Navigating Investment Frontiers with the "Emerging Technologies Macro Hedge" Portfolio | Echo Trade
[Music] welcome to Echo Trade I'm Jeff Roth here again with Zach Daniel from Digital Edge Wealth Management. Zach is the founder and head portfolio manager and today we're talking about his portfolio within Echo Trade emerging Technologies macro hedged so Zach thanks for being with us how's it going hey thanks for having me Jeff it's going great Summer's summer is going along and I'm happy to talk about my strategy at Echo Trader and give some context to everything so thanks yeah yeah we're excited to dive in and kind of learn more here from the horse's mouth so um yeah so I mean let's let's Dive Right In let's start a little maybe a little high level and give us a broad kind of broad Strokes overview of what the goals of the portfolio are you know kind of what you're trying to accomplish with within the within the strategy yeah it's definitely a growth oriented portfolio of course you have you know considerations for income and capital preservation in there but overall it's uh the strategy is an overall growth portfolio focused on the merging Technologies but understanding that the investment landscape and the macro census changed over the last couple years and that looks to continue to move to the next decade so things that had traditionally worked in you know 60 40 portfolios for the last 30 40 years fundamentally started to change after covid and we think that change is going to continue so you need a strategy and portfolio that addresses that um and that's really what was the focus was for this strategy was something Nimble able to kind of adapt to the changing landscape a lot of inflation and you know whether it's you know different interest rate environments and and whatnot but the the main drivers of portfolio Alpha is technology it kind of always has been technology and so we thought it was a very important piece to have that in there um obviously in the environment there's a lot of of tech that may be unprofitable or or overvalued but through careful research and you know leveraging our own expertise we can kind of find those pockets of of growth that coupled with kind of a macro hedge view with interest rates and inflation can kind of create a portfolio that can be very attractive for for growth and some downside protection should you know economic conditions deteriorate or not go exactly you know as a strategy predicts it's it's not a huge downside fall there so high level that's that's kind of General yeah no it's helpful so I mean basically um if I'm hearing you're right you know you're looking at the last you know several decades and that technology has been the driver of growth and Alpha for most strategies and so you're just focusing exclusively within this portfolio on on those Technologies um on that sector you know broadly speaking for the portfolio is that sound right yeah for sure um kind of that over you know the top-down approach is Tech in the technology driving but obviously a bottom-up approach for each individual company because you know not everything in Tech is is equally is equally valued so are you looking at certain sectors like like you said from a top-down technology perspective you're looking at certain sectors or you're just looking from a technology umbrella um hole and then like you said bottom up looking at you know sector agnostic but just looking at what specific companies and names you guys see as as driving growth and providing value for the portfolio yeah it's it's relatively sector agnostic um you know we have elements in the portfolio that address AI machine learning um you know just Broad tech moats uh you know leveraging social media and you know critical mask of critical mass of users um but it is relatively sector agnostic I would say probably the only sector that we've had we are you know have careful attention to is the semiconductor space we do believe that chip manufacturing and is going to be a big driver uh over the you know next decade as AI becomes more implemented in you know gpus or or use more in machine learning algorithms but um we're relatively sector agnostic we do have a special focus on where the technology platforms are going to be in five years from now um so how is this you know the AI Tech Machine learning space in general going to develop and grow to where what companies are looking three to five years down the road that have been developing tech for the last three to five years in anticipation of this kind of I wouldn't say I wouldn't say Revolution as of yet but movement uh into those spaces so I would say for like a quick example is you know Amazon web services has started 10 15 years ago Amazon wasn't quite sure where that was going to go you know they developed the product and it it grew they the product and Market grew to accept it and that's where you know people behind the scenes aren't really thinking about five or ten years down the road so that's where we're trying to identify companies and products that are gonna grow are going to be the Market's gonna grow into them so they might not be you know massive yet but it takes time for the market to kind of come to those really yeah you're looking to be on the Leading Edge of those Investments and so when when it comes to fruition then then you guys are going to to uh profit nicely yes exactly and uh and then the uh one of the the other side of the portfolio uh you know we have a very strong inflation thesis while you know right now we are in secular disinflation um the overall trend for this decade is inflationary um the kind of structural forces that are existing um from both the fiscal and monetary side of the U.S budget constraints um the debt side uh servicing the debt side and also just general Trends in a multi-polar world where there's more friction and trade there's more you know hostile actors there's more focus on kind of securing Supply chains and that comes to the cost and so a lot of the forces that we're contributing to the you know low inflation over the last couple decades are have structurally started to shift and we saw that kind of accelerate during covet and we do think that there will