Low-Correlation Strategies in a Volatile Market with Mario Valente

[00:00:21] Doug Heikkinen: Stansberry Asset Management, how would you describe what makes it a boutique and an actively managed wealth firm versus a large asset manager?

[00:00:31] Mario Valente: Sure. So let me give you a quick 60 second context behind Stansberry Asset Management. So, we founded the firm approximately 10 years ago.

We have offices in New York City. Headquartered in Dallas, and also offices in the San Francisco Bay area. Currently managed just under $1.4 billion for high net worth individuals and their families, as well as some nonprofit institutions as well. And I would say that what's very unique about Stansberry Asset Management is that a large percentage of our client base are formerly self-managers, right? In other words, folks who manage their own portfolios, either taxable accounts or qualified assets, and they did it because they loved it, right? They love getting their hands dirty in the markets, either from a macro perspective or a micro perspective. And most of them are of retirement age or greater.

And as a lot of these clients came on board over at Stansberry Asset Management, because of the fact that they were formally self-managers, we had a great deal of trust to earn on their behalf. They were very reluctant. to hand over the reins to us.

And over time we've earned their trust, I would argue, through a function of relative outperformance in our strategies, as well as coupling that with kind of the boutique wealth planning offerings that we provide for our clients as well. And that formula, while a little bit simple, has really worked for us significantly since inception.

[00:02:20] Doug Heikkinen: So what core investment principles guide Stansberry Asset Management? Can you share a recent example of out performance in a volatile period?

[00:02:30] Mario Valente: Yes, I'm glad you asked me because I would say, one of the core principles of our active management philosophy across our different strategies, one kind of recurring theme is producing idiosyncratic investment performance. In other words, finding investments that have low correlation to the overall markets, right? And that works well because when you do have periods of significant volatility in the greater markets, our portfolios tend to outperform dramatically.

And let me give you an example. So approximately 11 months ago, April 1st, April 2nd, we all just discovered Liberation Day, by our administration. And equity markets took a tumble. In fact, I think through mid-April, there was a point where the S&P 500 was down 10%, the NASDAQ was down 15% year to date, right? So significant bloodbath across the equity markets in mid-April. Conversely, if you look at our strategies, for which there are 10 different strategies in varying degrees of risk and reward, about 90% of the assets that we managed were either slightly down, in other words, down 1%, were unchanged, or slightly up for the year at that same point in time.

So we were having really lucrative and really positive conversations with our clients during that time period because they were so thankful that, for the most part, a lot of their Stansberry accounts were either holding steady versus the broader markets, which we're seeing a huge bloodbath at that time.

[00:04:23] Doug Heikkinen: How does SAM's ability to move across asset classes change the way you build and adjust portfolios over a full market cycle?

[00:04:32] Mario Valente: So I would say we're very tactical when it comes to making macro decisions across our portfolios. And, let me give you an example. I would say the beginning of 2022, it was a funny period, right? Because rates were still significantly low, and at the same time, the Federal Reserve was was telegraphing that they would likely start hiking rates, right? And that we felt like at that time two significant things were going to happen. If we felt like rates were going to continue to climb, that was going to bode not well for fixed income.

So we made a very concerted decision across our investment team to have a 0% allocation of fixed income at the beginning of 2022. And then furthermore, if we were going to go from a pretty much near zero rate environment, upwards, probably going to have a drag on equities as well, right? So we decided to turn down our equity allocations as well, have greater allocations to cash. And the result was that year in 2022, we had significant outperformance across our benchmarks, because of those two simple but sweeping macro decisions of having 0% allocation to fixed income, and really ratcheting down our equity exposure at the beginning of 2022.

[00:06:02] Doug Heikkinen: You have 10 in-house strategies. How do you explain the lineup to advisors without overwhelming them with product details?

[00:06:12] Mario Valente: that's a great question. Each of our strategies are separate and distinct when it comes to risk and reward. A few of them are niche. So for example, we have a gold strategy that has, as you can imagine, has done exceptionally well in the last 18 to 24 months. And so that strategy does well in terms of selling itself.

