A lot of ground gets covered in this interview with Jim Lonergan of the Connors Group, including the high degree of correlation between asset classes, and why cash is an effective tool for preserving capital in poor market conditions.
Kate Stalter: Today’s guest is Jim Lonergan, CEO of the Connors Group.
Jim, your company has a couple of different areas of businesses that pertain to individual investors, but I wanted to start out today by asking you about The Machine, and how retail investors can take advantage of this unique trading platform.
Jim Lonergan: We launched The Machine, which I will talk about in a minute, about a year ago. The whole idea was to really in some ways help level the playing field for the average investor.
This would simply give them the tools, all the data and models that we built over the years in that expertise, and put it in a software-as-a-service model, a platform for high-net-worth individuals that they can actually access that high-end content and use it to their advantage to invest on an active basis. Active is defined as intraday, weekly, monthly, or even annual, depending on the strategies that they would use.
We have had it out in the market about a year now. For people that are looking to take a more active approach, this is a great tool to get access to information that only high-end hedge funds and so forth would have access to.
Kate Stalter: I am looking at the Web site right now for The Machine. If I were a new client interested in this—walk me through what that process would look like.
Jim Lonergan: Yeah, I think there are a couple of things. We tried to make it as simple as possible.
We are leveraging all the data that we built up over the years, and put it in an application where you can go in and say, “I am looking for a strategy that would combine ETFs and equities that give me some risk protection as well as some upside,”—things like Dow Jones Select Dividend Index Fund (DVY) and a number of ETFs.
You can combine, and go in and take models that we have preset for you already, and use those models as your starting point. Or, you can go in and actually create your own models using a lot of the data elements, like standard deviation and risk, and things like that, and create your own customized models to your specific objectives.
It's a lot of information, but we really simplify it. And with a few clicks of the mouse, you can have your own custom portfolio, custom model, ready to go and basically act and invest on.
Kate Stalter: And is this completely for self-directed investors Jim, or is there a role for advisors in this as well?
Jim Lonergan: One of the tools advisors use for their clients is mutual funds and individual money management, and if you look back at the return coming from those mutual funds and money managers, you’d see they underperform pretty dramatically. We call it the lost decade: If you look at the 2000s, clients have ended up with no return.
So, the whole point of launching, and we just launched The Machine Advisor in January, was to give the advisor the tool to actually start taking on some responsibility of managing the client assets internally themselves by having the right simple tool, rather than having to farm that out.
Kate Stalter: So Jim, you were talking about some of the returns and strategies of advisors. I read a lot, and I talk to a lot of advisors. Many of them believe the best strategy is just to benchmark, to get something perhaps like the SPY, or just go into index funds and hold them over a long term. What do you think about that approach versus something more actively managed?
Jim Lonergan: I think every portfolio has some allocation that could be put towards something passively, so I wouldn’t say everything has to be actively managed.
But if you look back at a typical passive 60-40 portfolio, they have highly underperformed over the last ten years. I mean, most of them lost 35% during the 2008-2009 period, and the balanced mutual funds they put them in are down 37%.
The problem with index funds: You’re putting clients in indexed funds, quite frankly. One, the client could probably do it themselves. And two, those funds are obviously completely correlated to where the market goes. So, if the market’s going up or down, you’re going with it.
As an advisor to a client, I don’t necessarily think that does much in terms of diversification and protecting clients assets. And I know, as an advisor, I’m not so sure how much value that lends itself to a client who’s just in an index fund, which is basically wherever the market goes, I’m going with it. So, we have a different view of that. We really think taking an active approach to managing money is the right way to go, to some extent.
So, using data, behavioral finance, and models—and if you think about it, Kate, almost everything we do in life today has models or data back, whether it be Disney (DIS) Pass, or the weather patterns. What’s unique is in finance, a very small percentage of people use models and data to make decisions, and most of its discretionary in nature. And we believe strongly in behavioral finance and using data to make intelligent decisions.
From that, we come out with objectives of beating the benchmarks and also lower risk, lower standard deviation. Most of our model portfolios, pretty much, are about one-third of the risk of the market. Most of them protect your assets and use cash when needed.