be bouts of you know inflation comes down and it may stay there for a period of time but the general trend is inflation is is going to be a staple of this of this investing decade and to you know to kind of address that is bonds have only been bonds have basically been in the state of stable slash lowering inflation for the last 40 years change up that that cocktail and bonds are not as attractive as investment as they as they maybe have been in in Prior investing environments so um we're focused more on that side looking at Commodities and energy which historically relative to the S P 500 are at historic lows from a valuation perspective yeah have been largely neglected from you know capex investing if you look at capex Investing For the energy industry it's at you know historic lows uh even with even when Energy prices were spiking last year there was no increase in in you know existing or new Supply uh so we think there's a very strong Supply constraint in energy that right now you know demand has also been falling so we haven't seen we haven't seen those forces Collide yet but with inflation being where it at where it is and the overall landscape for fossil fuels we think that's a very good setup for a reversal and uh even if we don't see a massive reversal Energy prices at the next in the coming years a lot of those companies are really well capitalized compared to where they were 10 years ago they pay they're paying very healthy dividends they have a lot of their debt locked in for 20 30 years so even with interest rates you know coming up and they have a large obviously a large Capital fixed Capital base uh it should be it should be just fine for those companies and so that's another area that we see exciting opportunity yeah I mean this you touched on a handful of things there so so obviously you you have built the portfolio from a you know looking at the market conditions and and specifically for a continued inflationary environment um and and like you said with that you know one of the the reactions of that is is the bond market and then how that looks from a value standpoint and from an investment standpoint so a typical 60 40 or 70 30 you know 60 equities and and 40 fixed income or bonds they're investing in as as a you know kind of uh a diversification you know risk risk management technique you guys are going away from that saying hey the bonds are not going to be providing much value you know moving forward through this type of a period in an environment and so in exchange for that you're looking at Alternatives such as Commodities and energy as a replacement for for that part of the portfolio is that is that what I'm hearing yeah and and bonds you know they still have their place and I do think that there's pockets of opportunity in the bond um you know Bond valuations and bond market and so we we can take advantage of that um as we see fit you know just recently we've added a little bit more Bond exposure um where we had almost none before that's part of the the nice thing about the strategies it's very it's very Nimble and um kind of adapting to what's happening real time and yeah forecasting three six months from now but in general we do see more opportunity in the energy and commodity space from a dividend paying standpoint and from a valuation perspective a lot of I do think a lot of the movement and the hesitancy of existing energy players to expand their supply has been the ESG kind of movement this kind of expectation that renewable resources were going to eradicate the need for fossil fuels you know over time and so large investment in bringing out new Supply just seemed not not only not feasible but regulation has become a lot stricter and um has definitely gone up so but as we kind of get into this decade we're people are starting to realize that the energy density that fossil fuels provide cannot be supplanted yet by renewable energy and it's it's not even close um yeah to meet our energy needs we we need fossil fuels and we need a a lot of them so um some of that kind of investor sentiment and and realization shift I think is going to be happening over the the foreseeable future and it will lead institutional and regular investing back into you know energy and commodities which have been uh rather neglected and been on a downtrend for the better part of it a decade yeah because you you touched on it the ESG and so for people that don't know it's environmental social and governance and so there's been almost mandates and some a lot lots of large institutional investors that they are investing you know primarily in ESG which which is looking at environmental impact and social impact Etc um and and to the neglect of of the fossil fuels which like to your point that maybe that's a certain you know causation of the the the the the good value that you're seeing right now in those areas and taking advantage of that and then people are going to have to come back to that which will then increase the value even more of your of your existing Holdings engine boy so I mean with that that kind of ties into another thing that we want to kind of cover obviously risk is is a massive um you know concern for everybody and they want to know how much they're putting on the table how much they're risking so where would you you guys kind of quantify yourselves in terms of you know on a risk profile a low low medium or high and what kind of things are you doing to actually mitigate that risk which you've touched on a little bit here but we can kind of talk about that specifically yeah it's a good question and risk is a very tricky thing it's almost subjective at times you know as we saw with Silicon Valley Bank or some some other you know big companies overnight they can go to zero where everyone thought it was safe the bonds were safe um so you know risk is definitely something on the Forefront of my mind and and something from you know I've carried from my past and uh digital asset investing you know thinking about risk a little bit differently than than most people um as far as you know the the portfolio doesn't have a huge history to go through you know be able to exactly point back to Market down cycles and point to exact