Adam Eagleston, FORH

Process in 2020. And launched 4-H in 2021. Yeah, no, that's great. And you'd mentioned kind of working for that trust company and doing some SMA due diligence. I did that for a short while as well. And you really learn and understand so many different strategies. And I think it helps us as chief investment officers really build kind of more robust portfolios. And so...

I could not agree more with that. I think that's absolutely correct. Again, you see both ends of it, right? Like you kind of see what works, what doesn't work. And it's just the insight you gain. And I think the other piece too, and not to disparage manager selection, but when you're ultimately the person in the seat making the individual selections, it's just a whole different level of accountability versus the manager selection piece of it. So that was the one thing for which I probably wasn't entirely prepared to live and die by the daily report card you got.

Yeah. Yeah. That... Over time though, you learn to stop looking at the daily report card and... That's true. And just trust the strategy and know when it's going to work and when it's not going to work. And yeah, I was a P&L watcher for far too many years. And I think it's probably why my eyesight isn't so good anymore from staring at a screen for all that time. But... So Adam, what do you like to do outside the office? I always like to hear people's hobbies, things that they enjoy, and then we'll kind of jump right back into Forbiddle Bowl and the firm.

Yeah, of course. So with the 4th of July upcoming, I've got planned to pull my children around town in a rickshaw for the Wyoming 4th of July parade. But aside from that, I've got three youngest children. So I coach their soccer teams. And when I'm not injured, I still play a fair bit of soccer myself.

Yeah. It's funny. I also have young kids. And when we started five-year-old soccer, I thought, this is going to be horrible. And then I find myself at six-year-old soccer, like yelling on the sidelines and being that parent. And it's way more fun than I thought it was going to be.

Oh, for sure it is. And I joke with my wife all the time. The only thing worse than coaching is not coaching kind of thing. So the first year that my daughter played, she was probably three or four years old. And I took it arguably too seriously and was watching a very nice guy try to coach him. I thought, I think I can do better than that. So I've gone down the path of getting my coaching licenses and all that kind of stuff, because it's not dissimilar from building portfolios in terms of

Building soccer teams. So there's lots to learn from that type of interaction. Yeah, I actually did the same thing. I was assistant coach this year. I didn't want to take on the full head coaching role because part of that task is organizing who does snack time when, on what days. And I didn't want that responsibility. So I figured I would just help coach and let somebody else worry about that important stuff, like who's bringing the Cheez-Its.

Yeah, for sure. It's one of those things, right? You can sit at your desk and make large trades. But what always terrified me was getting a match day wrong and having the parents show up at the

Wrong place at the wrong time. So yeah, for sure. That's a lot of responsibility. So we're going to talk about the ETF mostly today. But before we do, let's talk about Formidable, the firm, more holistically. Can you talk about all the different services you provide? Because from what I saw, it looks like you have a robust asset management and planning business, and they're also a private fund business as well. So I'd like to talk about both of those things. So what do you guys all have going on at Formidable?

Yeah, we have a lot going on. Pleased to report that the firm just hit its 10-year anniversary. So really a credit to Will Brown and the team that he's built here. He spun the firm out. I think it's really part of our ethos is that we will build something if we think we can do it better. And that was really Will's impetus in building the firm. He's done a great job of recruiting a lot of talented advisors to come to the firm over the decade. It's been in existence. And that was really the progression for the ETFs as well. As I mentioned, we had been doing a private fund since 2016, which predated me. But that fund had some success, especially in 2020, thanks to some of

The history of the firm and how it's structured. So with the private fund, is that fund still in operation?

Yeah, that fund is still in operation. It is pivoted over time. So what we found is that a lot of the things that we were doing in the private fund found their way into 4-H. And we really like the ETF wrapper there. And the private fund has changed a bit. And that's become a little bit more of a hybrid between some of the traditional public equity stuff that we do, and also some more esoteric private equity, private placements, more traditional private equity, etc. So the private fund has shifted a little bit over the last few years.

So is the ETF kind of a version of that fund X the private investments? So does it mirror at all maybe the equity selection in that fund?

