Speaker 1: What can of trains.
Speaker 2: I'm Joel Webber and I'm Eric balchunis.
Speaker 1: Eric. The thing that we've talked about on the podcast
Speaker 1: before every Halloween or so, we try and do an
Speaker 1: ETF graveyard, which are things that liquidate, but we've actually
Speaker 1: never talked to someone who's actually liquidated up on ETF,
Speaker 1: and we are going to do so today.
Speaker 3: Yeah, the whole idea of how hard the ETF industry
Speaker 3: camp a lot in the bitcoin ETF race, because.
Speaker 1: You've long called this the ETF terror dome.
Speaker 2: Yeah, it's the ETF terro dome.
Speaker 3: So if you get a hundred million like some even
Speaker 3: the like the eighth bitcoin TF is one hundred million,
Speaker 3: I'm like, that's really good. Because it's a hard market.
Speaker 3: Advisors are cost obsessed. Your performance out of the gate,
Speaker 3: timing matters. There's a lot of variables, especially if you're
Speaker 3: doing something other than a vanguardian cheap thing. Right. It's
Speaker 3: interesting to find stories of people who took the chance,
Speaker 3: you know, in this case, folded up. They gave it,
Speaker 3: I don't know, five six years, tried everything they could,
Speaker 3: the market went against them.
Speaker 2: It was tough.
Speaker 3: These stories I think have universal appeal because twenty five
Speaker 3: percent of every ETF launch is closed, so your odds
Speaker 3: are one in four of not making it, and especially
Speaker 3: if you're smaller and it's your whole thing, right, Blackrock
Speaker 3: and those guys can sustain the ETFs that don't.
Speaker 2: Sell for a while because they do all these other things.
Speaker 3: But for an India issuer, this is you know, a
Speaker 3: lot of your whole life gets poured into this ETF.
Speaker 3: And these stories are really interesting to me. But I
Speaker 3: give everybody credit. It takes gut stroll to launch an
Speaker 3: ETF because it's public. The performance is there every day,
Speaker 3: you can't hide from it. It does take a lot
Speaker 3: and it doesn't always work out, and that's why it
Speaker 3: takes guts.
Speaker 1: So we're gonna speak with Validia Capital Management, where we've
Speaker 1: got Jack Foehand who's the president, and Justin Carmono who's
Speaker 1: the partner. The name of the ETF was Validia Market Legends.
Speaker 1: The ticker was va l X. If you like listening
Speaker 1: to them, you can check out their podcast Access returns,
Speaker 1: this time on Trillions inside a Liquidation. Jack, Justin, welcome
Speaker 1: to trillions.
Speaker 4: Thank you for having us, Hi guys.
Speaker 1: Okay, So the ETF that we're going to talk about
Speaker 1: is the validia market Legends ETF, which rip no longer.
Speaker 1: When did it launch and when did it liquidate?
Speaker 5: So launched in twenty fourteen and we liquidated it. It
Speaker 5: h during the pandemic in twenty twenty.
Speaker 1: Okay, and why what happened?
Speaker 4: Well, were going going back to the beginning, I should,
Speaker 4: There's a lot behind that. So we started.
Speaker 5: You know, we're primarily quant investors, and you know, when
Speaker 5: we look at like quant strategies that work over time,
Speaker 5: I think they tend to have a little bit of
Speaker 5: a value.
Speaker 4: Bent to them.
Speaker 5: So we had seen going back like in twenty thirteen
Speaker 5: when Cambria did shareholder yield, that ETF did really really well.
Speaker 5: I mean Eric knows better than me, but it got
Speaker 5: like three hundred million in assets pretty quickly. And you know,
Speaker 5: the the ETF space, like in that space was much
Speaker 5: less competitive back then. So in twenty fourteen we decided,
Speaker 5: you know, we should do it, this idea of like
Speaker 5: following the strategies of Legends. We thought we could market it.
Speaker 5: You know, it was a good thing for our clients
Speaker 5: from a tax efficiency standpoint. We thought we'd get some
Speaker 5: outside capital. So we decided to give it a shot.
Speaker 2: So what does legends mean? What were the legends?
Speaker 6: So the yeah, the idea is basically taking the publicly
Speaker 6: disclosed investment methodologies from famous investors, but it's extended beyond
Speaker 6: the likes of Born Buffet, Peter Lynch and Benjamin Graham
Speaker 6: and other strategies that have been written about in books
Speaker 6: or academic papers and basically creating models that utilize those
Speaker 6: strategies to select stocks. And so what the Market Legends
Speaker 6: strategy specifically was doing is at the outset, we were
Speaker 6: taking ten of those unique stock selection models and building
Speaker 6: what was effectively one hundred stock portfolio that sat inside
Speaker 6: the ETF rapper. So, and I think they're still around.
Speaker 6: I remember Alpha Clone was out there, and there was
Speaker 6: some other cloning strategies that exist, but they were using
Speaker 6: thirteen as filings. So we thought we could maybe stand
Speaker 6: out from a strategy perspective by saying, Okay, we're capturing
Speaker 6: these fundamental strategies quantitatively and let's stack these models together
Speaker 6: to create the actual portfolio for the ETF.
