NAAIM Founders Award – 2021 Winner

NAAIM Founder’s Award White Paper Winner Offers a Passive/Active Blending Approach that Responds to Risk/Reward Opportunities in the Stock Market

Littleton, Colorado – August 3, 2021 – The National Association of Active Investment Managers (NAAIM) has named Garrett H Brookes, CFA and founder of Slingshot Financial, as winner of its annual white paper competition, the NAAIM Founders Award. Brookes received $5,000 for ACTIVE/PASSIVE BLENDING BASED ON THE LIQUIDITY PREMIUM: A Practical Study, and will present his paper at the association’s OUTLOOK conference in Chicago, October 11-12, 2021.

“Too often active and passive investment approaches are an either-or choice,” explains Brookes. “I believe they belong together in a portfolio. There are times when passive will outperform and times when the market’s risk level merits an active approach. My focus was to provide an easy-to-understand, easy-to-implement framework for blending passive and active with improved risk-adjusted returns.”

ACTIVE/PASSIVE BLENDING is designed for asset accumulation portfolios, where investors are making regular contributions. The passive position invests in an equally weighted S&P 500 exchange traded fund (ETF). The active position uses a capitalization-weighted S&P 500 ETF and a money market fund.

To identify risk on, risk off periods of the market, Brookes uses the liquidity premium created by the spread between the U.S. Treasury 10-year and the 3-month securities. Flatter yield curves tend to occur later in the business cycle as greed takes over investor sentiment. A steeper yield curve typically occurs when there is fear in the market.

Among Warren Buffett’s oft-quoted investment advice is “Be fearful when others are greedy and greedy when others are fearful.” Using the liquidity premium provides a means of quantifying where the market might be on the scale from fear to greed. When the liquidity premium is low, risk is highest and new contributions are allocated to the Active portfolio. When the liquidity premium is high, indicating investors are fearful, new monies are allocated to the Passive portfolio. To test the effectiveness of the liquidity premium, simulations were run using a 50-50% contributions distribution, randomized contributions, reverse contributions and a randomized 2/3 passive and 1/3 active portfolio contribution distributions.

The second element of the Passive/Active Blend was determining how the active portfolio should be allocated between the cap-weighted S&P 500 ETF and a “cash” position. Again, seeking an easy-to-implement tool based on information readily available to the public, Brookes used the NAAIM Exposure Index as an equity/cash allocation strategy. This indicator represents the average level of exposure to the U.S. equity markets reported by the NAAIM membership on a weekly basis.

“NAAIM has published the Exposure Index for 14 years and while we have seen models that used the index before, Brookes’ use was unique and well documented as to its effectiveness,” explained a member of the judging committee, David Daughtrey, CFA, CPA^® of Copperwynd Financial LLC.

In the model developed for the white paper, there is no rebalancing between the passive and active portfolios. While the Liquidity Premium Blend strategy internal rate of return lags the Passive portfolio internal rate of return by 1.3%, it outperforms alternative contribution distributions, while drawdown and risk statistics show significant improvement over the passive portfolio.

“The biggest challenge advisors face is meeting investor expectations,” Brookes explains. “The average investor wants to be up when the market is up but avoid losing money when the market falls. While there isn’t a strategy out there that can achieve that with 100% accuracy, a blended approach heads you in the right direction.”

Download the 2021 1st Place Paper Here

About Garrett H Brookes

Garrett Brookes has worked in the financial industry for more than 20 years, serving in marketing and sales capacity to registered investment advisors, independent financial advisors, and money management firms throughout the U.S. on the behalf of major investment companies and well as small boutique investment providers. January 2021, he formed Slingshot Financial to partner with the “hidden gems” of money managers focused on quantitative strategies, alternatives, strategic income and innovative fintech, offering strategic guidance on wholesale product development and marketing, as well as tactical execution through Slingshot Financial’s turnkey wholesaler program. https://slingshotfin.com

About the NAAIM FOUNDERS AWARD:

Launched in 2009, the NAAIM Founders Award is designed to expand awareness of active investment management techniques and the results of active strategies through the solicitation and publication of research on active management. $5,000 is presented annually for the best paper submitted to the competition.

The National Association of Active Investment Managers (NAAIM) is a non-profit trade group of nearly 120 registered investment advisor firms that collectively manage more than $32 billion in assets. NAAIM member firms provide active money management services to their clients to produce favorable risk-adjusted returns as an alternative to passive, buy-and-hold investment strategies. NAAIM publishes the weekly NAAIM Exposure Index and sponsors the annual Uncommon Knowledge conference along with smaller conferences and regional workshops on topics of interest to its membership. For more information, visit www.naaim.org