I think at one point it did, and they've really diverged in some interesting ways. Really, when we used a lot of the learnings we had, some of the successes we had in the private fund, we decided to bring those to bear in 4-H. And then we built the structure around that to a greater degree too. So again, if you think back to that hub and spoke model, what we found is that as we were putting models together for the advisors to use, that the more traditional pieces of it, you could find solutions there for the most part. Now, that's not to say that everything out there was perfect. And as I mentioned, there are often cases where we think we can do it better. And

To a lesser degree like you had in 2022. Right. So can you explain the construction of 4-H? What type of investments are clients and advisors going to see inside of there and kind of just talk

About the strategy as a whole? Sure. So the components are individual equities and options, and those are designed to reflect any number of alternative sleeves that we find attractive in terms of an overall investment profile. The fund itself is constructed from both a top-down and bottom-up perspective. I know you had a great interview with somebody in the risk parity space, which I was listening earlier this week. And I would say there are aspects of the top-down component that are risk parity-ish. You also had the black swan guy, and there are pieces of it that are a little bit like that too in terms of trying to hedge some of the tail risks. So if you think about it, we look at the world in terms of four broad regimes that you can have, which is, again, sort of like risk parity.

Yeah. So as far as that framework is concerned, when you're doing that analysis, how are you deciding internally what regime you think we're either in or heading in? Is that something that you have a process for, or is that done by investment committee?

No, that's definitely a process and it is very committee oriented. So Will and I are the co-PMs on the fund. So we work together very closely on that, but also leverage. Again, we have a lot of really bright people here at the firm and those are, we do take input from them in terms of thinking through what our outlook is. So there's an investment committee, but it's really Will and I making the ultimate decision. In terms of how we think about the various factors, if you will. So broadly speaking, we're trying to determine, this is again, it harkens back to risk parity from both an absolute level and a rate of change perspective. What does growth look like? And what does inflation look like? And we kind of break that down into seven different categories.

Seeing right now. Yeah, no, I couldn't agree more. I think, you guys definitely aren't the only ones holding the view that defensive positioning is probably warranted. I have an interview with Michael Gade that came out before this interview and, he talks about his indicators were all risk off, but his rotation was into bonds, long bonds in 2023, or I'm sorry, in 2022. And he's like, look, the signal was right, but my escape valve was wrong. And, you just, you just, you never know what the market's going to bring you, but.

Um, no, and that's a great point, right? you think about the historical correlation among asset classes and, and if you were to just have a time issue and said, look, this is what's going to happen. What do you think would do well? And you're, you're anchored on those historical correlations. You could very easily make that case. Um, which is, is for us why we prefer to use hedges because those are mathematically a more assured way to do it. Now there is a cost associated with that. And we're dynamic in terms of how we do implement the hedges. Uh, we tend to use, uh, puts on HYG. Uh, we find that that correlation does tend to be higher, uh, but the implied volatility is much lower. And then if we're in a very risk off environment,

Which is the small cap ETF. Got it. Makes a lot of sense. So I read on the fact sheet, uh, something called the OODA loop framework. Can you explain that and how is that implemented?

Yeah, of course. So it's observe, orient, decide act, which is, uh, I think it was Thorpe's work. He was a fighter, well, Boyd's work. So he was a fighter pilot who came up with this. It's essentially the way that they improved, uh, not only fighter tactics, but also I think, uh, plane development, uh, post Vietnam. So essentially you're trying to get through that loop faster. Um, if you can, from a combat perspective now for us, what we're trying to do is take a look at the factors that are there. So that's the, uh, the seven factors to which I alluded earlier and take a look at what those rates of change are, where they're going. And can we get through that loop faster and make

Yeah, that was going to be, that was going to be my next question. So we talked about kind of the, the four regimes. And so once a regime is identified, the, is there a, are you, are you running a screen for stock selection based off of these categories that you just mentioned? Is that how you're actually identifying what is going to go in

To the fund? Yeah, absolutely. Very, very much screen oriented. Now we're, we're not, uh, dogmatic in terms of everything having to fit that screen. There are certain examples where something may come across your desk that that's just too compelling, but on balance, the majority of the stocks that we own in the portfolio would be companies that pay a dividend where we think there is a good prospect for, uh, earnings growth. There are a few, some of the parts things that make their way in there, maybe in the listed private equity sleeve or the merger artist sleeve, but, but on balance, most of the companies fit within that framework.

