Navigating Investment Frontiers with the "Emerging Technologies Macro Hedge" Portfolio | Echo Trade

Navigating Investment Frontiers with the

Show Video

[Music] welcome to Echo Trade I'm Jeff Roth here  again with Zach Daniel from Digital Edge Wealth   Management. Zach is the founder and head  portfolio manager and today we're talking   about his portfolio within Echo Trade emerging  Technologies macro hedged so Zach thanks for   being with us how's it going hey thanks for having  me Jeff it's going great Summer's summer is going   along and I'm happy to talk about my strategy at  Echo Trader and give some context to everything   so thanks yeah yeah we're excited to dive in and  kind of learn more here from the horse's mouth so   um yeah so I mean let's let's Dive Right In let's  start a little maybe a little high level and give   us a broad kind of broad Strokes overview  of what the goals of the portfolio are you   know kind of what you're trying to accomplish  with within the within the strategy yeah it's   definitely a growth oriented portfolio of course  you have you know considerations for income and   capital preservation in there but overall it's  uh the strategy is an overall growth portfolio   focused on the merging Technologies but  understanding that the investment landscape   and the macro census changed over the last couple  years and that looks to continue to move to the   next decade so things that had traditionally  worked in you know 60 40 portfolios for the   last 30 40 years fundamentally started  to change after covid and we think that   change is going to continue so you need a  strategy and portfolio that addresses that   um and that's really what was the focus was  for this strategy was something Nimble able   to kind of adapt to the changing landscape  a lot of inflation and you know whether it's   you know different interest rate environments  and and whatnot but the the main drivers of   portfolio Alpha is technology it kind of always  has been technology and so we thought it was   a very important piece to have that in there um  obviously in the environment there's a lot of of   tech that may be unprofitable or or overvalued but  through careful research and you know leveraging   our own expertise we can kind of find those  pockets of of growth that coupled with kind of a   macro hedge view with interest rates and inflation  can kind of create a portfolio that can be very   attractive for for growth and some downside  protection should you know economic conditions   deteriorate or not go exactly you know as a  strategy predicts it's it's not a huge downside   fall there so high level that's that's kind of  General yeah no it's helpful so I mean basically   um if I'm hearing you're right you know you're  looking at the last you know several decades   and that technology has been the driver of  growth and Alpha for most strategies and so   you're just focusing exclusively within  this portfolio on on those Technologies   um on that sector you know broadly speaking for  the portfolio is that sound right yeah for sure   um kind of that over you know the top-down  approach is Tech in the technology driving but   obviously a bottom-up approach for each individual  company because you know not everything in Tech is   is equally is equally valued so are you looking at  certain sectors like like you said from a top-down   technology perspective you're looking at certain  sectors or you're just looking from a technology   umbrella um hole and then like you said bottom  up looking at you know sector agnostic but   just looking at what specific companies and  names you guys see as as driving growth and   providing value for the portfolio yeah  it's it's relatively sector agnostic   um you know we have elements in the portfolio that  address AI machine learning um you know just Broad   tech moats uh you know leveraging social media and  you know critical mask of critical mass of users   um but it is relatively sector agnostic I would  say probably the only sector that we've had we   are you know have careful attention to is  the semiconductor space we do believe that   chip manufacturing and is going to be a big  driver uh over the you know next decade as   AI becomes more implemented in you know gpus or  or use more in machine learning algorithms but   um we're relatively sector agnostic we do have a  special focus on where the technology platforms   are going to be in five years from now um so how  is this you know the AI Tech Machine learning   space in general going to develop and grow to  where what companies are looking three to five   years down the road that have been developing tech  for the last three to five years in anticipation   of this kind of I wouldn't say I wouldn't say  Revolution as of yet but movement uh into those   spaces so I would say for like a quick example  is you know Amazon web services has started   10 15 years ago Amazon wasn't quite sure  where that was going to go you know they   developed the product and it it grew they the  product and Market grew to accept it and that's   where you know people behind the scenes aren't  really thinking about five or ten years down the   road so that's where we're trying to identify  companies and products that are gonna grow are   going to be the Market's gonna grow into them  so they might not be you know massive yet but   it takes time for the market to kind of come to  those really yeah you're looking to be on the   Leading Edge of those Investments and so when when  it comes to fruition then then you guys are going   to to uh profit nicely yes exactly and uh and then  the uh one of the the other side of the portfolio   uh you know we have a very strong inflation  thesis while you know right now we are in   secular disinflation um the overall trend for this  decade is inflationary um the kind of structural   forces that are existing um from both the fiscal  and monetary side of the U.S budget constraints um   the debt side uh servicing the debt side and also  just general Trends in a multi-polar world where   there's more friction and trade there's more you  know hostile actors there's more focus on kind of   securing Supply chains and that comes to the cost  and so a lot of the forces that we're contributing   to the you know low inflation over the last  couple decades are have structurally started   to shift and we saw that kind of accelerate during  covet