John Forlines

DAX versus the Nasdaq or et cetera. And now also have yield attached to it. So there were floors, caps, collars, you name it. It was a derivative business. It's very similar to the process that goes into selecting ETS, ETSware portfolio, basically. So that's how I got started. And then I went through a number of career permutations. JP Morgan at the time where I went was, after practicing law, was in tremendous flux. It was, they, they had the view, which was correct, that Glass-Steagall was going to go down under the Clinton administration. And so a number of us who had worked in London had been seconded back to New York to essentially build an investment bank because they knew we were going to get powers to underwrite debt, equities, et cetera. And so that's, I, I, you know,

Took over while I co-ran private equity for a bit, which was my introduction to sort of the innovation side of the world, because our largest single assignment was essentially helping liquidate a very large commercial bank portfolio of venture companies. They were trying to get out of it because of the real estate crash, the high interest rates I mentioned. And so I really, that's where I really met a lot of people in the tech side of the business. And then the next job, of course, I had was to run with another Morgan partner, technology media and telecom. And so that's where I've had my technology event, which is of course, one of our other ETS innovation. And so after that, in 2000, I was able to get

Out at kind of the market peak. It was just good timing, I think more anything else. And I helped Morgan liquidate a couple of their investments that we'd made as part of the tech process. And therefore, I got my stock and equity and all that stuff out, which is good. And I started a family office, which, exists today, which essentially does, I guess most of the thing you'd say it does over the period of time, which is now 20 some odd years, is to find financial services or fintech opportunities that I can either operate or I found someone who's really good and I want to go in, going with them. And so that's what the predecessor firm, which merged in with Donnie, who was, it was essentially a quantitative and

Engineered ETF set of portfolios that were for broker dealers. And in 2009, that was actually a novel concept because there's only about 600 billion of ETFs outstanding, contrasted with the trillions that are now outstanding. And I remember going into brokers and with proposals to, to essentially sell them portfolios for own use to their advisors. And I'd get, I'd have six to seven pages in there on what an ETF is. Yeah. And it just, it was amazing time. So I, I sold that company to Donahue, which was a Boston, a long time Boston based tactical manager in 2017. And that's the resultant firm, which is Donahue four lines now where we have a investment committee that essentially is more of an asset allocation committee now because a lot of our, and this probably from your own firm, a lot of

Our stuff is built into the, to the, to the ETF itself, which is includes, stock screening and, and also in certain cases, timing. And so, our, our view is that the world's changed and you need to constantly refresh your product suite and you need to, you need to do a lot of these, communicate to people about what you do. Because the old models I think have since really since 2018, 2019 have changed a lot. And that's so, so that was a long answer to, how I got here and what do I, about my background, but that's a pretty good picture. Yeah. Well, I'd say you made

Knew this or not, but I actually, I, I saw your, you made a reference to teaching. I still, I have, um, three courses I teach at Duke university, um, on one day in each semester. So I teach on Thursdays each semester. Um, and it's in, it's in economics and it's decision science oriented stuff. Um, so that, that's a real, that's a real passion too. I thought I'd do that for about two years back in 2012. Um, but I've, continued to do it. And, and I think it's something that I think about a lot about, how can you get better? Teaching is one of those things where, especially at university where you're constantly challenged to get better, uh, every, every semester. If you just mail it in, students know that faster than anybody.

A different mix of broker dealers that we were serving. They were serving a different kind of broker dealer. Mostly they were more on the RIA side. So it was a pretty good fit. Um, but something really weird happened and you probably remember this in 2018, um, prior to 2018, most of us were using either, um, BlackRock or State Street type products to build, uh, portfolios. Um, and we also, and we had a great relationship. Ours was more with the BlackRock team, mainly because they were in New York. I was in New York and back in 2009 and 10, they took a real interest in young firms like I had. Um, so there's a lot of loyalty there, but what happened in 2017, 18 is they decided to get into our business

Basically. Um, and worse, they started pricing their, their, their portfolios at zero. Yep. Meaning they were essentially offering prop products, uh, in a, in a kind of a free wrapper. So that's, that was a kind of a killer. We had to really act fast, but we did, we, we started, started transitioning our portfolios over, um, so that we also had low zero to low fees. Um, and, and that's where we had to do a lot of engineering about enforcing. We had it, in, in all, in all the different permutations, uh, of funds and ETFs that we could build those portfolios, um, to, to mimic what we were doing before without, you know,

Important sometimes. And so why is it important for investors and advisors really to implement some strategies around sound risk management techniques over just buy and hold and, and, um, you know,

