James St. Aubin

So we're either in front of a computer screen or shuffling kids around to different activities. But I like to be outdoors. And we're out here based in Santa Monica in Southern California. And the big reason why people move out here is to be in the outdoors. Yeah. No, I spend a little bit of time out there as well. It's beautiful out there. But yeah, you're with four kids between those ages. It's entering fall sports season. So I can assume you're all over the place. Always on the move. Always on the move. So let's talk about Ocean Park as a whole. You have a suite of ETFs, but you also do a number of other things. Can you just kind of talk about how the firm helps clients holistically and all the different things that you do?

Sure. So Ocean Park, its roots go back more than 35 years to the mid-80s, where the founders, and I think the origin story is really interesting, were folks that were not in finance or investing. They had an unconventional path to the asset management world. But they started an RIA. And when they started an RIA back in the mid-80s, they asked clients, what are your concerns? What means most to you in your investing journey? And they heard very much similar things. And keep in mind, they were targeting retirees or folks that were near retirement. And they all had a major concern of losing money in that very vulnerable period before or during retirement when distributions are near.

And recognize the sort of psychological impact and the sort of financial impact big, large declines in the market can have. And so they developed their own proprietary strategy, which I'm sure we'll get into, that really focused on protecting the downside, while hopefully being able to participate in the upside as well to deliver total return, but really focused on trying to mitigate exposure to the left-tail risk that is not common but can be painful when it happens. So today we have our four ETFs. We also advise eight mutual funds under the Sierra brand, which will be changing to Ocean Park next month.

And we also have a solutions business. So we've been packaging our funds as a fund strategist into portfolios for advisors to use. Those that don't want to use their own strategy, their own asset allocation, they can pour it into a solution that combines the best of our strategies together in a way that makes sense for a particular risk profile. Yeah. And we were talking before we got on, we run a very similar business and also have a very similar mindset, not only from the solution side with the ETF, but also, we kind of have that mantra as well, where it's like, we'd much rather cut off as much of the left tail as we can, as humanly possible, because that is tends to be the most painful question and the most painful things that advisors and clients have to deal with.

So let's talk about if as much as you want, as much as we can, kind of your quantitative process and kind of that quantitative strategy holistically. it seems to me it's three parts, right? You have security selection, which I think would that security selection would be deemed upon, what type of strategy you want to run. And then it looks like there is, a buy signal and also a sell signal. So could you explain to me, what would kind of trigger a signal on the buy side? And then since you're focused kind of more on capital preservation, what that sell signal looks like? Is it a stop loss?

Is it technically driven, quantitatively driven? Like, can you kind of get into the weeds a little bit? Absolutely. So you're right. How do we start with the buy signal? Because that's the first step. We always say every investment manager has to answer three questions. What to buy, when to buy and when to sell. So on the when to buy question, we look for trend, positive trends, right? Trend signals. Our strategy uses banded moving averages. Not to get too far into the weeds here. We have a lot of detail on that on our website if you're really interested. But the banded moving averages use short-term exponential moving averages as the bands. And we also have another secondary longer-term moving average as a sort of a second signal to confirm the uptrend.

And when we see that signal in a particular, like you mentioned, we have different target markets. And we'll get into specifics later. But whatever the target market is, we'll look for funds. All of our holdings are underlying ETFs. So we don't buy individual securities. We're buying other underlying ETFs. And each one of those ETFs has a band around its price. And when it crosses the recent low of the upper band and the secondary moving average, that is a buy signal for us. So that's a buyable fund. And in our ETFs, we have a predefined list of funds that we've researched that are, we believe, complementary to the target exposure we're looking for.

And if one of those funds enters a buy signal, it will be bought and added to the portfolio at a prescribed weight. Now, let's dig into that a little bit further before we go to the sell discipline, which would be, let's say, we're going to talk about DUKQs. Let's stick with domestic equities for the time being. I'm sorry, domestic ETFs since everything's fund-to-funds or ETF-ran. So are you picking that security selection? Are you picking a bench, if you will, to apply that signal to? Or are you kind of looking at a much broader universe? How narrow is your scope when you're kind of looking in a general direction?

So our research refined the list of names. So we do have a bench and a list of what if all the funds within our bench, our opportunity set that's been predefined, have buy signals. They will all be in a portfolio, have exposure in the portfolio at a certain weight. So we decided what funds, now that includes broad market exposures like the S&P 500 and QQQ or the Nasdaq 100, but also small cap and mid cap exposure as well as some factor exposure. So we looked at all the opportunities that we could invest in during our research process and said, okay, which ones are the most complementary to each other? And that's how we narrowed it down to a smaller list of individual ETFs that have specific market exposures that we think will be additive to the diversification of the portfolio overall.

Got it. And so then let's talk about the sell discipline. So we've picked our bench. We've identified things that are in positive trend that we want to own. So on the flip side of this, when are we deciding to kind of pull the plug on those investments and sell them and put them back on the bench? So yeah, our sell stop discipline is just it's a trailing stop that moves with the price of the fund. So just like I mentioned on the upper band, the signal for the sell signal for us is the price of the fund moving below the recent high of the lower band. And that is an automatic unemotional sell. And we will eliminate that in the portfolio. Now, under certain conditions that may be redeployed to other funds that are still in buy signals for us, if certain funds are not in buy signals, we can hold cash.