and we do think that there will be bouts of   you know inflation comes down and it may stay  there for a period of time but the general   trend is inflation is is going to be a staple of  this of this investing decade and to you know to   kind of address that is bonds have only been bonds  have basically been in the state of stable slash   lowering inflation for the last 40 years change up  that that cocktail and bonds are not as attractive   as investment as they as they maybe have been  in in Prior investing environments so um we're   focused more on that side looking at Commodities  and energy which historically relative to the   S P 500 are at historic lows from a valuation  perspective yeah have been largely neglected from   you know capex investing if you look at capex  Investing For the energy industry it's at you know   historic lows uh even with even when Energy prices  were spiking last year there was no increase in in   you know existing or new Supply uh so we think  there's a very strong Supply constraint in energy   that right now you know demand has also been  falling so we haven't seen we haven't seen those   forces Collide yet but with inflation being where  it at where it is and the overall landscape for   fossil fuels we think that's a very good setup  for a reversal and uh even if we don't see a   massive reversal Energy prices at the next in the  coming years a lot of those companies are really   well capitalized compared to where they were 10  years ago they pay they're paying very healthy   dividends they have a lot of their debt locked  in for 20 30 years so even with interest rates   you know coming up and they have a large obviously  a large Capital fixed Capital base uh it should be   it should be just fine for those companies  and so that's another area that we see   exciting opportunity yeah I mean this you  touched on a handful of things there so so   obviously you you have built the portfolio from  a you know looking at the market conditions and   and specifically for a continued inflationary  environment um and and like you said with that   you know one of the the reactions of that is is  the bond market and then how that looks from a   value standpoint and from an investment standpoint  so a typical 60 40 or 70 30 you know 60 equities   and and 40 fixed income or bonds they're investing  in as as a you know kind of uh a diversification   you know risk risk management technique you guys  are going away from that saying hey the bonds are   not going to be providing much value you know  moving forward through this type of a period in   an environment and so in exchange for that you're  looking at Alternatives such as Commodities and   energy as a replacement for for that part of the  portfolio is that is that what I'm hearing yeah   and and bonds you know they still have their place  and I do think that there's pockets of opportunity   in the bond um you know Bond valuations and bond  market and so we we can take advantage of that   um as we see fit you know just recently  we've added a little bit more Bond exposure   um where we had almost none before that's part of  the the nice thing about the strategies it's very   it's very Nimble and um kind of adapting to what's  happening real time and yeah forecasting three six   months from now but in general we do see more  opportunity in the energy and commodity space   from a dividend paying standpoint and from a  valuation perspective a lot of I do think a lot   of the movement and the hesitancy of existing  energy players to expand their supply has been   the ESG kind of movement this kind of expectation  that renewable resources were going to eradicate   the need for fossil fuels you know over time  and so large investment in bringing out new   Supply just seemed not not only not feasible  but regulation has become a lot stricter and   um has definitely gone up so but as we kind of  get into this decade we're people are starting to   realize that the energy density that fossil fuels  provide cannot be supplanted yet by renewable   energy and it's it's not even close um yeah to  meet our energy needs we we need fossil fuels and   we need a a lot of them so um some of that kind  of investor sentiment and and realization shift   I think is going to be happening over the the  foreseeable future and it will lead institutional   and regular investing back into you know energy  and commodities which have been uh rather   neglected and been on a downtrend for the better  part of it a decade yeah because you you touched   on it the ESG and so for people that don't know  it's environmental social and governance and so   there's been almost mandates and some a lot lots  of large institutional investors that they are   investing you know primarily in ESG which which is  looking at environmental impact and social impact   Etc um and and to the neglect of of the fossil  fuels which like to your point that maybe that's a   certain you know causation of the the the the the  good value that you're seeing right now in those   areas and taking advantage of that and then people  are going to have to come back to that which will   then increase the value even more of your of your  existing Holdings engine boy so I mean with that   that kind of ties into another thing that we want  to kind of cover obviously risk is is a massive   um you know concern for everybody and they want  to know how much they're putting on the table how   much they're risking so where would you you guys  kind of quantify yourselves in terms of you know   on a risk profile a low low medium or high and  what kind of things are you doing to actually   mitigate that risk which you've touched on a  little bit here but we can kind of talk about   that specifically yeah it's a good question  and risk is a very tricky thing it's almost   subjective at times you know as we saw with  Silicon Valley Bank or some some other you know   big companies overnight they can go to zero where  everyone thought it was safe the bonds were safe   um so you know risk is definitely something  on the Forefront of my mind and and something   from you know I've carried from my  past and uh digital asset investing   you know thinking about risk a little  bit differently than than most people   um as far as you know the the portfolio doesn't  have a huge history to go through you know be able   to exactly point back to Market down cycles and  point