Today we have one of the leaders from Ashton Thomas, Dr. Ron Piccinini. Ron has extensive background in risk analysis, portfolio management, and has expertise in assessment of alternative investments. In this interview, we dive deeper into their biannual playbook manager selection and risk-mitigating strategies, among others. Piccinini will be speaking at a Private Wealth Mountain States Forum on October 29th and Private Wealth Southwest Forum on December 3rd.
Interview by Muskan Arora
Muskan Arora: Ashton Thomas creates a biannual
playbook about their investment thesis and strategies. Could you dive deeper
into what is something contrary that you've observed this year?
Dr. Ron Piccinini: I don't know if it's particular to this year, but I
think we're a little different in terms of the standard allocation. We're
typically very, very light on international and small-cap values. I think we're
overweight on gold, which is also a little offside. I can go to the high-level
reasons right now. I think international is a real place. There's plenty of
data that says, well, you should diversify with international positions.
Things have changed in the last 15 years. About 45%
roughly of revenue in the S&P 500 comes from abroad. You're really getting
international exposure and diversification through your American-based stocks.
When you tack on extra IFA, you're overweighting things. That's one thing. When
we talk about diversification, diversification means you have something that
zigs when the other thing zags.
International does not do that or hasn't done that in
the last 15 years. Whenever the US crashes, international crashes and crashes
even more, so why have it? Then when it goes up, it goes up less. It also depends
on what you're trying to do with a portfolio.
If the data changes, we'll make the adjustments. I think
some of the biggest fortunes in space have been made in small-cap values. You
have people with a lot of analysts, trying to find a diamond in the rough and
all those good things.
What I think happens is, if you were good enough
small-cap value, private equity would take you out and you could operate at a
lower cost. I think you get a better deal doing private equity than if you go
public market with small caps. Gold has been a way better investment than the
S&P 500 this century, if you look at since January 2000. It truly does
provide diversification.
Arora: How are the Fed rates impacting your
fixed-income portfolio? How are you hedging against that?
Dr. Piccinini: You’re not going to have the same makeup when you know
rates are rising than when rates stay flat or go down, especially in a fixed
income. Typically, the difference between a through-the-cycle portfolio and
something that is condition Fed action is your allocation to long-duration
bonds. Your long-term treasuries are not good things that you want to be long
when interest rates are generally rising.
It's a little bit of a tactical adjustment. What's interesting
right now is we do a lot more options strategies right now. I will just give
you a simple strategy. If you go buy a treasury bond, a US treasury bond that
matures in December 2026. Let's say you can buy that bond for, I don't know,
I'm just making things up, $95. You give me $100, I'm going to put $95 in that
bond, or actually, it's more than that. I'm going to get par two and a half
years from now. With the present value, I'm going to buy you at the money call
option on the S&P 500.
If you do that right now, you're going to get-- Yes,
so you invest $100 now until December 2026, you get your money back or you get
67% of the upside of the S&P if the S&P goes up. If the S&P goes
down, you get your money back. If the S&P goes up 10%, you make 67. This
compared to a regular 60-40 portfolio, we think is way better from a
risk-reward point of view because how much can a 60-40 lose? We found out in
2022. It really depends on what the Fed is doing, which relates to your
previous comments. If you leave the markets alone, bonds will diversify your
equity exposure. When equity goes down, bonds will show up.
If the Fed, or I'd say all the central banks, together
act as one actor, nobody's got that much money to go against that. It will
completely mess up your risk management. With today's interest rates level, we
do feel that options plus bonds is a good trade. You don't know, we live in an
uncertain world. The Fed can do a bunch of stuff, can do things to wreck the
economy or to make the economy better, to give them credit.
Arora: Within your fixed-income portfolio, what
strategies are you looking at and do you think will perform well? What
strategies do you think will not perform well in this environment?
Dr. Piccinini: We really like the two to five-year part of the curve
there because it does have juice, but it doesn't have too much duration risk in
there. Who knows if that yield curve gets adjusted, which side, is it the
long-term that goes up, or is it the short-term that goes down? Maybe a linear
combination of both. We think that one in the middle, it's not going to change
too much. I would say that's the one we look at. Also, those are the perfect
bonds for us to put that bond plus option strategies together. We like that.
Honestly, certainly not a bond expert.
Arora: How has your private equity portfolio been
impacted by the denominator effect? Has it been impacted at all?
