FM: Your firm embodies the convergence between traditional and alternative investments. For about a decade, traditional firms have been trying to get into the alternatives space, while hedge funds and other alternative managers have been trying to launch mutual funds. Meanwhile ETFs have become all the rage. Can you flesh out this landscape, and Armored Wolf’s role in it?
JB: Yes. At [PIMCO], though I ran the some of the largest mutual funds in TIPS, commodities and the asset allocation space, my approach was decidedly quantitative, relying heavily on a concept called “portable alpha,” in which alpha became the centerpiece of my efforts, and the benchmark took a backseat. So analytically speaking, my ability to allocate across specialist managers and manage portfolios myself, was seamless.
In terms of clients and mandates, our firm spans the gamut. Our people and infra-structure, starting with my co-founder Mohan Phansalker (former CLO for PIMCO, now Armored Wolf’s COO & general counsel), span a variety of structures, regulatory frameworks and asset classes seamlessly.
Currently our clients are Eaton Vance: Armored Wolf serves as sub-advisor for the EV Commodity Strategy Fund; Curian Capital: Armored Wolf serves as a sub-advisor providing ETF model portfolio for Curian’s retail separate account product; OFI: Armored Wolf serves as sub-advisor for the OFI SSP-Armored Wolf Euro Inflation-Linked Bond UCITS Fund; James Alpha: Armored Wolf serves as advisor for the James Alpha Global Enhanced Real Return Fund; and Armored Wolf is the manager of various institutional separate accounts and privately placed funds (hedge funds) in the high-yield and absolute return arena.
FM: So coming back to the current investment environment, and synthesizing both your background, and your investment process, what can you tell us about the current outlook?
JB: In terms of inflection points, I’m drawn to commodities generally, and the tensions embodied therein. In the energy market, you have rapid innovation transforming: The supply side, transportation infra-structure, and via conservation and substitution, the demand side. This innovation, or these productivity enhancements, are keeping a lid on energy inflation. In the metals, and precious metals, you have a different and much more bullish dynamic going on.
Pricing for commodities, and metals in particular, is based on three intimately interrelated markets. The first and foremost of these is the long-term market, where ultimately supply and demand fundamentals intersect. The second is the spot market, where at each instant for every buyer there is a seller. The third, the glue that ties these first two together, is the market of storage, or inventories. Inventories are the “time machine” by which spot sale of current production is in effect delayed, as the material is transported into the future.
With the global economy experiencing “a new normal” sub-par rate of growth and industrialization, for five or more years as Reinhardt and Rogoff describe in their sarcastically titled book, “This Time is Different,” the spot market for many metals is relatively glutted. Don’t be fooled however. The longer term fundamentals could not be stronger.
I don’t expect this to endure. For some commodities, those that are difficult to store, this disconnect will simply endure, until gradually the passage of time will resolve the discrepancy. For metals markets, the cost of storage is low, so the spot market and the long term market remain linked. Low interest rates further facilitate this arbitrage.
Precious metals are of course the most direct way to play this, with platinum, at a discount to gold, providing both fundamental, and relative value.