Speaker 1: I mean that sounds like a good idea because it's like, Okay,
Speaker 1: if we have these got people investors legends over time,
Speaker 1: and you could kind of deduce what their strategies were
Speaker 1: and bring them into an ETF. We talked a lot
Speaker 1: about how ETFs can be like a vehicle for trades before.
Speaker 1: So when you launched, it must feel a little bit
Speaker 1: like you got bottled lightning. What did it feel like
Speaker 1: to bring this to market?
Speaker 5: Yeah, it was fun just learning like what goes on
Speaker 5: behind the scenes to get it to market in the
Speaker 5: first place was really cool because we knew nothing about that.
Speaker 4: But yeah, you know, we thought we had a pretty
Speaker 4: good opportunity.
Speaker 5: I mean, we had developed a pretty good plan in
Speaker 5: terms of how we would do this, and obviously that
Speaker 5: plan had to change a lot when we realized the
Speaker 5: reality of the ETF market. But you know, we had
Speaker 5: some of our own client money we were going to
Speaker 5: put in there. We thought we had a good story.
Speaker 5: We thought there was a good factor investing underpinnings and
Speaker 5: what we were doing in terms of like exposure to
Speaker 5: value and at that time turned out to be completely wrong.
Speaker 5: But at that time we thought it was a great
Speaker 5: time to invest in value. We thought value looked really attractive,
Speaker 5: so we thought.
Speaker 4: All that together gave us a shot.
Speaker 5: I mean, I don't think we had any illusions that
Speaker 5: it was going to be easy, but we thought we
Speaker 5: had a decent chance well.
Speaker 6: And I think one of the things that we realized
Speaker 6: too that that was different for us because we were
Speaker 6: running SMAs before that and we still do. But you know,
Speaker 6: when you come into the fund world, there's a whole
Speaker 6: different set of compliance rules and regulation around performance. So
Speaker 6: out of the gate, we couldn't show anyone any back
Speaker 6: tested or hypothetical results, and so you know, we started
Speaker 6: whatever it was December tenth of twenty fourteen, started tracking
Speaker 6: the actual fund and it was always the question of
Speaker 6: people liked the story, but it was like what is
Speaker 6: the performance? And so you start with kind of a
Speaker 6: day one with no performance, and then you have to
Speaker 6: build it up, and just the first couple of years
Speaker 6: for this type of strategy just was tough. So we
Speaker 6: were always struggling in that sense too.
Speaker 3: One of the things as an analyst, you brought up
Speaker 3: Alpha Clone and then I also think of GURU and GVIP.
Speaker 3: These are eachfs sort of look through thirteen F filings
Speaker 3: to see what stock picks hedge funds have bought and sold,
Speaker 3: and a lot of times these funds end up with
Speaker 3: a lot of tech, so they do. Okay, I can't
Speaker 3: say any of these have crushed it and been huge successes.
Speaker 3: GURU had a little nice run there, GVP as a Goldman,
Speaker 3: so I think some people like that brand, but they
Speaker 3: haven't really like crushed it either in performance or flows.
Speaker 2: But they've survived.
Speaker 3: I think because they largely are in large cap us equities,
Speaker 3: which have dominated.
Speaker 2: You guys are in small value.
Speaker 3: I guess as an analyst, I would have assumed this
Speaker 3: was large cap, but you weren't looking through thirteen f's right,
Speaker 3: and so as these market legends, what led you to
Speaker 3: small value? Did you pick small value and then say
Speaker 3: we're going to take these legends strategies and apply it
Speaker 3: to small value or were the legends picking small value?
Speaker 3: I guess I don't understand that.
Speaker 4: No, it actually flowed through the strategies themselves.
Speaker 5: So when you look at say Ben Graham's strategy, or
Speaker 5: any of these strategies that have either a long term
Speaker 5: track record on their own or follow people who have
Speaker 5: long term track records, these guys tend to be a
Speaker 5: little more of value biased. And also when you run
Speaker 5: a strategy and you run it as an all cap strategy.
Speaker 5: So you know, our universe was, say twenty seven hundred stocks,
Speaker 5: give or take we can invest in. When you run
Speaker 5: an equal weight strategy with twenty seven hundred stocks, the
Speaker 5: natural thing is you're going to end up with much
Speaker 5: more small cap exposure than say the S and P
Speaker 5: five hundred, because one you're equal weighting, and two you're
Speaker 5: picking from a much larger universe that has all those
Speaker 5: small and midcaps, and you typically find more small, more
Speaker 5: value in that small and MidCap area. So it was
Speaker 5: just like a natural We didn't come out saying we
Speaker 5: want to launch a small cap value ETF, but it
Speaker 5: was like this natural progression from the type of strategy
Speaker 5: we were running.
Speaker 1: And how much experience did either of you have around
Speaker 1: with ETFs before the launch?
