Welcome to the latest episode of Zephyr's Adjusted for Risk Podcast. I'm Ryan Nauman, the market strategist at Zephyr, and today we dive into the ever-critical topic of investment risk management. Often overshadowed when markets are on a high, the importance of risk management becomes undeniable amidst the uncertainty financial advisors face while crafting investment portfolios for their clients. This episode is sponsored by the award-winning Zephyr, dedicated to aiding investment professionals in making informed decisions.
Meet Dean Smith
Our guest today is Dean Smith, Portfolio Manager and Chief Strategist at FolioBeyond. With extensive experience in the fixed income markets, including trading mortgage-backed securities and engaging in complex hedge fund strategies, Dean comes with a wealth of knowledge. Folio Beyond launched six years ago, and under Dean's guidance, it introduced its first exchange-traded fund (ETF), Riser (RISR), followed by Fix (FIXP) this year. Both ETFs aim to provide investment advisors and investors tools to manage interest rate risk efficiently.
Evolution of Fixed Income Markets
Our discussion kicks off with an exploration of the changing dynamics in fixed income markets. From years of static interest rates to the volatility and shifts experienced today, the landscape has transformed significantly. As Dean recalls historical perspectives, he emphasizes that the current interest rates, averaging around 4.5%, aren't extreme by historical standards. Instead, a normalization process is underway post the zero interest rate policy era, creating both challenges and opportunities.
Tariffs and the Bond Market
Among the primary risk factors identified, tariffs stand out. As Jay Powell, chairman of the Federal Reserve, points out, tariffs are inflationary and contribute to market volatility. The podcast highlights the precarious nature of recent policy announcements and the subsequent influence on bond market performance. Such uncertainties are likely to persist, urging investors to brace for continued fluctuations.
Strategies for Managing Risk
Dean provides valuable insights into effective risk management strategies. Diversification remains key, but the conventional set-it-and-forget-it approach to fixed income management is inadequate today. Instead, Dean advocates for setting risk budgets, assessing portfolio drawdown risks, and remaining nimble in allocations. Understanding the correlation between assets and potential scenarios that could trigger drawdowns is essential for effective risk management.
The Dangers of Falling in Love with Forecasts
Avoiding the peril of becoming overly attached to forecasts is another crucial aspect discussed. Recognizing the limitations of predictions and preparing for alternative outcomes is vital. This approach ensures that investment advisors remain adaptable and responsive to shifting market conditions, thus safeguarding clients' interests.
Conclusion: Win by Not Losing
In wrapping up the conversation, the emphasis on managing downside risks becomes clear. At Zephyr, significant research focuses on understanding drawdown risks, aligning with Warren Buffett's principle: to prioritize avoiding losses. Folio Beyond offers products designed to mitigate drawdowns, providing tools for institutional and retail investors alike.
Thank you for joining us on this enlightening journey through risk management and evolving market dynamics. Stay tuned for more insightful episodes of Zephyr's Adjusted for Risk Podcast, available on YouTube, Spotify, and LinkedIn. Keep informed, stay adaptive, and remember: winning starts with not losing.