kind of down downturns uh you know based on you know some of the risk measurement that that we do it's you know say the market was down you know 10 percent uh this year you know we wouldn't expect the portfolio to be down know much more than that we wouldn't expect to see the portfolio down you know 30 percent you know 30 we wouldn't expect the portfolio to be down 60 and a lot of that has to do with some of the companies that we choose uh to be you know the you know the safer part of the portfolio they're very well capitalized companies with strong dividend payments and that even if the you know the economy goes into a period of deflation or recession that those security prices we would expect to hold up um better than a lot of the overall market and of course the more Tech driven positions you know as their PE multiples fall down and um you know those obviously are more levered to you know downturns so you know we're looking to balance balance those allocations and um depending on how overall I would say is generally a high risk strategy but it's not risking a significant amount of capital in the given year yeah so you're looking I mean you're you know if the market you know takes a turn then then you guys would expect to participate in in some of that that downturn but but not to uh to an exponential degree where it you know you're you're losing yeah particularly and then you're looking to outperform during um you know bull market runs is that kind of the consensus that's exactly right and and you know of course we'd like to outperform doing the down the down times too um but a lot of it has to do with you know how we're positioned at that time um you know currently at the at the start of the year we were very heavy as far as our normal allocation from Tech to you know other Securities we were we were very uh heavy in the allocation and that has waned as we've seen this rally and we've seen some overvaluation exuberance into uh you know a higher cash and safety position so should you know a downturn commence in the next three to six months we would expect the portfolio to hold up probably better than you know maybe what I forecast a little bit earlier but obviously a lot of that has to do with personal decisions in the management of the portfolio so I don't want to you know lead people you know give people any false information or make sure they know all the risks before they without but ideally we'd like to outperform during the up and the down time because the portfolio is so flexible yeah you know that's just uh something to think about that you know it is a higher risk portfolio overall yeah that's helpful um I mean so so kind of going into more specifics of of what you're investing in which we touch on a little bit you know it it sounds like it's very much um you know there's there's some themes to the portfolio on the tech side and then so some certain sectors that you had touched on kind of previously are there certain sectors that you said you're sector agnostic but are there certain kind of sectors that you're looking at that you guys are looking at specifically now and in the future um you mentioned I think aai um some of the semiconductor semiconductor space are there certain sectors that are attractive to you right now yeah um you know the the is space is attractive um we had strong positions in that that we've scale back on a little bit as you know the exuberance is but we we remain really long-term bullish in those scenarios and a lot of uh I would say most of our exposure from those Tech positions are not major cap tech stocks so yeah the Apple the Microsoft the Google um which have greatly outperformed this year but some of our some of our positions um because we see that you know those the opportunities on those are capped yeah and so we see greater opportunity in you know smaller to Mid cap uh players that are you know have different differentiated Technologies and and kind of higher growth prospects the semiconductor industry uh we see you know if you look at the balance of ETF we we see some companies being very you know in a much better position than others so we're kind of careful in how we select for that but we we like that space um we have dabbled in companies related to digital currency so um directly or indirectly and that is much more of a momentum trade currently we have a very small allocation to that but prior at the beginning of the year we had a lot of information and Analysis that pointed to a strong rally in those so that that part of the portfolio and that comes back with my own personal experience in that space it is very hard to very hard to navigate and very volatile you know having that personal expertise to really kind of shift through the noise and understand the signals of that particular asset class uh is is been of great benefit because you know the returns in in that space can be can be very very pleasant if you're right but obviously very dangerous if you're wrong so it's it all comes back to risk risk management how you know how heavy is that are those positions and and really a lot of it has to do with the timing of those positions so [Music] you know right now we don't see as big opportunity in the digital um digital currency space but uh but yeah and then there's just you know we're looking at tax positions that have you know critical mass kind of a critical mask of users because data is is everything data is a currency and you know as you get those crypto mask users you are not only harvesting their data but optimizing your own Services based on their data so we do think that you know Tech platforms that have a growing a fast-growing user base uh presents a very interesting investment opportunity yeah and to be clear so so we're with the portfolio you're investing in individual companies or are there any ETFs in there as well or no there you know there's uh there's ETFs as well there's some sectors that we you know based on either my personal expertise there's some sectors that we don't see much differentiation you know I would say something like utilities um you know the utility sector there we don't see as much differentiation where we need to dig in and find the utility company