Speaker 6: Almost none, right, justin yeah, well, we were running SMAs
Speaker 6: and we may have invested some of our client money
Speaker 6: in ets, but in terms of like launching a ETS
Speaker 6: and the inner workings of it, we basically did it
Speaker 6: all internally. There's services out there now that you can
Speaker 6: kind of partner and white label, and those are great
Speaker 6: for a lot of different shops. You know, we kind
Speaker 6: of said we got our own exemptive release, We interfaced
Speaker 6: with US Bank on the compliance and the trading jack
Speaker 6: did all the custom custom creating redeems in terms of
Speaker 6: sending those trades to the to the custodian, to the
Speaker 6: brokerage firm or the trader. So yeah, So, I.
Speaker 1: Mean there's hundreds of launches a year, thousands of ETFs
Speaker 1: out there. What did you what do you think you
Speaker 1: know now that you didn't know then about bringing an
Speaker 1: ETF to market in terms of the success.
Speaker 5: The biggest thing I think I know now is that,
Speaker 5: going back to what Justin said before about about short
Speaker 5: term performance, is that when you launch an ETF, you've
Speaker 5: got your story, you've got your marketing, you've got all
Speaker 5: that stuff.
Speaker 4: But what you do in those.
Speaker 5: First six months, that for a year, the first two years,
Speaker 5: is a huge party or success, and it's something that
Speaker 5: you cannot control. And so for us as a small
Speaker 5: cap value manager, that ended up going the other way.
Speaker 5: You know, we launched at the same time as Kathy
Speaker 5: Wood or right right around the same time. That went
Speaker 5: the you know, obviously in the positive way for her,
Speaker 5: in the negative way for us.
Speaker 4: But this is not an excuse for not working.
Speaker 5: But that is like maybe not withindts, but with these
Speaker 5: type of active strategies, people don't have any performance track
Speaker 5: record to go on other than what you've put out
Speaker 5: in the real world, and so they're going to judge
Speaker 5: you by that, and that's going to be a big
Speaker 5: part of your success.
Speaker 4: And you know, in our case of our failure.
Speaker 1: When did you get a sense that it wasn't going
Speaker 1: the way that you were most hoping for.
Speaker 4: I guess it took. It took a little while.
Speaker 5: We never had great performance because as you guys know,
Speaker 5: small Cat Value coming out of twenty fourteen had many
Speaker 5: years where it didn't work.
Speaker 4: But we did do okay.
Speaker 5: I think we got to like thirty million and assets
Speaker 5: at one point, so we crossed break even. So it
Speaker 5: wasn't like it was a failure out of the gate
Speaker 5: and it was just a disaster. It was like periods
Speaker 5: of great optimism and we got up to thirty million,
Speaker 5: were above break even, and then periods are great pessimism.
Speaker 4: In twenty twenty was a great example of that.
Speaker 5: You know, when the market was down thirty five percent
Speaker 5: with small Cat value to cut in half, so you know,
Speaker 5: I think our ATF went down to like fifteen million,
Speaker 5: so it wasn't.
Speaker 4: It was a back and forth justin.
Speaker 5: You may have some some you know, comments on that,
Speaker 5: but it was got back and forth as it went.
Speaker 6: No, I agree with all that. The only thing is
Speaker 6: like at the low end COVID we had I think
Speaker 6: it was like something like thirteen million in assets in
Speaker 6: the fund and we had a six year track record
Speaker 6: that it just wasn't good. And so as a business,
Speaker 6: we kind of just had to say, like, we kind
Speaker 6: of have to shut this thing down because you know,
Speaker 6: kind of pulling out of this is going to be
Speaker 6: tough now in retrospect, to be honest with you, those
Speaker 6: types of stocks that we were owning and we were
Speaker 6: part of what we did with the ETF. We actually
Speaker 6: followed like a monthly rebalancing, so every month we were
Speaker 6: rebalancing one tenth of the fund. So we were a
Speaker 6: little bit more active in that sense. So during that
Speaker 6: COVID decline, we were rebalancing and finding like more attractively
Speaker 6: priced value stocks. That was just part of the process.
Speaker 6: And then kind of coming out of that, that kind
Speaker 6: of stuff took off. But we shuttered the ETF I
Speaker 6: think in like May of that year, so at least
Speaker 6: the fundholders didn't get that. Now some of those clients'
Speaker 6: assets moved back over to the SMA, so we were
Speaker 6: fortunate in that sense.
Speaker 1: But yeah, so I'm curious, so you had the six
Speaker 1: that's your track record, and just wondering, did you have
Speaker 1: you kept a version of this strategy in place so
Speaker 1: that you could kind of track what the strategy would
Speaker 1: be doing had it not been liquidated.
Speaker 4: Yeah, we actually continue to run it.
Speaker 5: So for any of our clients that were in the ETF,
Speaker 5: we basically moved them the day the ETF shut down
Speaker 5: into an SMA strategy. There was actually a little bit
Speaker 5: more aggressive focused, small cat value version of what the
Speaker 5: ETF was that obviously did exceptionally well. And so you know,
Speaker 5: for us, that was something that we questioned after the fact,
Speaker 5: did we shut this ETF down at exactly the wrong time?
