We recently spoke with Mark Eicker – the Chief Investment Officer of Sterling Global Strategies. In the interview, he commented on the ALPS/Sterling ETF Tactical Rotation (ETRAX), as well as his firm’s investment strategies.
Insights from Mark Eicker
MutualFunds.com: In looking at this relatively new fund, we are seeing a bit of a twist in a mutual fund holding ETFs as part of the strategic allocation. This is exactly what the ALPS/Sterling ETF Tactical Rotation (ETRAX) is doing. Can you give us some insight on the fund and its objectives?
Mark Eicker: The ALPS/Sterling ETF Tactical Rotation fund was launched on 6/30/14 with the objective to replicate our Sterling Tactical Rotation Index, which went live on 6/23/10. Interestingly, our separately managed account was launched on 1/30/10, prior to our index; however, it also uses the same rules-based methodology as our index.
The fund is a global, high conviction fund that has the ability to invest 100% of assets in cash during broad market declines. We believe the most accurate factor for determining the direction of any asset class is price movement. Once an asset class enters into a bull market, it generally rises for many months/years, while bear markets last for many months/years as well. When I use the term high conviction, I’m referring to the fact that we are always allocated 50%/50% between the top two asset classes determined by our relative strength/moving average mathematical formula. We are not necessarily trying to be in the top two asset classes, but more importantly we are attempting to avoid asset classes that are in bear markets.
We rotate between commodities, U.S. equities, international equities, U.S. bonds, REITs and cash using ETFs that represent each asset class. The rationale behind what we do is that some asset classes are generally rising while some are falling and we attempt to avoid the asset classes that are declining. For instance, since the fund launched, both commodities and International equities have experienced steep declines and our fund has never owned either. Our index never rotated to U.S. bonds during 2013, which was a negative year for bonds.
During most market cycles (even equity bear markets) some asset classes rotate higher. Our ability to rotate to 100% cash is designed to protect during those periods that everything is falling in unison, such as the 2008 bear market.
MutualFunds.com: What specific sectors are you looking at currently for new capital?
Mark Eicker: While there are mutual funds that rotate sectors of the equity market, we rotate broad asset classes, seeking to take advantage of low correlations. We believe this is the best way to manage an absolute return product that has the ability to capture most of the equity market upside. In addition, we believe the fund should outperform equities over a full market cycle with considerably lower risk characteristics.
The two asset classes we are currently invested in are U.S. equities and REITs. Again, we own 50% of the portfolio in each.
MutualFunds.com: How will the expense ratio break down as far as ETFs being part of a mutual fund?
Mark Eicker: Most of the ETFs that we rotate between have low expense ratios, and just as importantly, tight spreads. We use ETFs to capture broad exposure to equity markets, and we value the tradability of the ETFs in our universe. The ETFs that make up our current allocation to US. .equities and REITs have a combined expense ratio of less than 1/10 of 1%. Our International equity and commodity exposure are more expensive but we believe the low correlations they provide are worth the added expense.
MutualFunds.com: For those who may not know how the birth of a new mutual fund takes shape, can you give us some insight as to the planning and preparation that goes into the process?
Mark Eicker: We are fortunate to have had a fantastic partner in ALPS. They are a mutual fund company located in Denver and this was not their first rodeo when it comes to launching a new fund. Everything was already in place and the process ran like a well-oiled machine. With that said, we were kept in the loop regarding time-lines and the overall process. I can only imagine how time consuming this would have been if we had done it ourselves.
Creating a new mutual fund is only the beginning. Once it launches, no one has access to invest in it until the fund has been placed on platforms. Fortunately for us, ALPS has an extremely experienced Key Accounts division that has done a great job in getting us shelf space. Their wholesalers have also done a wonderful job of explaining our value to financial advisors across the country.
MutualFunds.com: What macro factors do you use in forming your investment strategy?
Mark Eicker: We rely on price movement to determine our allocations rather than following global macro themes. Using price movement allows us to block out the investing noise and to eliminate human behavioral elements that tend to hurt long-term performance. With that said, we love when there is a divergence in returns between the asset classes we rotate between. We have seen this over the past several months with U.S. bonds and equities rising while commodities and international equities have been falling. When asset classes fall they give us an opportunity to buy at cheaper prices.
MutualFunds.com: Finally, what are the main themes you feel investors should pay attention to as we head into 2015?
Mark Eicker: As mentioned, we use quantitative analysis to determine our allocations. There are great mutual funds in the market that are focused on thematic investing, but that is simply not what we do at Sterling Global Strategies. I’m excited to see whether commodities rebound, international equities begin to outperform, how the Federal Reserve untangles the web they have weaved and so on in 2015, but I’m only a casual observer, not a prognosticator.
About Mark Eicker
Mark Eicker began his financial career at Smith Barney in 1993, and has since continued to dedicate his professional career to helping investors achieve their investment goals while also attempting to reduce their risk. As Chief Investment Officer, Mark has developed a set of proprietary algorithms that seek to significantly reduce portfolio volatility and downside market exposure, while also striving for positive returns in any market environment. In this role, he continues to develop new investment strategies that can take advantage of the inconsistencies of the capital markets.
Mark has been quoted in numerous national investment publications as well as respected trade magazines, and has recently been selected to be a contributor for Forbes. He can also be found speaking and presenting on the ETF industry, the global economy and other investment related topics at industry conferences and events across the country.
Mark holds a Bachelor’s Degree from the University of New Mexico, where he received the honor of 1st Team Western Athletic Conference Scholar Athlete Award in 1989 for football.
In addition to his enjoyment of football, Mark enjoys spending time reading, golfing, hiking and traveling abroad.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of MutualFunds.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.