to exact kind of down downturns uh you know   based on you know some of the risk measurement  that that we do it's you know say the market   was down you know 10 percent uh this year you  know we wouldn't expect the portfolio to be down   know much more than that we wouldn't expect to  see the portfolio down you know 30 percent you   know 30 we wouldn't expect the portfolio to  be down 60 and a lot of that has to do with   some of the companies that we choose uh to be  you know the you know the safer part of the   portfolio they're very well capitalized companies  with strong dividend payments and that even if   the you know the economy goes into a period of  deflation or recession that those security prices   we would expect to hold up um better than  a lot of the overall market and of course   the more Tech driven positions you know as  their PE multiples fall down and um you know   those obviously are more levered to you know  downturns so you know we're looking to balance   balance those allocations and um depending on  how overall I would say is generally a high   risk strategy but it's not risking a significant  amount of capital in the given year yeah so you're   looking I mean you're you know if the market you  know takes a turn then then you guys would expect   to participate in in some of that that downturn  but but not to uh to an exponential degree where   it you know you're you're losing yeah particularly  and then you're looking to outperform during   um you know bull market runs is that  kind of the consensus that's exactly   right and and you know of course we'd like to  outperform doing the down the down times too   um but a lot of it has to do with you  know how we're positioned at that time   um you know currently at the at the start of  the year we were very heavy as far as our normal   allocation from Tech to you know other Securities  we were we were very uh heavy in the allocation   and that has waned as we've seen this rally and  we've seen some overvaluation exuberance into   uh you know a higher cash and safety position so  should you know a downturn commence in the next   three to six months we would expect the portfolio  to hold up probably better than you know maybe   what I forecast a little bit earlier but obviously  a lot of that has to do with personal decisions in   the management of the portfolio so I don't want  to you know lead people you know give people any   false information or make sure they know all  the risks before they without but ideally we'd   like to outperform during the up and the down  time because the portfolio is so flexible yeah   you know that's just uh something to think about  that you know it is a higher risk portfolio   overall yeah that's helpful um I mean so so kind  of going into more specifics of of what you're   investing in which we touch on a little bit you  know it it sounds like it's very much um you know   there's there's some themes to the portfolio on  the tech side and then so some certain sectors   that you had touched on kind of previously are  there certain sectors that you said you're sector   agnostic but are there certain kind of sectors  that you're looking at that you guys are looking   at specifically now and in the future um you  mentioned I think aai um some of the semiconductor   semiconductor space are there certain  sectors that are attractive to you right now   yeah um you know the the is space is attractive  um we had strong positions in that that we've   scale back on a little bit as you know  the exuberance is but we we remain really   long-term bullish in those scenarios and a  lot of uh I would say most of our exposure   from those Tech positions are not major cap tech  stocks so yeah the Apple the Microsoft the Google   um which have greatly outperformed this  year but some of our some of our positions   um because we see that you know those the  opportunities on those are capped yeah and so we   see greater opportunity in you know smaller to Mid  cap uh players that are you know have different   differentiated Technologies and and kind of higher  growth prospects the semiconductor industry uh   we see you know if you look at the balance of  ETF we we see some companies being very you   know in a much better position than others so  we're kind of careful in how we select for that   but we we like that space um we have dabbled  in companies related to digital currency so   um directly or indirectly and that  is much more of a momentum trade   currently we have a very small allocation to that  but prior at the beginning of the year we had a   lot of information and Analysis that pointed  to a strong rally in those so that that part   of the portfolio and that comes back with my own  personal experience in that space it is very hard   to very hard to navigate and very volatile you  know having that personal expertise to really   kind of shift through the noise and understand  the signals of that particular asset class uh   is is been of great benefit because you know  the returns in in that space can be can be very   very pleasant if you're right but obviously  very dangerous if you're wrong so it's it all   comes back to risk risk management how you  know how heavy is that are those positions   and and really a lot of it has to do with  the timing of those positions so [Music]   you know right now we don't see  as big opportunity in the digital   um digital currency space but uh but yeah and  then there's just you know we're looking at   tax positions that have you know critical mass  kind of a critical mask of users because data   is is everything data is a currency and you know  as you get those crypto mask users you are not   only harvesting their data but optimizing your own  Services based on their data so we do think that   you know Tech platforms that have a growing  a fast-growing user base uh presents a very   interesting investment opportunity yeah and to  be clear so so we're with the portfolio you're   investing in individual companies or are  there any ETFs in there as well or no there   you know there's uh there's ETFs as  well there's some sectors that we   you know based on either my personal expertise  there's some sectors that we don't see much   differentiation you know I would say something  like utilities um you know the utility sector   there we don't see as much differentiation where  we need to dig in and find the utility company   