You Are Not Alone
A Conversation with f3Logic OCIO, Clint Sorenson
During these turbulent times, it’s best to have is a strong foundation. Being an independent advisor does not mean you have to weather the storm alone. There are many resources out there for you and having an Outsourced Chief Investment Officer (OCIO) is just one of them. What is the true value of an OCIO? We believe the objective expertise we gain through our OCIO is a crucial part of our strength as a firm and complements the overall support services that f3Logic offers.
In this conversation, I spoke with Clint Sorenson, f3Logic’s OCIO, and asked him some timely questions about the markets, his investment philosophy, and the role of an OCIO during unprecedented times like these.
RICH: Why does an RIA firm need an OCIO now more than ever?
CLINT: As we all know, the markets are complex. There is too much information and too many tasks for one advisor to manage on their own. I believe advisors cannot and should not go at it alone in this rapidly changing industry. We’re experiencing fee compression, expanding opportunities, and so much more that makes it increasingly important to have a strong team. An OCIO can be the objective lens that advisors use to focus on what’s important. To achieve the maximum positive impact for clients, an OCIO functions to support financial advisors in all investment aspects of their business so that he or she can focus on behavioral coaching, financial planning, and managing client relationships.
RICH: What is your overall investment philosophy and how did you arrive at this conclusion?
CLINT: I started in the industry at a major bank in 2007, right before the global financial crisis. My difficult learning experience in the industry began by watching things break down. I saw the traditional belief that markets and investments were based on the modern portfolio theory and the efficient market hypothesis completely fall apart. Here, I began to learn about the academic underpinning of markets and investment theory through experience and study. It became clear to me that the business environment goes through cycles and these business cycles matter a great deal.
In my experience, if we can accurately interpret where we are in the business cycle, we can reliably build portfolios where probabilities are stacked in our favor. We built an investment framework that is predicated on measuring and mapping where the business cycle is currently positioned, not where it’s going. Then, we determine the best investments to make given the respective business cycle environment. What we’ve found is that there is historical precedent in what investments and investment styles work in each stage of the business cycle. Simply put, measure and map where we are in the business cycle, invest according to where we are in that cycle, and make disciplined investment decisions in the current investment environment.
RICH: You were speaking about the Fed lowering interest rates to almost 0% before it happened. How did you know?
CLINT: I like to say this was a quasi-prediction because the Fed is somewhat easy to front run, considering they follow the business cycle just like we do. In late 2018, I was able to determine that we were at the point of the cycle where growth and inflation were slowing. Historically, under these circumstances, the Fed tends to ease policy as the cycle moves towards a slowdown.
It was all about understanding where we were in the cycle and taking the right course of action for that environment. The same holds true today! The Fed eased policy, expanding its balance sheet at the end of 2019 and it didn’t work. Instead, The COVID-19 virus acted as a catalyst that fueled a slowdown and pushed us into contraction. Based on our information and where we were in the business cycle, we knew the Fed would take drastic measures which is how I predicted this interest rate drop.
RICH: How does this market compare with 2008 and how quickly will we recover?
CLINT: There’s no doubt that in March, liquidity was worse than 2008 in the fixed income market. There were huge spreads between bids and asks in treasuries and everyone was selling substantial stakes in the market, hoping to increase liquidity. While this was happening, I and many others had flashbacks of 2008 and how illiquid markets can become. Fortunately, the Fed announced breathtaking transitions that helped solve that problem, including a reduction of interest rates to almost zero, limitless QE, and expanded the range of what they could buy. They can now purchase corporate bonds, commercial paper, and municipal bonds which they didn’t do in 2008, showing how extreme the liquidity problem was. Things have stabilized a bit and the Fed has done a great job so far.
This is very different than 2008 because at that time, financial institutions were part of the problem. Banks’ balance sheets were in a terrible state and therefore, they could not lend, leading to a credit freeze. We often say that the credit cycle drives the business cycle which drives the market cycle. Our business cycle is driven almost entirely based on the availability of credit, with over 80% of the debt in the market being refinanced instead of paid off. Today, the Fed has provided liquidity, allowing banks to continue to lend. The stimulus programs being signed into action in Congress will enable banks to be part of the solution. These factors combined lead me to believe that there will be a faster recovery than what we saw in 2008.
RICH: Compared to the beginning of 2019, how has your investment thesis changed?
CLINT: In 2019, we were in a very opportunity-poor environment. I was distraught because of the dismal prospect of future returns based on valuations, economic growth rate, where we were in the cycle, the Fed ramping up a balance sheet, low interest rates, markets at all-time highs, and other factors. We didn’t know where we were going to find returns and it started to seem like investors were being robbed of their futures. Based on several valuation metrics that have been historically accurate, the S&P 500 was expected to yield nothing over the next 10 to 15 years. It was extremely tough to help people build a portfolio, find income sources for their retirement, and get the appropriate compensation for the amount of risk in an environment like this. All we saw was risk with no reward.
Now, we’ve rapidly gone from an opportunity-poor environment to an opportunity-rich one. The decline in the business cycle has been accelerated, forcing us into a contraction, but also driving future returns up. Certain sectors are down 50-70%, resetting valuations internationally and presenting a unique opportunity for investors. Building a portfolio that fetches a better than average return is much more possible now.
RICH: What financial allocations do you recommend for the average investor?
CLINT: I believe a moderate portfolio should increase international and emerging market exposure as well as high-quality fixed income. For the bond allocation in your typical 60/40 portfolio, we also recommend that investors look at investment grade corporate bonds that the Fed is now able to buy.
However, be prepared for volatility. We will most likely find the bottom of the economy in the second quarter and that won’t be reported until Q3. It most likely won’t be until Q4 that we start seeing real economic recovery begin.
A new concern I am investigating is how this will change how we work and shop. I believe this will have a profound psychological effect on individuals and businesses and will ultimately increase our efficiencies in the methods that work in this evolving society. We will most likely continue to work remotely more regularly to maintain a certain level of “social distancing”. This may lead to a slow return of the work force, but I believe we will see a robust recovery of economic activity.
As we see the return of economic activity, there should be an amazing opportunity in small cap and value so be prepared for that as well.
We can’t say this enough: ADVISORS ARE NOT ALONE!
Now is the time to drastically increase activity, sit on same side of the table as your clients, and let them know you no longer just represent a firm. If you do this, clients will realize how much you care and how important it is to have a trusted professional taking care of their financial future. In the coming months, I expect that the pendulum will swing back towards favoring relationships with advisors over tech platforms, investment websites, and financial planning tools. It will be a true test of who is the best relationship manager and we can help you pass with flying colors.
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Advisory services are offered through f3Logic, LLC, a registered investment advisor.