So we, we talked about how investment decisions in terms of gets made, what goes in the portfolio. Now, when you remove something from a portfolio, is that going to be the same screen? Um, or, or there are other decisions, a certain target, maybe something has met, uh, that you put in that's done well. Like how are, how was the removal process the other side of that coin work?

Yeah, no, that's a great question. And it's something that I've given a short script actually, in terms of describing the overall process. So we certainly set price targets for the names in the portfolio. And what you find is because there's an options overlay to this, I mentioned the, the hedging side of that. We also write calls to generate income. And we use that oftentimes for an exit strategy as well, especially if you see the implied volatility on an individual name, relatively high, if it's getting near our target, we can write calls and either harvest that or have a call the way. And we're, we're perfectly fine with that. So, uh, we do set price targets. Uh, and those are cases of successes, right? Like that's, that's the ideal scenario to exit a name.

Right. So what about waiting? Um, how are waiting decisions made? I've looked at, not everything in there is obviously equal weighted. Um, how are you guys deciding how many chips to put behind, each stock as it goes through the selection process?

Of course, conviction weighted, uh, we tend to run a relatively concentrated portfolio. So normally it's around 30 or so stocks. And some of those weights can range up to six, seven, 8%. And those are the names that are higher conviction names in the portfolio. And some of the smaller names are ones that either a, we've been trimming over time as they've neared a valuation target, or B in certain circumstances, it might be, uh, essentially a sleeve within a sleeve. So an example of that would be, uh, in the merger ARB sleeve, we may look at biotech names and try to find a list that are trading below cash that we think have a good catalyst. And those are cases where we don't want to allocate as much of the risk budget to a name like that, but we might buy three of those at

Got it. So how does the, is the fund on a consistent rebalancing schedule or you, it sounds like you're just going to let things run if they're working, remove things, uh, if they aren't. And so it's really a pure active strategy from that standpoint, but are you doing, um, a consistent rebalance schedule or is the portfolio just so active that rebalancing kind of takes care

Of itself? I would say the latter rebalancing takes care of itself. It is a, it is a truly active fund. So we know there are other managers out there who, uh, who have more of a disciplined approach rebalance. And we think that's great. Uh, that is, that's just not how we run the portfolio. Again, most everything comes as a result of our weekly investment committee meeting, uh, in the event that something falls outside of that, and it's an idiosyncratic event, uh, we'll address that as PMs and then, uh, work to, uh, either enter or exit that position, uh, in as judicious a way as possible.

So let's talk about the hedges, um, and also the calls that you, that you write, um, is the fund, can the fund get net short ever, or, or is it going to stay kind of long only or net neutral? And then on the flip side of that, uh, if you're buying call options, uh, does the fund ever take on some

Leverage? Uh, no, no leverage. Uh, we use options just to manage the risk. And again, part of that risk is trying to manage the, the drawdowns, uh, which the fund did well in 2022. Uh, the other piece of that is, is writing the calls to harvest income and as, and as an exit strategy for, uh, for some of the names. So that is really the extent of how we use the options in the fund. I think by prospectus, we may be permitted, uh, to buy calls. Uh, that's nothing we've done. Uh, I suppose if you had a scenario where the market was massively, let's just say you had an event and the hedges were, were paying off massively and you thought that there was a, uh, an opportunity there that you could

Got it. No, I misunderstood that. Yep. That makes sense. So if you're sitting down with, uh, an, an, an RIA or an advisor, um, that's either at working at formidable or, or hopefully outside as you scale this thing, um, how are you, how would you use this inside of a already existing diversified model portfolio? Where would you, where would you kind of bucket it? And, what investments that might you typically see in there already, would you suggest to maybe