Speaker 5: Because we basically shut it down at the COVID bottom
Speaker 5: And as you guys know, small cat Value went on
Speaker 5: to have a ridiculous run in the next year or two. So, yeah,
Speaker 5: it did well, and you know, the clients that moved
Speaker 5: to the SMAs did well. But you know, we always
Speaker 5: have that question, you know, did we make.
Speaker 6: The right choice that strategy that Jack's talking about kind
Speaker 6: of tracks AVUV, but with a little bit more optane.
Speaker 6: So the event to small cat value figned with kind
Speaker 6: of more variation both to the up and downside.
Speaker 2: Which by the way, is a pretty big hit.
Speaker 3: Avantis has a pretty decent hit with that small value fund,
Speaker 3: but it came out better timing. And it's interesting. It's
Speaker 3: always darkest before dawn. They literally closed it like four
Speaker 3: in the morning, you know what I mean. They didn't
Speaker 3: realize the sun was just about to rise. Ted Aronson,
Speaker 3: who's a guy I interviewed for my Bogel book, he
Speaker 3: also closed up at a similar time. There was a
Speaker 3: couple shops who were just like, I don't get this market,
Speaker 3: Like they almost had like an existential crisis, and they
Speaker 3: were like, the hell with it, I'm done. And most
Speaker 3: of them were value type investors, because value was supposed
Speaker 3: to come back like three or four times, and it
Speaker 3: would have like a couple months, but then growth would
Speaker 3: just run it over again and again. Like Marshawn Lynch,
Speaker 3: you know, the the cues would go beast mode, as
Speaker 3: we say, and I want to ask about that. We
Speaker 3: have been studying the cues and for us, we felt
Speaker 3: like last year, the cues We're going to have like
Speaker 3: a decade where small value and these other things were
Speaker 3: going to do well, and the cues came back even though.
Speaker 2: Rates were high.
Speaker 3: I want to talk about the existential crisis that people
Speaker 3: who are steeped in academic literature, who have mentors who
Speaker 3: have taken CFAs and multiple degrees. You know, only one
Speaker 3: manager on planet Earth has outperformed QQQ over fifteen years,
Speaker 3: and it's this guy, Ron Barron. And he only did
Speaker 3: it because he bought Tesla like fifteen years ago and
Speaker 3: let it become like fifty percent of the portfolio, and
Speaker 3: that was the only winning way to beat QQQ. Everybody
Speaker 3: else underperformed it. And a lot of the training is, well,
Speaker 3: these stocks look over valued, I should go into better deals.
Speaker 3: How do you feel about that? Because all of the
Speaker 3: academic literature and everything's pointing to looking at fundamentals and value,
Speaker 3: and yet the cues just kind of runs it over
Speaker 3: with these seven stocks leading the way. I guess I
Speaker 3: want to talk about your mentality and your spirit as
Speaker 3: this goes on year after year.
Speaker 4: Yeah.
Speaker 5: No, it's really really tough because, like you said, I mean,
Speaker 5: if you look at value spreads or if you look
Speaker 5: at any kind of data, someone like us behind the
Speaker 5: scenes will look at to say, is value attractive?
Speaker 4: Is value cheap?
Speaker 5: It's been that way, It's been cheap for a really
Speaker 5: long time, and we have had a good on recently.
Speaker 5: But like you said, it's nothing like what's going on
Speaker 5: with the qqqs. But you know, ultimately this is something
Speaker 5: you see throughout history.
Speaker 4: There's two things with this.
Speaker 5: One is this is something you've seen in other periods
Speaker 5: in history, and value has always come back, So that
Speaker 5: gives all of us that follow it optimism. But the
Speaker 5: other thing we tend to say to a lot of
Speaker 5: people is small cap value investing, particularly small cat value,
Speaker 5: aggressive small cat value investing is not for your average investor,
Speaker 5: or not for a lot of your average investors.
Speaker 4: You have to be able to sit through these periods.
Speaker 5: And you look at the period, say from two thousand
Speaker 5: to two thousand and two, after you know a period
Speaker 5: that ended in ninety nine where small cat value was awful,
Speaker 5: you got ridiculous performance over a three year period.
Speaker 4: And that's kind of what the history.
Speaker 5: Of value tells you, is that you get these long
Speaker 5: periods where you struggle, you get outrageously good performance over
Speaker 5: a very short period, and if you can't stick through
Speaker 5: the long periods, you don't get the short period. So
Speaker 5: for us, for people who look at data like you said,
Speaker 5: I mean, we're very very optimistic about small cap value.
Speaker 5: It's still exceptionally cheap. But also, like I think every
Speaker 5: investor has to look themselves in the mirror and say,
Speaker 5: can I sit through those kind of periods or maybe
Speaker 5: as you've talked about ERIC a lot of like in
Speaker 5: terms of how people size ARC and things like that,
Speaker 5: you know, sizing small cat value is a smaller portion
Speaker 5: of your portfolio is probably a good idea because it
Speaker 5: allows you to maybe sit through those kind of periods.
Speaker 2: Yeah.
