In this conversation with financial advisor Josh Jalinski, David shares his views on constructing and benchmarking portfolios, factor investing including growth versus value, and managing regret. We explore a number of asset classes and strategies including dividend investing, leveraged loans, closed-end funds, equity REITs, and China. We also discuss how to manage retirement assets.
Show Notes
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 473. It’s titled “Investing Fundamentals and What is Attractive Now.”
Today’s episode is an edited version of a conversation I had with financial advisor Josh Jalinski. The interview originally aired on Josh’s Financial Quarterback radio show and podcast. The radio show is broadcast each Saturday on WOR710 in New York City.
In the episode, Josh and I cover a number of topics on investing fundamentals, including benchmarking portfolios, portfolio construction, and factor exposure; growth versus value investing, behavioral finance, including managing regret. Investing in leveraged loans, closed-end funds. We talked about China, ESG investing, dividend investing, and retirement investing.
Josh Jalinski is the founder, CEO, Chief Investment Officer, and portfolio manager at Jalinski Advisory Group. Josh founded his firm in 2005, with the aim of helping people put together a financial gameplan to maximize wealth, reduce risk, and protect their lifestyle in retirement. I hope you enjoy this conversation on a variety of topics that Josh Jalinski and I had.
David’s Journey into Podcasting
Josh Jalinski: Hi, everybody. This is Josh Jalinski, the Financial Quarterback, and we’re being joined by legendary podcast host since 2014, David Stein, founder of Money for the Rest of Us. So in 2014, I had a guy who had a podcast on finance, a million downloads, like you, since 2009. Everybody wants a podcast now, but in 2014 it was not easy to do. It was kind of a new thing. So describe your origin story in podcasting, David.
David Stein: Sure. So I left the institutional investment business in 2012. I worked for an asset management firm, I was the chief investment strategist, and retired; I called myself retired for a little bit in my mid-40s. But I missed teaching.
I worked with a lot of endowments and foundations, institutional assets, and was a guest on a podcast called Listen Money Matters, and realized at the time people were getting these data plans on their phones, and as a result, all-in data, we thought “Well, I like being a guest. Let me launch a podcast and see how it works.” And timing was good, and much better timing back then than it is trying to launch a podcast now.
Josh Jalinski: Definitely. So what about your work in institutional money? Describe that. You had how many years as an institutional advisor?
David Stein: Yeah, I did just over 16 years. So I joined a firm in Cincinnati called—it’s called FEG Advisors now. And they were a traditional sort of pension consultant, working mostly with not-for-profits. And then we launched one of the first outsource asset management businesses in 2003.
So I sort of put that product together, me and a few partners. We’ve launched a track record, and so I ran that for just about a decade before leaving in 2012. And so we had assets that we managed, in terms of just sort of with these not-for-profits taking discretion, within the confines of their policy statements. And it was pretty much an active allocation approach, multi-asset classes, and they continue to run that product today. It has multiple billions of dollars in that service.
Josh Jalinski: Do you miss it?
David Stein: Managing money? No. Not at all. It’s hard to do, because you’re very much compared to a benchmark every month, and I just got tired of the rat race. So no, I’d much prefer doing what I do now.
Benchmarking Portfolios
Josh Jalinski: Let’s talk about benchmarking. And I do want to talk about what you’re doing now. Benchmarking. The average person, Money for the Rest of Us, they hear benchmark—most people don’t even benchmark. They don’t even know what benchmarking is. And then when they benchmark, they benchmark to the wrong thing. Talk about that.
David Stein: Right. But within the institutional space, you have these—let’s say a typical university endowment, there’s an investment committee, and every quarter they’re getting a report, and they’re showing “Here’s how we did, and here’s our annualized return for our endowment. And here’s a market benchmark made up of indexes”.
It’s usually some type of weighted index made up of, let’s say, MSCI indices on the stock side, Bloomberg indices on the bonds. Or it could be other asset classes including in that. And the goal—I mean, these committee members measure success. Did the portfolio outperform that index over a quarter, a year, three or five years?
They’re also measuring against their peers. How did other endowments do? And so as individuals, we don’t do that. And which I think is a good thing, because we care about making money. Did our portfolio grow? And are we going to meet our retirement savings goals? But the institutional world, because you just have these volunteers coming, they are very focused on “If we’re paying fees to advisors, did they add value above a passively managed index?” Most individual investors are already—they’re using ETFs, or let’s say an index fund, and so it’s less of an issue. And it certainly isn’t the mindset of individuals, by any means.
Josh Jalinski: Yeah, definitely. So how do you get out of the FEG world? Layoffs?
David Stein: No. So I joined in ’95 and became a partner, and on our executive team by ’98. We sold the firm to help our founding partners exit in 2002. And then we bought it back in 2005, at half what we sold it for.
Josh Jalinski: That was smart.
David Stein: .by leveraged buyout. So 2011-ish my retirement number had been hit. I was just ready to move on, so my partners bought me out.
Managing Assets
Josh Jalinski: Did you do some of the things you talk about on a weekly basis on Money for the Rest of Us? Did you do those tips then? Or have you kind of emerged into this financial —
David Stein: No. I mean, how I teach investing now is how we managed assets at FEG. Especially the outsource asset management division. So it was very much active allocation, but making maybe two to three changes a year, focusing on portfolio drivers, expected returns. And back in 2003 we were using ETFs to implement a portfolio, and we actually got pushback from institutions. Like “ETFs? That’s a retail product.” And now institutions use ETFs all the time. So we were ahead of the curve in terms of using ETFs.
And really, the impetus of that product was—we were traditional consulting, selecting active managers, and I got the idea kind of 2002 to say “Well, what if we just took the best ideas from our best managers?” And these were managers on a recommended list. This was an equity product. “And we’ll just get their top five to top ten holdings, and we’ll put together a portfolio, and we’ll get on a turnkey asset management program, and we’ll run this portfolio. Best ideas, high conviction ideas.”
So I spent a summer—and it was the summer of 2002—backtesting it. We used BARRA software at the time, which was really a way to kind of backtest, and control your risk. And lo and behold, there wasn’t any excess return. There was no alpha in this product. And that was incredibly discouraging, because either we were lousy at picking managers, or there was something else going on.
And what that something else was is much of what’s considered excess return or outperformance from an active manager is not due to security selection; it’s due to their factor exposure. Is it a value tilt? Is it momentum? Is it yield? And by combining 100 stocks in a portfolio and constraining the risk, we basically diversified all that factor exposure to where we couldn’t exceed the benchmark net of fees.
And so that’s when we said “Well, we can develop our own factor exposure using ETFs.” And that’s what we did. We could put a value tilt on, or just focus on what were the areas of the market most attractive back in 2003. In 2004 it was emerging markets, it was small cap, and that was enough to add excess return, and we attracted a good following, and grew a really good, solid business there.
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