Peel from to add exposure here? Sure. We we've seen people bucketed in two ways. One would be as it was designed, which is, is the, uh, the one-stop alt sleeve for a portfolio. And depending on the overall asset allocation, that could be between 5% and 20%. Uh, the other way that we've seen some people use it is because it's categorized as mid blend. And because you do have a relatively reasonable portion of the portfolio that is small and mid cap, uh, we have seen some people use it for, uh, more small to mid cap exposure. Um, but you would have, you would certainly have some, uh, some basis risk there because it's just not going to track that index particularly to be perfectly blunt. It doesn't

Tends to tends to be majority, uh, equities. Right. And that, I always find that question funny when I'm talking to an advisor about a model that we're running or our ETF and they're saying, well, the tracking error is really high. And I said, well, yeah, if I'm going to create any alpha for you on the downside or the upside, we need to have some tracking error in there and some, and add some diversification and non-correlated benefit or else I might as well just buy the S.

Yeah, absolutely. That's well said. I agree with that a hundred percent. And that's, that, that can make it challenging, but it's also why we think the fund is a great compliment to where most investors are. Right. we're at the point in the market cycle where the S&P is once again, crushing everything. And, uh, it really is down to a handful of stocks, which I know you've had prior guests talk about that. And it's, it's in the zeitgeist, uh, regardless where you look. Uh, but no, it can make it a little bit tougher sell. And a good friend of mine, uh, once said that really within your portfolio, there, there should always be, uh, one stock or one fund that you really don't like at any, at any given time, because that's your, that's your

Look at it from that perspective. Yeah. And, and I, I couldn't agree with that more. What we've seen, in our experiences, especially with kind of small to midsize RIAs is that they, they tend to want to strategy chase, um, and they'll come in and buy a fund like yours or buy a fund like ours, um, after the damage has already been done. When in reality that should have been allocated to it while the party was still going on, um, and just stay in the portfolio all the time.

We would, right. No, absolutely. Right. Like our phone was ringing a whole lot more in January and February on the heels of 22, right? It's been pretty quiet lately, but I think what that shows you is that for a fund like yours, a fund like ours, but yes, it's a, when you get a drawdown and you need to reallocate to risk assets strategically, it's a source of capital. And then you opportunistically rebalance to it when it's out of favor and maybe you're harvesting some gains in your large cap gross sleeve and you're, you're allocating to alts at a time like this, right? Like that's how, that's how a disciplined advisor would tend to use this fund. And we're, we're lucky enough here to have a lot of great and disciplined advisors who are using the fund that way.

Yeah, no, that's great. So outside of the advisors at formidable, how are you guys approaching kind of marketing and distribution of the fund, right? That we talk about all the quote unquote hard stuff of making investment decisions and putting together a really unique and differentiated and robust strategy, but really it all comes down to, can we raise assets? And so how, uh, how is marketing and distribution going and what are some things that are working? Maybe what are some things that, uh, you still find to be a bit of a challenge? No, for sure. And one of my lessons from working

At Opus was that it sounds Marxish, but, uh, it's important to control the means of distribution. So, uh, we, we were terminated from a couple of sub-advisor relationships there and, and that really gets one to focus on how do I distribute this myself? Uh, so from our perspective, clearly we have the, the, the formidable RIA as a great source. Uh, we are working with a, uh, a third party firm, uh, safe Harbor to help with more of the traditional, uh, distribution. So that is the, uh, very much the cliche feet on the street, knocking on doors, making phone calls, email campaign kind of thing. And, and that's still in its earlier days. the, as the, the sales process is relatively long, uh, even for traditional funds that have great performance. Again, this is a much

Able to generate some traction for the fund. Yeah. I, I think that that part of the business, that OCIO business is just going to continue to grow. as people become, uh, more entrepreneurial in nature and, and want to put their own shingle out, you've got a hundred or $200 million, uh, broker who, who leaves a wire house and decides to open up their own shop. they were used to, uh, having those services provided. And, and quite frankly, when, when you have the accounting hat and the marketing hat and the salesperson hat and the planning hat on, trying to, uh, build portfolios and stay up on top of, uh, of research can become