Speaker 3: No, I remember one year we said that it was
Speaker 3: q VAL, which is your colleague West Gray's ETF. We
Speaker 3: thought that could be the next ARC because we're tobias
Speaker 3: is because it was so concentrated and if the regime
Speaker 3: changed that one should pop the most. Then we thought
Speaker 3: it had ARC potential, but it never lasted long enough
Speaker 3: to turn heads. It sort of needs to be like
Speaker 3: over a year, you know, it has to like have
Speaker 3: time to set in, and it just never got going.
Speaker 3: I think the other question I have for you about
Speaker 3: value is we had Kai wuh In here who runs
Speaker 3: the it tan ETF. He's a you know, a quant
Speaker 3: guy too, and he talks about intangible value, which is
Speaker 3: like a lot of the numbers that all of the
Speaker 3: quants look at. The dark matter that isn't measured is
Speaker 3: the brands and the brand value, and there's the people
Speaker 3: and this other stuff that makes the Magnificent seven and
Speaker 3: the queues actually more justifiable, and the sort of beaten
Speaker 3: up value stocks actually more justifiable where they are. In
Speaker 3: other words, that gap that you might measure that seems
Speaker 3: like values obvious is actually more narrow because of the
Speaker 3: intangible value not measured by the numbers.
Speaker 2: Do you have any thoughts on that?
Speaker 5: Yeah? No, I think Kai is one hundred percent right.
Speaker 5: We've actually had him on our podcast and talked about
Speaker 5: this as well. If you look at a company like
Speaker 5: say Microsoft, and you look at the price to book, like,
Speaker 5: is Microsoft's valuation relative to its office buildings and whatever
Speaker 5: physical things it has? Does that make any sense at all? No,
Speaker 5: it doesn't make any sense. So it obviously makes sense
Speaker 5: to adjust for its brand. It's technology like all that stuff.
Speaker 5: And so I think, actually what Kai is doing is awesome,
Speaker 5: and I think it's a great compliment to traditional value.
Speaker 5: Another thing I would say, though in favor of traditional value,
Speaker 5: is when you run like a very cheap small cap
Speaker 5: value strategy, the types of companies you're investing in are
Speaker 5: not the types of companies that have a lot of
Speaker 5: intangible assets. So value does a better je of valuing
Speaker 5: those kind of companies that are steel companies or whatever
Speaker 5: they are like that they don't have tons of intangible assets.
Speaker 5: And so as much as like the christ to book
Speaker 5: is way way off for Microsoft or Google, it's a
Speaker 5: better valuation metric for those really cheap companies. But when
Speaker 5: we had Kai on, he talked about the idea of
Speaker 5: blending both, which is, if you have your traditional value,
Speaker 5: taking this sort of new intangible based value and putting
Speaker 5: them together in a portfolio can make a lot of
Speaker 5: sense because we don't know which path the world's going
Speaker 5: to take. We don't know if these other value companies
Speaker 5: are going to come back or if these intangible companies
Speaker 5: are going to continue to lead the way, so a
Speaker 5: combination of them can make a lot of sense.
Speaker 3: Okay, while we're on this sort of nerdy value talk,
Speaker 3: I got to ask you about a report that I
Speaker 3: was writing last week. We had the guy Tim Rittolo
Speaker 3: on ETFIQ and this guy, you know how, you guys
Speaker 3: launched after a horrible run for value and you thought, Okay,
Speaker 3: it's good to launch after a bad back test because
Speaker 3: then you have room to run if it goes up.
Speaker 3: I kind of dig that that makes sense to me.
Speaker 3: You didn't get that run because it hasn't happened yet obviously,
Speaker 3: but a lot of ETFs launch after a good back
Speaker 3: test and then they actually go down. Studies have shown
Speaker 3: that after it hits market generally there's an underperformance period
Speaker 3: because they launched at the top.
Speaker 2: This guy launched.
Speaker 3: The CTF detracts coal stocks, and as we know, cole
Speaker 3: stocks are just like demonized all over the place and
Speaker 3: a lot of them are really just beaten up. But
Speaker 3: if you dig into this, it's fascinating, Like they the
Speaker 3: colestocks are on one hundred and seventy percent run, but
Speaker 3: their price to earnings is still five, which is half
Speaker 3: of their sector, which is the material sector, and the
Speaker 3: S and P is like twenty five.
Speaker 2: I think the queues is like forty.
Speaker 3: And it's interesting to me as value investors when you
Speaker 3: see something like this, you know, what's your take on that?
Speaker 2: Have you ever seen that.
Speaker 3: Much momentum and still that much deep value in one place?
Speaker 5: I mean maybe not, But after the pandemic we kind
Speaker 5: of saw that too, Like some of the pees at
Speaker 5: the you know, for all value small cap value companies
Speaker 5: coming off the you know, off the bottom of the pandemic,
Speaker 5: we're ridiculously low. And then you got that run where
Speaker 5: you had you on two hundred percent and they still
Speaker 5: were pretty cheap. You know, we didn't see like value
Speaker 5: spreads getting create or anything like that. We still saw
Speaker 5: them on the cheaper end after that. So yeah, and
Speaker 5: that's you know, studies have shown that's when you can
Speaker 5: really get some really great performance, you know, when you
Speaker 5: can get value momentum together working together, like you know,
Speaker 5: like your reference Wes Gray before like q mom became
Speaker 5: actually a value ETF for a while. Then like you
Speaker 5: had q valan q MOM looking very similar because value
Speaker 5: was doing so well. So you can get some of
Speaker 5: your best performance off periods like that. They just they
Speaker 5: just don't happen that often.