And so I think that's our defensive nature is to be able to hold cash during those periods of broad market declines. And that has been, we think, the value in our strategy is to be able to weather the storm, so to speak, by holding cash when markets are declining broadly. So that was going to be my next question. And let's elaborate on this a little bit. So you get a sell signal. It doesn't necessarily, let's just say you've got a sell signal on small caps. Doesn't necessarily mean that that allocation is going to move directly to cash. It can be deployed elsewhere in the market that might be a little bit less volatile for a period of time or until that enters a sell zone.

So it's not, hey, a one for one. We're going to allocate, making this up, 5% of the portfolio to small caps. If it's risk off, you're not just going to bucket that to cash immediately. Do I have that right? Exactly. So in that example of small cap or small cap fund hit a sell signal and we still had a buy signal in the S&P 500, we would reallocate that capital to the S&P 500. So now if the S&P 500 did not have a buy signal, it was in a sell signal, then that's when the portfolio can start moving to cash. Got it. Makes a ton of sense. So let's dive into DUKQ. I've been calling it DUKQ. I don't know what you guys call it short over there, but it is your domestic ETF.

So at a very high level, can you tell us what that fund is trying to accomplish? Sure. All of our strategies follow the same process that we just talked about, and it is applied to different areas of the market. In this case, domestic equities are the target exposure that we're looking for. And in that area, we have, like I said, a core exposure and say the S&P 500 and then sort of tertiary exposure to things like small cap, mid cap factors, momentum. there's a number of areas in the market we can go into that, again, our research, historically indicated would be value add to the portfolio. And for us, it was really about making the targeted exposure to equities.

So it can be slotted into an individual or an advisor's portfolio that would, that generally has allocation of domestic equity. So it's broad based. And again, it's just about applying that same process, whether it's DUKQ. We have, as you mentioned, three other ETFs follow the same process, target different parts of the market. This one happens to target domestic equities. So in this particular fund, about how many securities are kind of sitting on that bench and like what does that investable universe looks like in terms of like number of names or, if everything's in buy mode, about how many holdings could we expect in the fund at any given time? So it'll be about 10 to 12 names across all of our funds.

We try it. We keep it diversified, but we don't want to diversify too much. And we think right now it would be about 10 names. And so when, let's say everything is risk on, right, about how are you making kind of weighting decisions? Is it going to be market cap weighted? Is it weighted based off of, momentum or conviction? Like how are you deriving a weighting for those holdings? Yeah. So the weights are predetermined. And what are sort of the grounding philosophy was that we wanted core equity exposure, meaning as you think about the market cap and how that looks, we have some, I would call them tilts relative to say a broad market, our index, which is more of an all cap broad market index.

But, we, everything has a prescribed weight depending conditionally based on having a buy signal, right? So something like a small cap ETF, would have roughly a 5% weight in the portfolio. So is the fund itself, is it like purely active where you can get the signal on a Wednesday and you're trading it on a Wednesday? Or do you have a kind of a weekly or monthly reconstitution that you're kind of, taking in signals over a period of time and then deploying them? It's a daily process. We base our signals on the previous day closing NAV of the underlying ETFs in the portfolio. So we revisit that every day and discuss, it's very, again, an unemotional process where we look at, okay, is this in a sell signal or not?

And if it is, obviously it gets sold. And depending on other factors, it may get redeployed somewhere else in the portfolio or sent to cash temporarily. Yeah. So without going, again, too deep in the weeds on process, what is a typical holding period or turnover look like for a particular ETF? Like, are you guys making shorter term investment decisions? Are you looking, are these holding periods longer in nature? Like, where are you kind of targeting a signal on average? So, yeah, it depends on your definition of short term or long term, I suppose. But our typical turnover is two times a year.

So we would be going in and out of a fund on average. that can vary from zero to four, but the average tends to be around two times. Got it. So, you have a fairly active process. Markets can be, kind of finicky. Can this ETF in particular sit 100% in cash or short term money markets? Absolutely. Yeah. And that happens from time to time when the market's in complete meltdown mode. The optionality to go to cash, I think, is what really gives us an advantage. We don't like to be in cash. That's not a target allocation for us. But if we need to be, we can be. And so the portfolio can be 100% cash if all of the funds and the opportunity set are in

Sales, sell signals, then the fund will be 100% cash. Got it. And I know the answer to this question, but just like you're not, there's no, this isn't like a pure, you're not doing any shorting, you're not buying any inverse, right? It's either, we are either long equities or we are either in money markets. Yeah, you call it long neutral, long cash. I know a lot of trend followers, managed futures specifically, will have short exposures. Some of the reasons we don't feel like that's necessarily a good thing for us is that the short exposure can sort of exacerbate the, what we call whipsaw risk of markets when you get a false positive and changing the sign there can have some big ramifications.