Quite a challenge. Um, there is no doubt about it. And I remember meeting with firms, uh, years ago and they would spin out of, of, of a wire house and they would celebrate the freedom that they all of a sudden had. And then all of a sudden you're in this, you go from this very well defined sandbox of investment choices to this undefined sandbox of choices. And you're just, it's decision fatigue, right? Like we've all seen the studies from a behavioral finance perspective where you can only deal with a certain number of choices, if you will. So that's just the math of it. And, uh, again, I think that we, uh, we were reviewing a lot of studies as we started to put this together and there are essentially three main responsibilities that

Get better outcomes. Yeah, no, I, I agree with all of that. Uh, that's funny. I, I was a CFP charter holder, um, for a number of years, uh, and realized that I belong behind a computer as well. I don't, I'm not, I don't do, uh, I don't love the one-on-one planning component, but you got to find, uh, you got to find what your, what your lane is, but that I can relate to you, Adam. That's, that's awesome. Yeah. No doubt about it. Again, my, my first job was working for a CPA firm. That was

Always the old joke is that the extroverted accountant looked at the other guy's shoes

Kind of thing. There, there, there's, there's some truth in that. So, yeah. So before I let you go, do you guys have any, uh, any plans to maybe launch some more funds or are you going to keep, uh, just laser focused on, uh, on your first issue here? So we have two that are active currently,

And then we have a third that is undergoing SEC review. I think literally as we speak, I don't have an update, uh, from our council, uh, on that yet. Uh, but we are working on a third, uh, that we think is going to also be, uh, I probably shouldn't say too much about it, but we're excited about that. It really builds on the, that, uh, the D component of our D plus G

Equation. So I didn't, I didn't notice the other fund. I'll let you take a minute or two,

If you'd like to talk about it. Oh, of course. Yeah. Uh, so ticker is, is Kong K O N G, which is a tremendous ticker. Uh, Eric Balkunas even tweeted about it when the fund was, uh, was launched back in July of 22. Uh, so we've got that up at the office here. Um, really, uh, a little bit of a legacy fund. So it's a strategy that, uh, that we'll put together before I joined the firm. Uh, it's called the, the fortress strategy. And so Kong's name is the formidable fortress, but really focused on higher quality, mid to large cap names, quality businesses, strong growth, high margins, uh, fortress balance sheets, et cetera. So, uh, that, that is how that fund is put together. Similar from the perspective in terms of concentration. So about 30 names there as well,

Because I didn't know that was out there. Um, so I might have to have you back on to talk about Kong, uh, another time and dive into a little bit more detail on it, but Adam would love that. We may,

Uh, may, may throw that one over to Will since that's his baby. Okay. Yeah. I'd be happy to talk

To Will. Um, look, where can people, before I let you go, where can people learn more about formidable? Where can they learn more about four H? Where can they learn about Kong? where, where's all of your information out there? Of course. So, uh, a little bifurcated here. So

As in terms of dealing with the world of ETFs, we're a little limited in terms of what we put on the, uh, the funds website. So if you want more information on four H or Kong, uh, you can go to formidable funds.com. Uh, if you want more information on the parent company, the RA, if you will, uh, that is formidable am.com. And, uh, I would say there, uh, you're probably going to get a little bit more, uh, pointed commentary. We write a monthly newsletter actually in the process of working on that. Now that's, uh, is titled, I think, uh, break point or point break. Uh, so we, uh, we, we, we have a little bit of fun with that. Uh, our podcast is there, uh, some, some content we

Of thing. Well, Adam, I appreciate, and I'm very thankful for your time. Um, thanks for joining us. Thank you so much. Yeah. And we'll talk to you soon. I hope to, uh, run India at some point in the future, hopefully at a conference or an ETF conference and, uh, uh, be able to meet you in person. Would love that. Absolutely. All right. Have a good day, Adam. Thanks, Brad. Take care. See you. Bye. Bye.