Terri Spath is chief investment officer at Sierra Investment Management, the parent company of the Sierra Mutual Funds and Ocean Park Asset Management. She is responsible for market and economic analysis, portfolio allocation, investment strategy and building client solutions at the firm. Terri previously served as deputy chief investment officer at Mercer Global Advisors. Her extensive experience in the financial services industry includes portfolio management and analyst responsibilities at Franklin Templeton, Fidelity Investments and RSF Capital Management.
Terri holds the Chartered Financial Analyst and the CFP® designations. She earned an MBA from Columbia Business School and an A.B. from the University of Michigan.
I interviewed Terri last week.
What is the history of Sierra and what led you to introduce your mutual funds?
Sierra was founded in 1987 by Dave Wright and Ken Sleeper, who were focused on providing like-minded conservative investors with a disciplined, rules-based investing approach. After two decades of seeing how well their clients responded to a concerted effort to provide downside protection and mute volatility, Sierra took its approach, previously only available in separately managed accounts, and created those same strategies in a mutual fund format. Obviously, this provides far greater access for investors and advisors seeking a manager with a track record of limiting drawdowns while generating satisfying risk-adjusted returns over time, but it’s no less important now than when we exclusively offered SMAs that our clients understand our processes and that their goals are aligned with ours.
Tell us a little bit about how Sierra invests. What’s unique about your approach?
Our investment approach is centered on tactical asset allocation. We allocate to mutual funds and ETFs across the range of asset classes, including global equities and bonds, commodities, currencies and alternative investments, with a focus on keeping clients out of trouble while earning a satisfactory return over a market cycle. Our investment philosophy is rooted in a disciplined, rules-based approach that uses time-tested proprietary metrics to identify changes in trend and answer the questions of when to buy and when to sell in a given asset class.
On a daily basis, we look at every holding across every account to identify whether a position’s trend has reversed from rising to falling and moved through our dynamic “line-in-the-sand” trailing stop sell level. Similarly, we rank and identify any mutual fund or ETF which has developed a rising trend and reached a buy level. So our approach is very tactical and predicated on a holistic view of all the asset classes we monitor. We are looking to dynamically allocate to asset classes with the right valuation, and limit exposure to those that, according to our conservative metrics, are no longer as attractive.
What does tactical investing mean to you?
We view tactical investing as the intersection between passive investing, on the premise of which is the belief that all investors are at all times logical, and active investing, which frequently falls victim to the emotional biases of the investor. We take a rules-based, logical approach in order to capitalize on the trends that emotional investing produces in the markets.
Many advisors assume that tactical investing is synonymous with market timing, and are very skeptical of anyone’s ability to accurately time the market. How do you respond to that concern?
Market timing suggests making bets on directions of individual investments based on a prediction of the future. Our decisions to buy or sell are always the result of what the market is telling us. We are reactive, not predictive, looking at the trends in any given asset class or security as they happen rather than guessing what we think should be happening.
How do you go about selecting underlying managers? What makes one high-yield fund better than the next, for example?
We evaluate managers with a rules-based decision making process that is similar to how we evaluate asset classes. Even an average manager outperforms a passive benchmark in many asset classes, so we work to identify those managers that are outperforming with a similar, or lower, risk profile than the asset class in which they operate.
Here is an example: in late 2015, some high-yield funds began declining and reaching sell levels while others were holding up. The difference? The weak performers had greater exposure to energy issuers and oil prices were falling fast. Our rules show us how to avoid managers making the wrong decisions and identify those that are making better ones.
Your funds focus on conservative investors. What are the biggest challenges inherent in investing with this focus? Is the volatility helpful or harmful to this pursuit?
Discipline, or “staying the course,” is a challenge many tactical managers face, but with our rules-based process, we don’t have the ability to talk ourselves into making a mistake. That’s not to say we don’t ever make errors, but we have navigated the ups and downs of the stock and bond markets over the long term in part by making money by not losing money. Even in the most volatile markets, our track record demonstrates that we are consistently able to outperform and mute volatility. For investors who are in retirement, approaching retirement, conservative, or looking for management of a conservative part of a portfolio, this is critical to achieving long-term goals.
How do you manage for downside protection?
Avoiding losses is a cornerstone of our tactical strategy. On a daily basis, we use our proprietary systems in order to identify whether a position’s trend has reversed from rising to falling and moved through our dynamic “trailing stop” sell level. In other words, depending on the asset class, even a small regression can trigger a sell in our portfolios. While this can of course put a cap on the upside, it limits downside as well, which is our primary concern.
It seems as if Sierra is more fixed-income oriented. How do you feel about the bond market right now especially with the return of volatility in the equity markets and rising rates?
Tightening Fed policy, inflation, rapidly growing deficits and their impact on rates can sometimes move bond prices violently. There were plenty of fixed-income safety nets during the first correction of 2018, but, and this is critical, those safety nets aren’t components of the Barclays Aggregate index. Being tactical, our exposure includes asset classes such as floating rate loans, for instance, which have held up in positive territory, but have a zero allocation in the Barclays Aggregate index.
What should investors be wary of within the bond market?
I am very concerned that most investors are not aware of the sharply higher interest rate sensitivity of the Barclays Aggregate index, where duration is now at a 30-year high. Think of it this way: Right now, a 1% rise in rates knocks about 6% off the price of the index and takes 28 months to recover, at current yields. Ten years ago, that same 1% rise in rates clipped only 3.75% off the price with less than 12 months to recover (at prevailing rates at that time). Most investors are not aware of the current riskier profile of this “low-risk” index that so many investors have exposure to.
Which asset classes are providing opportunity in this environment?
The current environment has been characterized by volatile and falling stock prices as well as volatile and rising interest rates: an unusual combination. In more recent history, when stocks fall, bond prices go up (and interest rates fall) as investors look for safety. During the first correction of 2018, this relationship did not materialize. Asset classes that we have been adding to incrementally are small cap stocks, floating rate loan funds and certain commodities.
How do advisors typically use your products within their clients’ asset allocations?
Advisors will utilize our strategies as a single-ticket solution to their fixed-income needs or as a single-ticket solution for the conservative sleeve of their client’s portfolios.
What do you say to those who argue passive management is the future?
There is certainly a role for passive management for investors who are willing to ride the roller coasters over a long period of time. For most asset classes, including high-yield corporate bonds, emerging-markets bonds, preferred stocks, municipal bonds and many more, even the average active manager outperforms a passive benchmark. Layer on a robust sell strategy like we have at Sierra and the left-tail risk of big losses are reduced substantially.
Life isn’t passive. Your investment management shouldn’t be either.
Read more articles by Robert Huebscher
Terri Spath is chief investment officer at Sierra Investment Management, the parent company of the Sierra Mutual Funds and Ocean Park Asset Management. She is responsible for market and economic analysis, portfolio allocation, investment strategy and building client solutions at the firm. Terri previously served as deputy chief investment officer at Mercer Global Advisors. Her extensive experience in the financial services industry includes portfolio management and analyst responsibilities at Franklin Templeton, Fidelity Investments and RSF Capital Management.