Meet a Strategist is a weekly feature where Evan Harp talks to different strategists about how their firms are responding to the current moment. This week, he sits down with John Davi, founder and CIO, Astoria Portfolio Advisors.
Evan Harp: What’s keeping your clients up at night?
John Davi: One word: inflation.
Evan Harp: Do you have any recent changes in allocations?
John Davi: We actually have not rebalanced much this year, and the reason why is because we prepared our portfolios in 2021 for what we envisioned would play out in 2022. Fortunately, last year our portfolios were prepared for higher inflation, higher volatility, and the shift out of growth and into value in 2022. That’s translated into on a relatively good portfolio experience for our investors. Last year, we added inflation hedges, we shortened duration, we went underweight fixed income, and we increased the quality of our portfolio on the bond side and on the equity side. So, we’re pretty happy where we are with our portfolios. We’re longer term strategic in nature, we’re not tactical investors, but we do look forward and prepare for what we think is going to happen over the next 12 to 18 months. That’s why our portfolios, on a relative basis, have been doing well this year. Past performance not indicative of future results.
Evan Harp: What do you think of the markets right now?
John Davi: It’s funny because you asked me before what is on people’s mind and inflation is front and center. I think a lot of people are concerned inflation is not transitory. Inflation continues to rise as we saw with the June CPI print that came out higher than expected. It turns out that we have not reached peak inflation and investors are now scrambling. From our work acting as an Outsourced CIO, we know people’s portfolios are still stuck in the prior cycle, which was dominated by low interest rates, deflation, tech and growth outperformance. However, we are now seeing a market leadership change where we have inflation, cyclicals, and value stocks are outperforming while tech and growth are underperforming.
I think people are wishing that the old regime comes into play, but just having lived through these market cycles in the past, nothing stays up forever. There’s always a change in market leadership. So what we’ve been trying to do at Astoria Portfolio Advisors is getting our advisors to prepare their portfolios for the next two, three, four, five years – which is going to look very different from the prior cycle.
On the topic of alternatives, we got a lot of pushback from investors because the past 3 years the S&P 500 was rallying quite a lot and alts were underperforming. However, in a year like 2022 when both stocks and bonds are down, owning alternatives has paid off. I would continue to advocate for investors to own a bit of insurance in their portfolios and not to time it.
Evan Harp: Are there any ETFs you want to highlight?
John Davi: Well, selfishly, we have an inflation sensitive ETF, the AXS Astoria Inflation Sensitive ETF (PPI), that we launched in late December of 2021 with AXS investments. AXS is the advisor and Astoria is the sub-adviser. But the genesis of that is that we did not think that inflation was not going to be transitory and that it would stay structurally higher. We had been running an inflation solution as a Separately Managed Account back in 2020, and we just had the conviction to convert our strategy and launch it as an ETF in late December. It’s up about 15% in 2022 as of the time of this interview. What is interesting is that PPI has been inversely correlated with both the S&P, the NASDAQ, and the bond index. We can talk about why there’s that inverse correlation, but, at the end of the day, I think the ETF is doing what we thought it would do – which is provide protection and actually let investors benefit from higher inflation.
PPI owns about 80%-ish in cyclical equities then about 10-15-ish% in physical commodity via ETFs, and about 5% in TIPs. We’ve been pleased with it so far, but just knowing that most portfolios are still stuck in that deflation, low interest rate world, with a lot of tech and growth stocks, we think we’ve got more room to run with PPI.
Evan Harp: What’s one thing that sets your firm apart?
John Davi: I’ll offer a couple of things that I think are unique about Astoria Advisors. One is that we have a range of solutions. We’ve offer ETF models, quantitatively driven stock solutions, we do custom bespoke solutions, and we have an outsourced CIO business. Then, more recently, we began sub-advising the ETF that I mentioned previously, the ticker PPI.
I think investors appreciate that we are cross asset and macro in nature plus we have a quantitative tilt to our portfolio construction. I tend to think of firms as being either very macro or quantitative, but not really both. I see some of my peers are very tactical and I would say we’re more measured with our risk. I don’t think you can be tactical and win over long periods of time.
There are 3 main components of our asset allocation discipline: Macroeconomic policy, Earnings & Valuation catalysts, and Portfolio risk mitigation via alternatives that are inversely correlated to stocks.
Everyone at the firm, we all come from the institutional world. We can deliver any type of risk return profile that our clients want. We’re also not afraid to think outside of the box. For instance, a couple years ago, everyone wanted to own disruptive growth, crypto, hyper growth stocks; and we were telling clients that they we’re in a speculative bubble. It turned out that was the right call.
We weren’t afraid to stick with our alternatives. It felt like the S&P was going up every year 25%, and the alternatives were not working. But, sure enough, we have a big sell off this year and alternatives are working. In the end, we were confident with our macro views and that they would play out.
We’re very knowledgeable about portfolio construction. We may not beat the benchmark every year, but we strive to deliver attractive risk adjusted return over varying cycles. I think we’ve proven that since the firm began. As I like to say, it’s easy to look good when S&P goes up 25% every year, and you’ve got a very supportive backdrop of easy money, a supportive Fed, and tons of quantitative easing. Obviously, we are in a different environment now.
We have the standard risk-based ETF models like everyone else. Here are a few solutions which are unique.
As I mentioned, we began managing an Inflation Sensitive ETF model back in 2020 which was converted to an ETF. The original SMA which was lightyears ahead of our competition and is comprised of global cyclicals, physical commodities, commodity equities, and TIPS.
We began running a cyclical stock portfolio because our investors were so loaded up on tech/duration/deflation heavy assets. So we created a cyclical stock only model to hedge this risk. It’s comprised of 30 high quality equities with above-average ROE, ROA, and earnings growth within the cyclical sector cohort.
Similarly, clients didn’t have enough dividend/value centric stocks in their portfolios. Remember everyone wanted to own growth/technology but we thought eventually the world would return to normal. So our Dividend Growers Portfolio contains 40 stocks that have raised their dividends for 10 consecutive years, with above-average ROE/ROA metrics.
Lastly, clients liked our risk-based ETF models but we had a certain type of investor that wanted us to take more risk. So we launched what we call the Renaissance Risk Managed Rotation Portfolio. It captures the most relevant macroeconomic portfolio tilts via ETFs while targeting an S&P 500 standard deviation. It’s the closest thing we have to offering a tactical solution although as I mentioned earlier, we don’t believe you can be tactical. Our Renaissance model simply takes on more tracking error than our standard models.
We have in-depth research offering. We offer our investors portfolio construction dashboards, we do portfolio diagnostics, and tax management oversight. We offer a broad array of market commentaries at the macro and factor level. We put out forward looking commentaries, which I think is very unique. A lot of people just regurgitate what happened in the news yesterday, whereas we look forward. We do an extensive Investment Committee quarterly report. We have a piece called CIO Thoughts which is our most widely read report. Our research is arguably what sets us apart from our competitors.
In the end, we’ve got unique solutions, we’ve got a strong team, and we’ve got great clients which appreciate our solutions and complimentary skillset.
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