versus kind of a broad stroke of of allocating that asset class as a whole versus like when we talk about semiconductors the semiconductor ETF is is a much different story where we don't want the broad exposure we think that there's much better opportunity picking out individual companies based on you know whatever metrics we use to Value them and where the Market's valuing them so um there are ETFs I would say you know currently it's probably you know maybe like a 20 to 30 exposure to ETF and then the rest is generally individual companies got it and so it's probably about where it stays normally yeah and so so what's your process then for for kind of you know determining you know what you want to put in the portfolio whether it's an individual company or an ETF what kind of screening process are you doing what's your research look like what's the analysis look like yeah so like I said it starts with with top down kind of the macro and then um you know bottom up you know traditional valuation measures as far as you know just examining the balance sheet you know uh discounted cash flow model depending on depending on which security we're talking about kind of looking at the sector overall what's the sector what's the sector Health where the you know what's the addressable Market of this sector how do we think the addressable Market of this certain security is going to change over the next you know three to five years so yeah we're talking about the energy industry um you know Midstream gas you know if a company is a Midstream gas we see you know LNG being a big part of that growth over the next 10 years how much of that growth is going to be captured by this company how much do they have now what's what's their market share going to look like in five or ten years they got a couple facilities coming online and they might you know gain market share in you know a category that's that's growing very rapidly so that's the kind of individual uh some of the individual thinkings that we we do on each security and we also look at you know regulatory uh you know the regulatory environment is a big part of this you know especially you know if we're talking about Oil and Gas Energy Commodities um the tech you know uh I think Congress is is very behind on on realizing um and understanding Tech if you you know watch any of the hearings but that that opens that industry up to I would say onerous regulation and all it takes is is a one broad stroke of a of a a bill that gets passed uh without much understanding from the Congressional authorities that are passing it to fundamentally change a tech companies entire business you know we saw that with a little bit with meta um now granted Apple did it but it it really limited a lot of what Meadow was doing business-wise of course Matt is a huge company and there's there's so many different business facets but uh so we're conscious about the regulatory environment how might how in you know safe is you know a company from you know one change in regulatory code so uh yeah I mean we're from from the other side of the table we're we're a tech company in finance so it is a a constant you know daily reminder that we have to be very very cognizant of what's happening over there and what that what what what The Regulators you know what they're saying and what they any changes that they make so we're seeing it firsthand so that's definitely something to be aware of um so how much time do you think you spend on on a given you know month or a given year on Research it it really I it's tough to add up the the total amount yeah you know it depends on a given security too I would say you know one thing about this portfolio I think is different than a lot of other portfolios is we're willing to go you know a little bit heavier on individual positions that we have a high conviction in yeah so where I think a lot of other portfolios the kind of the practices well this position was up 50 we got to trim it a ton you know trim it back to if we have high conviction in in a security um we're fine with it being very overweight because we're looking around and saying well what are we going to do with that Capital otherwise yeah and there's if there's no other better place to allocate that Capital then you know why are we you know why are we trimming it um so I would say I can certainly test my two highest conviction equity allocations in the tech sector have probably I've probably put 200 Plus hours into each yeah um now if those are exceptions I would I would say normally those most Equity positions are not researched to that degree um but they're also much smaller allocations but that's 200 hours into into like you said just a few positions versus you know I'm sure you're looking at several other companies on any given day any given month and year that that don't ever make it to the portfolio so so that's a a significant amount of time that that you're spending researching these and making these decisions yeah and a lot of it goes with you know um you know the broad kind of the broad macro thesis a lot of the research goes into that because you know we have these individual positions but depending on the the overall investing macroeconomic landscape that can help decide a lot of the weight of those businesses so they might not go away we just might not be as heavily weighted in them because um you know interest rates are rising and PE multiples are expected to contract and that heavily advert you know Hertz Tech and you know the high you know opportunity cost you know you're able to get a five percent Treasury and there's a bunch of tech companies that are you know yielding nothing so you know based on that broad macroeconomic environment we might not change or eliminate positions but we might trim some of those positions uh-huh um it has a lot to do with it no I mean I I think this has been fantastic um I really appreciate you taking the time Zach the I mean the portfolio is performing fantastically so far this year um so yeah if anybody has any other questions you can dive into your firm profile and find Zach and his Emerging Technology Macro Hedge portfolio on Echo Trade thanks for being here Zach [Music]
2023-08-19 05:42
