in mind that these are portfolios with a long-term investment mandate, and after rebalancing for the fourth time in under a year, I had to take a step back. I described ourselves as taking an intensive approach to long term investment management, as in a hospital environment when something is uncertain and unstable and needs a constant watch and adjustments. That is how we have been investing this year and how things have evolved.”
Michaud also comments on the high dispersion of asset classes. “Technology is one of the great examples,” he says. “People see technology as a safe haven asset during a time when the traditional economy has been partially shut down by the pandemic, so tech stocks have been behaving quite differently than they have in the past.”
Tax sensitive portfolios occasioned another rebalance for New Frontier. “This is even more unusual because the standard treatment of tax sensitive portfolios is that you don’t look at them until 365 days have passed. But with many equity ETFs rising 50 per cent in such a short period there was a danger to the risk management of the portfolio that outweighed the tax consequences.”
New Frontier was one of the first firms to build portfolios of ETFs and Michaud says that ETFs have performed very much as he would have expected during this time period.
“During a time like this, it’s been helpful that we understand the behaviour of more traditional and established ETFs quite well, ” Michaud says, commenting that unlike in 2008, they had confidence to trade high yield bonds and they performed well for them.
The rebalances have occurred throughout the crisis, managing the risk characteristics of the portfolio and locking in gains during a period of uncertainty. The rebalances have worked, Michaud says, giving the portfolio better risk management and also benefiting the value of the portfolio, which has outperformed its benchmark.
Michaud believes that the ETF industry has a lot going for it and provides many reasons why investors should be flocking to ETFs over mutual funds.
But they largely use cap-weighted ETFs. Michaud believes that some multi-factor ETFs are appealing because they offer access to a range of investments through one equity fund. “But an investor will always do better if the whole portfolio is tailored to their investment goal,” he says.
Nor is the firm not investing in any of the new active ETFs or in the semi-transparent products. “There are informed investors out there expressing their views and buying individual stocks, so it’s a good thing for us and for many other investors that we can take advantage of active managers keeping markets efficient. But we are active at the asset allocation level. For investors like us who do sophisticated asset allocation optimisation, we need each ETF to behave the way we expect it to.”
Michaud believes that some multi-factor ETFs are appealing because they offer access to a range of investments through one equity fund.
“But you always do better if the whole portfolio is tailored to your investment goal,” he says.
Michaud believes that the ETF industry has a lot going for it and provides many reasons why investors should be flocking to ETFs over mutual funds.
“We’re thinking about the big picture,” he says. “As a firm we have been trying to redefine long term asset management during a time of crisis, which requires having a long-term focus but also adapting to rapidly changing market environments. New frontier is redefining 60/40 investment for the future.
“We’ve developed an active approach to building long term portfolios—60/40 isn’t just one stock fund and one bond fund. If you add up all the investable assets in the world, it will change over time, but will be close to a 60/40 portfolio which means that has to be the average portfolio for all investors, the most flexible portfolio allowing for maximum diversification across all asset classes – it’s like risk parity without the leverage.”
“Optimising your portfolio for an uncertain future is the foundational concept of our firm and it has never applied more than now.”