So that's not what we're trying to do to add, to necessarily have positive performance, so to speak, when the markets are selling off. We want to be able just to limit the losses. And we're not really trying to limit the one standard deviation type events. It's those two and three standard deviation events that we're really focusing on and trying to mitigate the exposure there. And so that's how we've thought about it. So if you're sitting down with an advisor that's already has a diversified model portfolio, where are you advising them to kind of slot this ETF in? Yeah. So for domestic equities, obviously, everybody with equity exposure has some exposure to domestic equities.

And it really depends on an advisor or a particular client's risk aversion, right? Some folks have a greater need, greater comfort with something, a strategy with more downside protection. So this can fill the entire domestic equity bucket for a particular allocation. Now, that's not necessarily everybody's speed. So we also say it's not zero. It doesn't have to be 100%. But somewhere in there, really, a lot of times, it's up to the advisor to determine, all right, how much protection do I want to put in the portfolio? So it's very customizable. We can think of it as being modular, right, to that specific target allocation that are common amongst most portfolios.

So the fund is fairly new. I believe it launched in July. Is that right? Yes. Yes. Less than two months old. Yeah. It's fairly new. So I know a lot of thought goes into the decision to launch a fund. So what was it for you and the team over at Ocean Park to say, look, let's get this thing out in an ETF wrapper and let's go compete in the US tactical fund space? Yes. Oh, well, look, I think we saw what everybody else is seeing. If you're an asset manager now, I think I've said this, that ETS are almost table stakes, right? And it's still a fairly new universe, right? It's only been since 2019 when the rule change happened and made active management more feasible

In an ETF. And we've seen a rush of products to the market. And right now, I think there's about 1600 products out there. We know that there are advisors that only want to use ETFs for whatever reason. Obviously, there's tax efficiency benefits and so forth. But there are advisors who would love to use our products. But if they're only available in mutual funds, then that obviously eliminates our ability to serve their clients. So recognizing that reality, we said, okay, it's time to launch ETFs and meet the demand where it is.

And the demand is clearly in the ETF space right now. We do think there's still plenty of room for mutual funds in the marketplace. But the puck is certainly heading in the direction of mutual funds. And that's where we came to the realization that we need to be able to deliver to those advisors and clients that want ETF exposure. Yeah, I couldn't agree more. And so again, being new, or this particular fund being new, you guys have been around for a very, very long time. How do you go about... I think it's a very different sales process than selling solutions than selling an ETF product. So how is the team over there thinking about marketing and distribution of this ETF suite in a different way than maybe the model portfolio suite or the mutual funds?

At least there are certainly differences, right? But I think the core demand we've seen in our products for mutual funds and for the package solutions have all been with meeting with financial advisors, right? Meeting them sort of hand-to-hand combat, bringing belly to belly, trying to educate them as to what the virtues of our strategy are. And we don't think that will necessarily change. I think that the ability... We've had a lot of success in the TAMP world as a fund strategist. And I think that has to do with the fact that you give a solution to an advisor rather than letting them figure out how to do it on their own.

Some of them want to do it on their own, and that's great. And we still want to allow that flexibility. But for those that want to outsource that decision, we'll still be offering our package solutions to give them an easy program to implement. Well, I think too, just staying on the topic of ETF creation off of the solution side business, it gives advisors a little bit more flexibility in a couple areas. If you're blending your strategies together in a solution with other strategies, it's going to help lower some of those model minimums to allow some entry. The other thing too, I think in the solutions business, not to get too far off topic, that's almost a race to zero.

And I think if you don't have ETFs out there to support that business to allow a free model marketplace at some of these TAMPs, I think you're going to have a hard time gathering assets probably later on down the line. It's not happening tomorrow. But I can see a world where that starts to become a reality. Yeah. Yeah. Look, our philosophy has been, again, meeting the demand where it is. And the reason we've had success in our mutual fund suite, and we think we'll have continued success with ETFs, is that we give advisors options to create solutions for their clients. And this fund strategist model makes it so easy for them to make those decisions rather than trying to do, like I said, there's 1,600 active ETFs out there.

And by the way, our strategies also use outside funds in addition to our own funds. So it's just a conduit to our products that we think really allows the advisor to sort of toss the keys and say, all right, we can't necessarily figure out the right allocation to your domestic fund, your international fund, your diversity. So it's a complicated decision, and there's an easy way to solve for that. And I think it's just sort of a value add that I think more and more asset managers are recognizing as sort of, again, more like a table stakes opportunity. Well, James, I really appreciate your time with me today. Before I let you go, where can people learn more about Ocean Park?

Where can people learn more about your suite of funds? Sure. One good place would be OceanParkAM.com. And if you want to specifically look at the ETFs, there's OceanParkETFs.com. So either one of those sites will get you to a place where you can learn more about the company and our individual funds. Well, again, James, thanks so much for being here. I appreciate you spending some time with me. Thanks a lot, Brad. Great to be here. See you next time. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye.

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