The founder of Validea Capital asset management firm describes their newest product, a robo-advisory service called Validea Legends Advisor.
Validea Capital Management is a systematic-based asset management firm. Since 2005, I and the team at Validea Capital have been running active equity models utilizing the stock selection strategies of legendary investors, including approaches based on Benjamin Graham, Peter Lynch, John Neff, Joel Greenblatt and even Warren Buffett. Validea Capital runs over 30 unique factor-based models ranging from deep value strategies to growth and momentum approaches. Validea Capital’s investing system replicates the strategies of history’s best investors through a highly disciplined, rules-based investment framework.
In April 2017, Validea Capital launched a robo-adviser product called Validea Legends Advisor. Validea Legends builds off the concept of emulating successful investors by combining Validea’s guru-based stock selection models with exposure to Warren Buffett’s Berkshire Hathaway A Shares as well as various other asset classes (modeled off the investment allocations of leading endowments such as Yale University’s). Validea Legends also incorporates a downside protection system on various asset classes to mitigate losses in major bear market environments.
Account Opening and Investor Risk Assessment
From the Validea Capital website, investors can directly open their accounts through the FOLIOfn Investments Advisor Connexion platform. Individual and joint accounts, IRAs—including Roths, rollovers, SEP and Simple IRAs—along with trust and business accounts are all accepted. Once an account is opened, each investor is presented with an online risk questionnaire that contains a set of questions relating to the level of risk they are willing to accept, their time horizon on the investment and a number of other factors relating to risk and return objectives. From there, one of five investment allocations is suggested to the investor based on their score. As part of the onboarding and investment allocation process, clients are shown a simulated risk analysis of the strategy that displays worst-case scenario and drawdown statistics for an allocation similar to how they will be invested. The goal of this analysis is not to show the returns of a particular allocation, but instead to show each investor what a worst-case scenario might look like, as well as historical recovery periods. This helps to ensure that clients are ultimately invested in an allocation they can stick with over time, even during periods when the market is falling and asset prices are declining.
Clients can speak to an investment representative during the account opening process or at any time once their account is opened. Allocations can also be changed based on changes in the clients’ circumstances.
Learn From and Invest With the Best
All of the Validea Legends allocations have exposure to the firm’s own ETF (exchange-traded fund), which holds the highest-scoring stocks based on a series of systematic, fundamental-based investing models that focus on the strategies of Wall Street legends. The portfolio consists of 10 “guru”-inspired models, each selecting 10 stocks, resulting in an actively managed portfolio of 100 stocks. The 10 strategies that are currently utilized were selected based on their long-term performance and their correlation to each other. The combination of a diverse set of investing models that utilize both value- and growth-based investing styles is designed to reduce variability of returns and diversify strategy specific risk. The top 100 guru-rated stocks are spread across the entire market universe.
Changes to the stock holdings, which are held in the ETF, are a function of a disciplined buy/sell methodology that looks to sell stocks that have fallen in score and replace those names with higher-scoring securities based on Validea’s models. The models utilized in the fund can search for the best opportunities across all segments of the market and, as a result, the portfolio consists of small, medium and large-sized domestic and international companies (the latter via ADRs, American Depositary Receipts). Fund analysis would reveal a small-cap and value bias—two characteristics the firm believes will enhance long-term performance.
Validea Legends may also be the only robo-advisory with exposure to Buffett’s Berkshire Hathaway A Shares, which have returned over 21% annually since 1965. Allocations have anywhere from a 5% to 15% position in Berkshire at the target weights. The Berkshire exposure provides investors with a high quality, blue-chip name that balances out the smaller and all-cap exposure selected by the firm’s quantitative models.
Endowment Asset Allocation Framework
Validea Capital also takes a novel approach to its asset allocation framework using the playbook of leading endowment funds such as Yale. Included in each of the firm’s allocations are a number of asset classes, including fixed income, gold, real estate (via publicly traded real estate investment trusts, REITs), commodities (including timber) and a handful of private equity positions.
The pie chart and table below show the holdings of the moderate allocation in Validea Legends. The moderate allocation is the middle-of-the-road allocation that offers a balance between growth and stability. At the target weights in the allocation, the holding breakdown will be as shown in the pie chart.
This allocation provides investors with 20% long-only exposure to the top stocks selected by the Validea investing system. The allocation seeks to maintain 10% exposure to Berkshire Hathaway. Approximately 25% of the allocation will be in fixed income, while gold, commodities (including a small allocation to forest) and real estate will make up anywhere from 7.5% to 10% within the portfolio. The allocation also holds a 5% position in publicly traded private equity names. In most cases, Validea Legends is utilizing low-cost ETFs to get exposure to these areas of the market, although in the case of Berkshire and private equity names, individual stocks are held in the client’s account.
All allocations utilize Validea’s internally developed technical-based rotational model, which effectively acts as a timing overlay on specific asset classes. The rotational model seeks to limit losses across the riskier asset classes we hold when they enter a period of significant decline. The timing model also maintains a disciplined buy trigger, which seeks to re-enter the asset class when an uptrend is reconfirmed. The rotational overlay is built on a technical model that looks at medium- and longer-term moving averages, and the combination of those indicators. The buy, or re-entry, trigger is less stringent. The asymmetrical timing model seeks to capitalize on the fact that bull market periods are typically much longer than bear market periods. So, the system will buy more quickly when the market goes up than it will sell when it goes down. In the testing of various timing models, this approach proved to strike an advantageous risk/return balance for investors.
Table 1 lists the weightings across various holdings using the moderate allocation at target weights. This allocation offers a balance between growth and stability, and the strategy that sits between the more conservative and aggressive allocations. Asset classes marked with asterisks (**) are the portions of the portfolio that have the ability to go to cash when technical conditions deteriorate. While it would be rare to see all of these asset classes be in cash at once, the portfolio does have the ability to see up to 45% of its exposure in cash during significant declines.
Table 1 contains the five investment allocations available to clients who invest with the Validea Legends Advisor, along with the total fees associated with each allocation. Portfolio approaches range from conservative and balanced to aggressive and ultra-aggressive, with the latter two investing all or mostly in equities.
|Conservative||Stablize returns over time||0.52%|
|Balanced||Stabilize returns with increased growth||0.60%|
|Moderate||Balance between growth and stability||0.62%|
|Aggressive||Primary focus on growth||0.78%|
|Ultra-Aggressive||Complete focus on growth||0.80%|
|*Includes trading and management fees|
The robo-advisory space is rapidly developing—firms like Betterment and Wealthfront got out early, and now larger incumbents like Schwab and Vanguard are making strategic thrusts and gaining assets and new customers. Unlike many of these larger, more established players that maintain simpler asset allocation techniques, Validea Legends brings a unique perspective into the robo-advisory space with the combination of active stock selection utilizing its guru-based investing system, actual exposure to Berkshire Hathaway, different types of asset classes modeled after endowments and a technical-based model to help protect during major downturns. By emulating successful investors and strategies through a low-cost and highly disciplined approach, the firm hopes to get the right long-term investors in the investment allocation at Validea Legends that is best for them.