Speaker 6: Now I forget what year it was, but we got
Speaker 6: caught in some energy names because the trailing twelve month
Speaker 6: earnings were really high, but the price of oil had
Speaker 6: fallen dramatically, so the forward earnings were coming way down,
Speaker 6: and so our system was picking up these energy stocks
Speaker 6: that looked like they were like incredible values. And I
Speaker 6: think that hurt us. I forget if that was like
Speaker 6: twenty fifteen or whenever, that was, whatever year, but I
Speaker 6: think Jack, we we sort of modified some things coming
Speaker 6: off of that with our value trap. We kind of
Speaker 6: run a value trap negative screen to try to avoid
Speaker 6: like really bad performers, like the worst five percent of
Speaker 6: our universe. And I think that was a result of
Speaker 6: those energy positions, if I'm remembering correctly.
Speaker 3: Jack.
Speaker 4: Yeah.
Speaker 5: You know, one of the things anybody who does the
Speaker 5: type of value investing we do face is you're using
Speaker 5: past fundamentals to try to predict the future. And so
Speaker 5: what Justin's referencing with the value trap idea is, well,
Speaker 5: what types of scenarios would those past results tell us
Speaker 5: nothing about the future or tell us less about the future.
Speaker 5: And that's the idea that if you own a bunch
Speaker 5: of oil stocks and the price of oil just plummets,
Speaker 5: well that's not in the past fundamentals yet so we
Speaker 5: try to do some adjustments around the edges. To say, right,
Speaker 5: in a situation like that where the past fundamentals are
Speaker 5: not as predictive, what other things can we use to
Speaker 5: try to enhance our strategy.
Speaker 1: So I'm curious, knowing what you've known about ETFs now
Speaker 1: and this sort of baptism and exposure to like having
Speaker 1: a great idea and the market not totally rewarding the
Speaker 1: strategy at the time, and your conversations with financial advisor
Speaker 1: and clients and everything else, how do you evaluate just
Speaker 1: the ETF market as a whole now. I mean, there's
Speaker 1: so many things there. Obviously Eric's brain is filled with them.
Speaker 1: Normal people aren't like that, But like, how do you
Speaker 1: when you look at the options that are out there,
Speaker 1: how do you evaluate them now? And how has that
Speaker 1: change from your experience?
Speaker 5: Yeah, I mean I would say it's even more crowded
Speaker 5: and even tougher than when we started. And that was
Speaker 5: one of the reasons why when we look at shutting
Speaker 5: it down and say, well, you know, it was a
Speaker 5: mistake to shut it down because small.
Speaker 4: Cat value went on to do really well.
Speaker 6: You know.
Speaker 5: The other side of that coin is there were way
Speaker 5: more small cap value ETFs in twenty twenty when we
Speaker 5: shut it down, than there weren't twenty fourteen. So it's
Speaker 5: just it's a very like Eric, what you call it,
Speaker 5: what the terror Dome, Eric, Right, it's a you know,
Speaker 5: it's just a much more competitive space. It's a tough space,
Speaker 5: and we knew that going in, but I think it
Speaker 5: got a lot tougher as it went on.
Speaker 6: When we were trying to get the ETF up on
Speaker 6: some platforms, we went into UBS down and I think
Speaker 6: it was Jersey City or something like that, where their
Speaker 6: ETF due diligence team was, and we kind of pitched
Speaker 6: them on the market legends ETF and they were looking
Speaker 6: at it and they were asking us questions about our
Speaker 6: firm and the strategy and stuff, and then they're like,
Speaker 6: what are your plans on launching other ETFs? And we
Speaker 6: sort of at the time we were like, well, we're
Speaker 6: putting on because we were funding this on their own money,
Speaker 6: so we said we're putting all of our resources behind
Speaker 6: this ETF. But in retrospect, now that we kind of
Speaker 6: know everything and how it all shook out, like I
Speaker 6: could see how a firm like UBS would want to
Speaker 6: see a firm like ours launching multiple strategies, and if
Speaker 6: we would have launched a value strategy, a growth strategy,
Speaker 6: maybe something using momentum or something like that, I don't
Speaker 6: know what. You can slice and dice a lot of
Speaker 6: our stock selection strategies in a lot of different ways.
Speaker 6: So it's I can see why they were asking that question,
Speaker 6: and we kind of got it wrong. Like what we
Speaker 6: should have done out of the gate, if we had
Speaker 6: the capital to do it was probably launched two or
Speaker 6: three of these things, because maybe the growth one would
Speaker 6: have took off, the value one would have lingered there,
Speaker 6: but you could have used the growth profits to stay
Speaker 6: in the game long term for the value one to
Speaker 6: eventually see see the data.