So really, I don't really spend a lot of time on the niche strategies. It's really our larger strategies that have within them some pretty compelling attributes. For example, our flagship strategy, our all weather strategy, which has been around since day one, constitutes about 40% of our assets.

And the reason why it's so popular amongst our client base is number one. It has, very much low correlation to the overall equity markets. But number two, there are investment sleeves that reside within all weather that I would argue you can't really get anywhere else. And it's because of the backgrounds of our investment team that we're able to find these compelling investment opportunities within the markets, and exploit them for our clients. let me give you a couple examples. Number one, we like, idiosyncratic investment opportunities. In other words, investments that are able to generate positive performance outside of the broader markets.

In one area where we see that is merger arbitrage. So merger arbitrage is really the investment discipline of buying a stock of an acquired company, or I should say, where it's been announced that the stock is going to be taken over. And typically what happens is that acquired stock trades up to, but not quite the acquisition price. And typically there's a spread, and that spread could be 1%, 2%, 10%, and it's a function of the perceived risks surrounding that transaction. And so over the last, gosh, over the last 8, 9, 10 years, we've done a pretty good job of finding those investment opportunities within merger arbitrage and capitalizing on positive performance within that asset class, and adding it to our all-weather strategy. And so when we talk about our 10 different strategies, really what we'd like to do is focus on, I would say our, larger portfolio models, like our all weather strategy that has these unique attributes within them.

[00:08:46] Doug Heikkinen: I neglected to ask you about your pre SAM life, and I guess we'll get it in here.

So what parts of your pre SAM experience most shape how you view opportunities and risk in your job today?

[00:09:01] Mario Valente: So I started my asset management career at Citadel in Chicago, on the distress and high yield convertibles desk there almost 20 years ago, just over 20 years ago. And when you start out in asset management as a credit professional, you tend to take on a cynical lens of the world, right?

I think as a credit analyst, you're taught that there's little upside and a lot of downside. So you're almost checking off all your boxes to make sure that there's no possible way for you to lose money, to make that little sum of money that's at the end of your investment thesis.

And so that cynical perspective of the world really shaped me as an asset management professional, right? I'm always very leery about investments and making sure that I cover all my angles, right? How can I lose money? How can I make money in this particular investment?

And so as a result, the cumulative effect of our portfolios is that they tend to be probably more on the conservative end of the spectrum in terms of how aggressive the investments can be. And that's done purposefully, Because we know at the end of the day, a large percentage of our client base is of retirement age or greater.

So risk appetite is dialed down. And their appetite for capital appreciation investments really aren't the same as it was 10, 15, 20 years ago in their prior professional life. So I would say my credit background marries well with the kind of investment objectives of our overall client base.

[00:10:50] Doug Heikkinen: Which three tamp strategies are most popular right now, and what is each designed to do for a client's portfolio?

[00:11:00] Mario Valente: Oh, gosh. I could spend more than 30 minutes on this particular discussion, but I'll highlight one area. And I would say our most popular tamp strategy right now is called Tactical Select.

And Tactical Select is relatively new. It just celebrated is three year anniversary last month. We started the strategy of February 1st, 2023. And it's our first attempt at marrying fundamental research with kind of quantitative technical analysis. Our first endeavor.

And so far the results have been extremely compelling. Almost, I think, versus the benchmark, on an annual basis, after fees, the strategy has outperformed the benchmark by over 400 basis points. So very compelling. And at the same time, at the same time that we're generating this outperformance, we're also pro producing a beta that's probably 25 to 30% lower than the benchmark.

So significantly lesser volatility than its benchmark. And so at the end of the day, I think a lot of folks see that, on the tamp platform, right? The outperformance, the lower beta, the lower correlation, and they're attracted to what we've done, despite the fact that it's only been around for three years.

I would say that's definitely a highlight on the tamp offerings that we provide.

[00:12:33] Doug Heikkinen: Where does that strategy typically sit in a portfolio? Core, satellite, risk management?