Yale picked up on this. Um, and he basically said, look, um, it's probably true. The long-termist, um, Shiller won the, the prize, the Nobel prize, the same time as a long-termist one. But if you do that, if you manage your, if you're an advisor, a money manager, and you run your business like that, every, every time a business cycle shifts over or there's radical change in the market, like a 2008, uh, you're going to lose clients. So, um, and in truth, if the behavioral science part of it is that typically, if you look at the risk reward, um, spectrum, um, people are much more likely, about two and a half, three times more likely to be risk averse with things like money and their

Health and other things that are important, um, than gain seeking. So that's really what we both built our philosophy around, which is, uh, and, and, and, we discussed this before, Brad, there's times when it can be painful as an advisor because the markets are going up because of monetary policy. There's nothing you can do about it. Right. Um, but to be poised to help out during those times of the large drawdowns, I think is an important function. Um, and it's one of the reasons why there are firms like ours around because enough people, believe that, gee, I don't have the emotional stability to make it through another 2008 again. Right. I'm very happy with a certain level of returns. Uh, and I actually, and it's true. If you, if you got a lot of folks

And brokers who, who understand that strategy, one of the things you'll find out is when you have a really good year from a nominal standpoint, good return year, there's questions asked about you, like, how come you did so well? which is, which is absolutely different from, a lot of people's experience when they think about investment management, gee, I got a lot of good returns. Well, that's not really the business, is it? The business is how much risk did you manage along the way? Uh, and how much are you willing to tolerate? And so that's what our businesses are about. Um, and it's, it's a matter of constant communication and especially in markets where like this one, um, last few years where we've been flooded with monetary, um, um,

And risk off decision-making across the book, as well as, uh, potentially in your funds, which we're going to get to, uh, how are those investment decisions getting made? Are they, is everything rules-based and systematic or how, how are you guys going about the process of making

Know, a lot of the, a lot of the way screens and managers look at, um, companies is wrong in our view in the public markets. Um, and we look at it like private market folks do. We look just at our version of free cashflow. And so if you're looking at free cashflow, you're, you're, you're not looking at manipulated earnings or, charges here and there and all the other stuff. It's just basically money of the, that's available for investors. Um, and, and that, that is built, that methodology is actually built into the screens in DFRA, which is we're looking for opportunities, which includes, REITs, includes, um, companies that are in, um, you would call them more like the commodity businesses, uh, in real estate, um, that,

That actually offer, um, really good cashflow. Um, and we, and, and then they sort of fit into our philosophy is okay. How, how, how, how much do we want with oil? How much do we want with real estate? How much do we want with, uh, other components like soft components? Um, so that's not dissimilar, right? That's not dissimilar from how you build a commodity ETF, but that first part is, and so what you end up with is you end up with really high quality type opportunities, but the, the yields you get are also pretty high and the yield are, from our view is less, suspect. Um, it's, it's coming out of cashflow. Um, and so that's how, that's the philosophy behind, um, the, what I call

The, in fact, all our ETF products are built like that. Um, but it's a good way to kind of ground your, ground the conversation about how we start to build. And that's the first step. And then the second step is really, okay, now you have these products, the, there are certain ETFs that are cashflow oriented and others that aren't, but they're all tactical in the sense. And they all, for example, have either signals built into them. In fact, they all do except one, and I'll get into that in a little bit. Um, and the, the bottom line is that stuff runs pretty well. Um, and as you probably know, there are times where it doesn't work well, but that's okay because that's, it's at least if the, if market metrics, traditional market

Metrics, which define elevated risk are in place, we may miss some returns. That's the way it is. Now, in terms of just the actual doing it, it's an allocation process where we have a lot to choose from, right? And you have percentages you can choose from. Um, and, and, and that's important too. So if you, if you decide you, so for example, you may want to switch to an ETF in the portfolio that's in, in cash or treasuries because you want to raise cash, that's how you do it. As opposed to

Right. Because as we now know, it's very possible in a 60, 40 portfolio, or in our case, probably since that 60 includes alternatives, it's very possible for everything to, to correlate. Um, and that strategy is sort of flawed. So you have, that's another reason where you may want to engineer something.

Meaning that's the, probably the largest drawdown you're going to have either right before it or during it. Um, and that's when you need that, that signal to kick in. The others probably have a little faster Twitch. Um, and that's more of a function of the fact that if you look in the last 20 years, the incidence of volatility is greater than it used to be. Right. Volatility used to be here and then not here, here and not here. Well, now it's almost always here. Right. Yeah. It seems

Environment, even where people do want steady yield. So for example, it's often used in, um, in retirement portfolios where it does kick off that high yield. Um, and yet, it doesn't have, it doesn't typically track what else is in there, which includes their typical smattering of stock and bond holdings. So, um, as far as communicating with an advisor in a model portfolio,

But make it possible. And then there was this notion that almost always, um, we've had great success with yield products. And it's mainly because I don't know if it, when I first got started, we were dealing a lot with insurance brokerages and they're more conservative and they have a lot of people who use them for retirement accounts. I think that's, there's some grounding in that, but nevertheless, I think that's, that's a fast growing, it's still a fast growing business demographically. Uh, and it's a, and it's a place where, uh, if you don't have that yield component, you're, it takes some work to figure out what you're doing different.