Speaker 3: And also if you let's say you get thirty million
Speaker 3: in the growth the nobody else bought it, it would
Speaker 3: it might have doubled to sixty just on the market performance,
Speaker 3: which helps you stay in business. It's interesting them and
Speaker 3: Kathy having this sort of like launch date where they
Speaker 3: both thought they were right. Kathy happened to get the performance.
Speaker 3: Not to say either the both ideas were completely logical
Speaker 3: and genuine, but it's just interesting and both went all in.
Speaker 3: I mean, she doesn't have any value hedge, that's for sure.
Speaker 3: She doesn't just doesn't believe in it. Could you guys
Speaker 3: even launch your growth stocks or is that just against
Speaker 3: your like, I don't know, like being to be into
Speaker 3: high growth.
Speaker 4: No, not at all.
Speaker 5: We have strategies that are growth, We have momentum, We
Speaker 5: have all kinds of strategies. They just tend to have
Speaker 5: a bias if you look at them all as a whole,
Speaker 5: they tend to have a bias towards value. But no,
Speaker 5: we could have done that, And to Justin's point, I mean,
Speaker 5: that might have been the best way is to have
Speaker 5: you know, you see that a lot. I think with
Speaker 5: ETF launches, people will kind of do both ends of
Speaker 5: the spectrum so that you're at least gonna win on
Speaker 5: one side of it.
Speaker 4: So that might have been something we should have done.
Speaker 1: We haven't talked about artificial intelligence, which, if there were
Speaker 1: ever a buzzy word or phrase, it feels like it's
Speaker 1: succeeded all rational expectations already when you look at what's
Speaker 1: capable of investing, also at the companies that are obviously
Speaker 1: becoming increasingly involved and invested in this space. Is there
Speaker 1: a moment that any of this looks like value or
Speaker 1: is it just all speculation and growth stiff.
Speaker 4: I mean, there's a couple sides to AI.
Speaker 5: There's there's like the market impact of it, and there's
Speaker 5: kind of what's going on behind the scenes. So we're
Speaker 5: starting to play with it in terms of, you know,
Speaker 5: it can be useful in value, in terms of maybe
Speaker 5: you actually constructing value strategies. You know, for us, with
Speaker 5: our bias is value is value investors. You know, it's
Speaker 5: hard for us to see like those types.
Speaker 4: It's hard for us to invest in those types of companies.
Speaker 5: And you know, the thing about growth too, and especially
Speaker 5: early stage growth, is quant strategies do not work well
Speaker 5: at all because you most of if you look at
Speaker 5: the AI type compmpanies right now, most of them will
Speaker 5: not do well. The basket of them probably will not
Speaker 5: do well, but there'll be just some outrageous, massive winners
Speaker 5: in there. And that's where the growth people, the people
Speaker 5: that are good at growth investing, the venture guys, the
Speaker 5: growth investors, they do a really good job of being
Speaker 5: able to figure out what those companies are like. We
Speaker 5: can't apply a quant screen right now to those types
Speaker 5: of companies and say here are going to be the winners.
Speaker 4: It just doesn't work.
Speaker 5: So we don't exist that much in that space because
Speaker 5: our types of quant strategies don't work very well there.
Speaker 6: Just from an investment standpoint, there are some I mean,
Speaker 6: we don't do any of this, but Doug Clinton over
Speaker 6: at deep Water, he's Gene Munster's partner. They're building these
Speaker 6: and tracking these indexes, broad based market indexes that are
Speaker 6: waiting companies based on sort of looking at their I
Speaker 6: guess fundamentals through the lens of AI and then trying
Speaker 6: to let the AI create sort of the better index
Speaker 6: versus market cap weighted And I think they started tracking
Speaker 6: that at some point last year. So obviously they've got
Speaker 6: along ways to go in terms of when the performance
Speaker 6: becomes meaningful. But you know, you're starting to see some
Speaker 6: strategies be created using using AI. The only thing that
Speaker 6: I wonder with that is, you know, if you feed chat,
Speaker 6: GPT or some AI engine, I don't know, thirty years
Speaker 6: of fundamental data and ask it to create a strategy
Speaker 6: and you get this like great back test, It's like, well,
Speaker 6: is that just maybe a big exercise and just data
Speaker 6: mining and doesn't make sense? And is it likely to
Speaker 6: work going forward, but they're starting to in the academic world.
Speaker 6: There's been some research where some of the academics we've
Speaker 6: actually had in our podcasts are finding things using AI
Speaker 6: and machine learning. And it's almost like the mindset is
Speaker 6: it almost doesn't matter why it works. The fact that
Speaker 6: it works is it works. And so it's kind of
Speaker 6: a weird thing, like we tend to be grounded in
Speaker 6: like first principles and why value investing should work, or
Speaker 6: why growth at reasonable price investing, or why quality companies
Speaker 6: should compound and over time, but the AI is kind
Speaker 6: of bringing us a little bit in a different direction.
Speaker 3: Real quick about you guys have small value. You guys
Speaker 3: are the quants, and I'm friends with the quants. I
Speaker 3: met you Justin at West Gray's Marines March for the Fallen, which,
Speaker 3: by the way, this guy Justin is iron Man. Like
Speaker 3: there's a lot of iron Man in the quant world.