versus kind of a broad stroke of of allocating  that asset class as a whole versus like when we   talk about semiconductors the semiconductor ETF is  is a much different story where we don't want the   broad exposure we think that there's much better  opportunity picking out individual companies based   on you know whatever metrics we use to Value  them and where the Market's valuing them so   um there are ETFs I would say you know currently  it's probably you know maybe like a 20 to   30 exposure to ETF and then the rest  is generally individual companies   got it and so it's probably about where it stays  normally yeah and so so what's your process then   for for kind of you know determining you know  what you want to put in the portfolio whether   it's an individual company or an ETF what kind  of screening process are you doing what's your   research look like what's the analysis look like  yeah so like I said it starts with with top down   kind of the macro and then um you know bottom  up you know traditional valuation measures as   far as you know just examining the balance sheet  you know uh discounted cash flow model depending   on depending on which security we're talking  about kind of looking at the sector overall   what's the sector what's the sector Health where  the you know what's the addressable Market of this   sector how do we think the addressable Market  of this certain security is going to change   over the next you know three to five years so  yeah we're talking about the energy industry   um you know Midstream gas you know if a company  is a Midstream gas we see you know LNG being   a big part of that growth over the next 10  years how much of that growth is going to be   captured by this company how much do they  have now what's what's their market share   going to look like in five or ten years they got  a couple facilities coming online and they might   you know gain market share in you know a category  that's that's growing very rapidly so that's the   kind of individual uh some of the individual  thinkings that we we do on each security and   we also look at you know regulatory uh you know  the regulatory environment is a big part of this   you know especially you know if we're  talking about Oil and Gas Energy Commodities   um the tech you know uh I think Congress is is  very behind on on realizing um and understanding   Tech if you you know watch any of the hearings  but that that opens that industry up to   I would say onerous regulation and all it takes  is is a one broad stroke of a of a a bill that   gets passed uh without much understanding from the  Congressional authorities that are passing it to   fundamentally change a tech companies entire  business you know we saw that with a little   bit with meta um now granted Apple did it but it  it really limited a lot of what Meadow was doing   business-wise of course Matt is a huge company and  there's there's so many different business facets   but uh so we're conscious about the regulatory  environment how might how in you know safe is   you know a company from you know one change in  regulatory code so uh yeah I mean we're from   from the other side of the table we're we're a  tech company in finance so it is a a constant   you know daily reminder that we have to be very  very cognizant of what's happening over there   and what that what what what The Regulators you  know what they're saying and what they any changes   that they make so we're seeing it firsthand  so that's definitely something to be aware of   um so how much time do you think you spend on on  a given you know month or a given year on Research   it it really I it's tough to add up the the  total amount yeah you know it depends on a given   security too I would say you know one thing about  this portfolio I think is different than a lot of   other portfolios is we're willing to go you know  a little bit heavier on individual positions that   we have a high conviction in yeah so where I  think a lot of other portfolios the kind of   the practices well this position was up 50 we  got to trim it a ton you know trim it back to   if we have high conviction in in a security  um we're fine with it being very overweight   because we're looking around and saying  well what are we going to do with that   Capital otherwise yeah and there's if there's no  other better place to allocate that Capital then   you know why are we you know why  are we trimming it um so I would say   I can certainly test my two highest conviction  equity allocations in the tech sector have   probably I've probably put 200 Plus hours into  each yeah um now if those are exceptions I would   I would say normally those most Equity positions  are not researched to that degree um but they're   also much smaller allocations but that's 200  hours into into like you said just a few positions   versus you know I'm sure you're looking at several  other companies on any given day any given month   and year that that don't ever make it to the  portfolio so so that's a a significant amount   of time that that you're spending researching  these and making these decisions yeah and a   lot of it goes with you know um you know the  broad kind of the broad macro thesis a lot of   the research goes into that because you know we  have these individual positions but depending on   the the overall investing macroeconomic landscape  that can help decide a lot of the weight of those   businesses so they might not go away we just  might not be as heavily weighted in them because   um you know interest rates are rising and PE  multiples are expected to contract and that   heavily advert you know Hertz Tech and you  know the high you know opportunity cost you   know you're able to get a five percent Treasury  and there's a bunch of tech companies that are   you know yielding nothing so you know based  on that broad macroeconomic environment we   might not change or eliminate positions but  we might trim some of those positions uh-huh   um it has a lot to do with it no I mean I I think  this has been fantastic um I really appreciate you   taking the time Zach the I mean the portfolio  is performing fantastically so far this year   um so yeah if anybody has any other questions you  can dive into your firm profile and find Zach and   his Emerging Technology Macro Hedge portfolio  on Echo Trade thanks for being here Zach [Music]

2023-08-19 05:42

Show Video

Other news