Tech stocks took a dive and, and as you pointed out, I think we talked about this earlier bang, hardly anybody anticipated the route upwards you'd have after such a horrible decline. Usually you have, the, the battlefield gets picked upon and the wounded walks out for a while. And suddenly, a year later, people start saying, gee, maybe there's some value in here. That's not what happened. So that's why we went to the monthly recon, which is let's take another look now because things are moving too fast.

Talk about your other two ETFs. Um, you have DFNV, which is risk managed innovation, which I'm, I'm excited. I'm excited to hear what that is. Um, and DFHY, which is tactical high yield. So can you briefly talk about those funds and, what are the objectives of those funds?

And so, it'll, it'll probably knock out a lot of the, in fact, if you're not, if you're not thinking about it and we don't think about it that way, but if you're thinking about it in terms of cap weighted, you don't end up with a lot of small caps, right? You end up with mid and large, but that's okay for us. Um, as long as it's getting the characteristics we want from free cashflow, the, the twists in innovation is that we add a concept known as, research intensity. And, um, it's different from a lot of the, people say, Oh, we're going to add R and D back in because that's how we tell if a company's innovative or not. And our view is that's just,

That's a quarter of the battle we're looking at. Research intensity means that you spent money, uh, on, on research and perhaps even buying companies that have great research and you're, and you've got new product revenue flowing from that. Got it. Right. So there's, that's why, for example, yes, every now and then you'll see Apple pop in and, and you'll see, but you'll also see a lot of, uh, folks like NVIDIA will show up in those screens precisely because they have great cashflow and precisely because they are spending money like you would believe on research, uh, and, and are winning with the research. Um, so that's that, that piece in high yield. It's just, it's, I think the secret sauce

In high yield is that free cashflow points. It's higher quality junk, if you will, which is kind of hard to describe to people who aren't in the high yield business. Um, but it's the other key to that is, uh, like innovation, that innovation has a really deep recession signal built in, um, and typically won't hit until there's those dynamics play out, which is interesting because it wouldn't have been triggered in the pandemic one, right? There's just no, no way for a long-term signal to have any kind of effect there. Um, but, or have any kind of trigger and, um, the high yield one has a tighter signal and that's basically indicative of how that market works. Cause a lot of that market, the high yield market is a lot of hedging goes on between treasuries, high yield,

Et cetera. And there's a mimicking process of that so that we're trying to keep with higher duration when it's, when it pays and then short duration when, when we think it does it.

Like ours and yours that need to have a story attached to them that are, that are worth the while of the product person or the advisor hearing it, you have to develop different strategies like this one, you have to have good communication. So we try to do that on a very regular basis. we'll never turn down an opportunity to do that. Now, a lot of that's also allied with the particular platforms that we're on and where we'll push them to say, gee, how much content do you guys have? Because by the way, um, that's, advisors want that. They want to have something that's recorded that they can listen to in their own home and they do.

Um, so we do, we do not only webinars on what we're doing and how we're doing, we do it on content stuff like, gee, um, what's really going on with inflation and why is it? It's, it's, everything seems kind of different now. Um, we'll do those things on a pretty consistent basis too. But I think big challenge is if you're not, if, if you don't have all your investment professionals talking, um, to, in those communication channels, you're, you're hamstrung these days. Cause again, it's, I don't know of any, I don't, I think that's just really super important, particularly again, if you're trying to fight against the guys who have, large checkbooks who can kind of buy their way into places.

And, there's certain advantages to keeping it, especially with that moat that's been put around broker dealers and obviously, uh, how mutual funds can, can provide some economic benefit for, uh, the advisor. So any thoughts about converting those or are you going to keep

Puts together a multi manager package, we're often included there as a sleeve. Um, and, um, that's, that's a pretty successful business. It's sticky and it's, um, it requires a lot of upfront work, but once you do the upfront work, it's kind of stays in there. Um, so those are two main reasons why you probably, again, it's endemic. It's, it's endemic to whatever the firm is, but that's just how we came up in the business and we want to serve those channels. Um, but I, I, to, if you asked me today, um, if we're going to look at any new products to build or buy, I would be saying there'd be ETFs because I think that market's growing at a faster rate. Yeah.