Dr. Piccinini: Right now, private equity hasn't been impacted
directly. What we do is I spend an inordinate amount of time on stress testing
in any private equity manager that comes in. We really want to understand what the
major factors are impacting the performance of the fund.
If certain managers’ interest rates go up, their
margin go up. Otherwise, interest rates go down, their margin goes down. The
art of putting a portfolio together is really to find those are the four or
five big things that impact my managers, and you're trying to have opposites
and canceling forces in there. You have a really good idea of what the average
is going to be, and you can't be too confident, but you can't actually bank on
an average return because you know no matter what happens interest rate is
going to impact positive some, interest is going to impact negatively some,
whatever, and there's the other factors.
Our view, too, of managers, and I'm sure you'll hear a
lot of cursing about that later, is some of them are going to get lucky, some
are going to get unlucky, but over a long period of time, they'll average out.
We shouldn't overreact to short-term fluctuation whether they're positive or
negative. We are really looking for people who are adaptable. I think it's one
of the main qualities.
Arora: Within your public equity portfolio, what kind of investments and
sectors are you eyeing this year and why?
Dr. Piccinini: Again, when you think about investing, you're trying
to put together a probability distribution. I know I'm starting like a stats
guy and very boring, but this is really what you're looking for. You put things
in a portfolio not necessarily because you think they're going up, but because
when you put them together, it's something that is statistically superior to
other things.
Now, having said that, the driving forces, if you want
to overperform the markets from a risk-adjusted point of view, you should
invest in sectors that have better risk-reward ratios or better risk-reward
profiles than things that don't. The market's an average, in there you get bad
sectors, you get good sectors, so we're trying to outweigh the good sectors.
Just because sometimes you could have something that's not as good from a view
by itself but put in with the context of another portfolio makes sense.
Having said all that, we really don't think technology
has had the best risk reward has had for 15 years. Again, thinking about when
there's a surprise in tech, it typically is a big game changer. When you have a
surprise, it typically is positive. You have this asymmetric distribution of
surprise.
Arora: What are the few factors that you consider
while building your risk-mitigating strategies in this current environment?
Dr. Piccinini: First, I think that bond plus option strategy makes a
lot of sense. It's not like you start with no baggage and you can just sell
whatever you want and pay the taxes, and you'll do things. There's a different
risk management strategy. I think, first, diversification. That one is when
you're an advisor, diversification is your only source of alpha. I hate the
term alpha because it's so misused. It's you're on the edge.
It's like finding the right combination of things that
are going to perform well for you over a long period of time. I think that's
where a lot of people think diversification just means having a collection of
different things.
We have a serious effort right now to say, "Okay,
what is our sensitivity of business to different big things? Can we go by a
cheap hedge that is like catastrophic insurance that will pay once in a great
while? If something bad happens," and I don't know what could happen,
nobody can. Hedging at the firm level and then diversifying or use options at
the individual portfolio level is like a one-two punch that we utilize.
Arora: I would love to know what are a few red and
green flags that you look for in managers?
Dr. Piccinini: What we look for is adaptability. The markets will
change. Players will change. People who can understand their industry well and
then make changes and adapt to new environments are probably the ones that we
really like.
Again, when we look at managers, I look at it as a
long-term relationship. We're going to be partners for 10 years minimum. It's
important that you have good quarters, but we're not going to get too excited
about things because if you can, how do you say, learn from your mistake and
become better, that's a huge trait.
We also don't like people who are too big in terms of
AUM because we want to feel special. We know if you deal with a mega, mega
fund, a little unsophisticated retail guy, we may or may not decide to give you
the best deals. I'm not saying anybody would do that, but you have a higher
probability of adverse selection versus somebody who's already established.
You're going to have more access anyways because
typically the founder is also the guy raising the money. You're not talking to
the third-string quarterback. You're talking to the main guy. Then you can get
access to a little deeper thinking. You're talking to the manager.
We want to have not a safe focus organization. We want
people who are really good custodians of their capital. I would say those are
the main two things.
One of the questions to understand risk is, we want
people to understand how much risk they take. The rest will take care of themselves.
We're not returns-focused. We're risk-focused.
Typically, it's not the funds themselves, it's just
the guys that send us because we're unsophisticated little retail managers.
Once you start with this question and you can't really drill down and say,
"Okay, well, you think you're going to make 12 on average, whatever, but
what would because a delta?" You start really digging into it, a lot of
interesting things come up. This is where you come up with the list of big
things that can go wrong, and you're trying to counterbalance them somewhere
else in your portfolio.