Speaker 3: They love to work out. This guy's like the top guy.
Speaker 3: I think he did the race like in half the
Speaker 3: time I did, or something like that. You still do
Speaker 3: you do Ironman?
Speaker 2: Run? Still?
Speaker 6: No, I'm just just just a runner and rocking when
Speaker 6: I can. I have I didn't do Wes's I didn't
Speaker 6: do the marsh for the fallen last year. It's it's tough,
Speaker 6: that's that's pretty brutal, but it's it's so good and
Speaker 6: it's so good to get out there and just work hard,
Speaker 6: and I.
Speaker 3: Was impressed by you. Okay, so these quants. I have
Speaker 3: a theory that part of the other thing going on
Speaker 3: with the quant world is that you've got the ETFs
Speaker 3: coming out from themes and even track metrics, so metrics specific.
Speaker 3: So for example, the free cash flow yield ETF, CAF
Speaker 3: and cows have gotten billions. I mean, the flows into
Speaker 3: these are ridiculous. They tend to lean value. Then you've
Speaker 3: got something like natural resources ETFs, which is now the
Speaker 3: biggest thematic category you open up the hood, it's largely value.
Speaker 3: What do you think of this idea that just sort
Speaker 3: of slapping on different names to ETFs actually is maybe
Speaker 3: part of how to sell value going forward, as opposed
Speaker 3: to just calling it value.
Speaker 6: I mean that sort of makes sense to me because
Speaker 6: I mean I think people those themes and ideas and narratives,
Speaker 6: you know, can make it more understandable, maybe make it
Speaker 6: more sellable. You kind of get off the value train,
Speaker 6: and it's more like, Okay, we're going to look to
Speaker 6: capitalize on this theme in the market or trend. I
Speaker 6: could certainly see that for sure.
Speaker 5: There's just so many You've seen so many ETFs with
Speaker 5: like small cap value or whatever in their name. It
Speaker 5: probably is good to try something different because going back
Speaker 5: to our own experience, like and you compared us to
Speaker 5: Kathy would before, it wasn't just the performance that she
Speaker 5: did better than us. She is master of marketing. The
Speaker 5: stuff she talks about for the future and the fifty
Speaker 5: percent GDP growth and all that stuff. I mean, she
Speaker 5: is really really good at that, and you know we're
Speaker 5: not as good. So you know that that is something
Speaker 5: we probably could have figured out. Is maybe if we
Speaker 5: had wrapped it, if we had named it differently, or
Speaker 5: we'd wrapped it in a different way, maybe it would
Speaker 5: have done better.
Speaker 3: Yeah, we joke on the team sometimes they just have
Speaker 3: these companies that make money or stuff you really need
Speaker 3: in life, just you know, because her stuff is all
Speaker 3: like you know, electronic and robots and I don't know,
Speaker 3: just like getting back to basics, you know, Joel, like
Speaker 3: that just seemed to and that actually worked In twenty
Speaker 3: twenty one for a little bit, right, some of the
Speaker 3: those names actually became popular companies that had a lot
Speaker 3: of cash. It all of a sudden became like fundamentals
Speaker 3: matter for a brief moment there.
Speaker 1: Well, I'm just curious, do you ever think that you'll
Speaker 1: do an ETF again or was this a one and
Speaker 1: done and stick to SMAs from now on.
Speaker 4: I think it's I think it's unlikely. It would be
Speaker 4: my answer to it.
Speaker 5: I just think it's a tough I mean, if we
Speaker 5: ever have a ton of success in the business, then
Speaker 5: we want to try it again. Maybe, But it's just
Speaker 5: going back to what I said before. It's just a
Speaker 5: really really tough space right now, and it is. There
Speaker 5: are people like say Simplify as an example, there are
Speaker 5: people who are finding things that are white space, things
Speaker 5: that are very different than anybody else is offering. But
Speaker 5: for us in the quant space, whether it's quant value
Speaker 5: or quant momentum, I mean, there.
Speaker 4: Are some really really great cheap funds.
Speaker 5: Also, if you look at something like q val, which
Speaker 5: you mentioned before, when we started, qu vow's fee was
Speaker 5: probably twice what it is now. So just to show
Speaker 5: how much fees have compressed. So even if we had
Speaker 5: a great idea, it would be very hard to execute it.
Speaker 5: From the perspective, we'd probably start with a break even
Speaker 5: that was double than what our break even was when
Speaker 5: we did the first time.
Speaker 1: All right, Jack fourhand, justin Garbload. Thank you so much
Speaker 1: for joining us on Trillions.
Speaker 4: Thank you for having us.
Speaker 7: Thanks guys, thanks for listening to Trillions until next time.
Speaker 7: You can find us on the Bloomberg Terminal, Bloomberg dot com,
Speaker 7: Apple Podcasts, Spotify, or wherever else you'd like to listen.
Speaker 7: We'd love to hear from you. We're on Twitter, I'm
Speaker 7: at Joel Webber Show.
Speaker 1: He's at Eric Baltunas.
Speaker 7: This episode of Trillions was produced by Magnus Hendrickson. Bye.