[00:12:40] Mario Valente: It's a function of both core management, because at the end of the day, there's an emphasis on finding pockets of value within that strategy, right?

But also there's very tight risk management metrics surrounding the strategy. So in other words, each position is governed by very tight trading stops. And so if a position kind of trades down, perhaps, 8%, 9%, 10% below cost or what have you, the system will generate a red flag.

We'll sell the position and recycle that capital into something else. So at the same time, you've got a strategy that is pursuing, compelling investment opportunities within value, but also very tight risk management framework as well. And those two attributes are what our clients find very compelling about this new tactical select strategy.

[00:13:40] Doug Heikkinen: How do your key strategies seek to manage drawdowns and volatility when markets are under real stress like this week?

[00:13:50] Mario Valente: You know, I think we love the fact when there's volatility in the markets, right? Because, a recurring theme across our strategies is low correlation, low beta. On days like today, we're significantly outperforming, number one.

Number two, I would say, we are not afraid to be extremely nimble when it comes to generating liquidity, going to cash, going to t-bills, and our broader strategies. So I would say, when we see periods of extreme geopolitical volatility, like I mentioned last year, it was liberation day, 2022.

It was, the rise of quantitative tightening and even in 2020, March of 2020, COVID, I, right when in March, I think March of 2020, the S&P 500 on March 23rd was down over 35%. Our flagship strategy was down right around nine. And that's a function of the fact that three, four days prior we were raising significant amounts of cash for our clients because we thought, we felt like this coronavirus that was coming out of Asia would likely significantly impact the broader American equity markets. And we were right. So again, not afraid to be extremely tactical and nimble when it comes to raising cash across our strategies as well.

[00:15:25] Doug Heikkinen: What do you think are the one or two structural factors at SAM, team process, research, most drive the consistency of your results?

[00:15:36] Mario Valente: I think it's very important, and we felt this probably, probably nine years ago, that we establish a process that can be repeated. And be successful time and time again, right?

But also marry that process that's successful with the right team. I think we've done that very successfully over the last eight to nine years. I'm surrounded by investment contemporaries that have been in the markets on an average of over 20 years. They've invested across multiple drawdowns.

They've been in the markets in COVID. They were investing in the markets during the financial crisis in '08-'09. And some of us were around during the tech blow up in '99 and 2000 as well. So, a lot of us have significant battle scars and I would say the team married with the process has definitely produced the successful outperformance that we've generated for our clients over the last 10 years.

[00:16:36] Doug Heikkinen: Alright, last one for you. Given today's higher rate volatile environment, what adjustments are you making across SAM's active strategies and what should advisors be thinking about as they position their client portfolios?

[00:16:52] Mario Valente: You know, that's such an interesting question. We were just talking about today on our investment committee call about, obviously geopolitical volatility that's been occurring over the last 48, 72 hours.

How do we think about it long term? is this an environment where we should be capitalizing on opportunities that have traded down in the last day and a half or so? Or are there other more secular risks that we should be concerned about. In other words, I'm sure a lot of our audience is seeing the software market, private credit market trade down significantly. Is that a secular theme going forward? Are we going to see AI displacement across the board, across software companies or not? Is that a buying opportunity?

And so I think the answer is, it depends, right? And I think the answer becomes more flushed out as we do our own due diligence on these companies across the investment team and figure out which companies will be the winners, which ones will be the losers.

And the only way we can do that is with an investment team that embraces active management, and embraces performing their own internal due diligence on names. And I think the type of team that we have is probably very much unusual or not really emblematic of probably a lot of other managers out there who don't have the ability to do their own internal due diligence on names.

[00:18:31] Doug Heikkinen: The world's certainly not making that puzzle any easier for all of you who do this for a living. Mario, great stuff. Thank you so much for being with us today.

[00:18:42] Mario Valente: Thank you so much. I really appreciate the time you, gave me.

[00:18:46] Doug Heikkinen: To learn more about Stansberry Asset Management, please visit StansberryAM.com.

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