Build was founded to provide savers and investors with solutions that keep their long-term goals on track as we navigate a new, disruptive era in financial markets. Today we’re proud to celebrate the first anniversary of the launch of Build’s Indexed Risk Control investment strategy. As we reflect on this milestone, we would like to thank our clients, partners, and advocates who made this first step possible. We would also like to thank our fellow team members – Builders as we like to call ourselves internally – who together delivered on a big vision and made this first success a reality. Achieving our mission would not be possible without the great deal of effort, investment, and contributions from many people who have helped us along the way. We are overwhelmed with gratitude for the contributions of each and every person who made this possible and look forward to validating the encouragement and support we have received in the coming years.
We take great pride in the results we’ve delivered in an otherwise tumultuous year. Soon after the launch of our strategy, the COVID-19 pandemic materialized into a serious challenge to the American economy and its retirement savers. By late March 2020, the S&P 500™ index fell to its lowest point of the year, recording a -33.92% drawdown within a matter of weeks. Many investment strategies for investors with a conservative risk tolerance – which would likely include late-stage workers and those nearing their intended retirement date — fell by a similar magnitude to the -14.55% drawdown recorded by the S&P Target Risk Conservative Index™ over the initial weeks that the pandemic took shape in the United States. In contrast, Build’s Conservative Indexed Risk Control™ strategy recorded a -6.24% drawdown through this period, demonstrating its ability to weather market stress and better position its clients for the recovery ahead. Over ensuing quarters, the recovery took place as fiscal and monetary actions stabilized financial markets.
Now that we’ve reached the one-year finish line, it does appear that many conservative investments look to have arrived at similar total return destinations after a volatile year. From our point of view, that’s a dangerous assumption. We believe all conservative investments are not the same, and that the path taken to reach the destination matters greatly. As we proceed through this challenging investment environment, drawdown and volatility are key hazards investors must navigate in this era. We ask you to let our track record in the COVID-19 pandemic serve as a helpful and powerful reminder.
Why We’re Here
Over recent decades we have seen passive investing grow to become the most widely adopted tool in the financial services industry. This trend was driven by the persuasive argument and belief that financial markets are efficient over the long run, and that the soundest approach over a long enough time horizon is to ride “risky” asset prices higher on their long-term upward trend. Naturally under this standard, the most important feature in investing becomes minimizing costs over the length of the journey. The emergence of passive investing has been essential to staying on track for retirement up until this day for many savers. Retirement savers have needed growth in asset prices to offset the consistent erosion of interest rates lower over the last forty years. Without the growth and adoption of passive investing, we believe we would undoubtedly be in a much worse position today as we stare down a new era of investing challenges.
But a foreseeable challenge to passive investing in this new, low-rate environment is its lack of a prescriptive view of risk in portfolio construction. Under most passive multi-asset strategies, risk is most commonly assumed to be driven by asset allocation. The Target Date Fund, which has grown to become the dominant solution in the retirement savings industry, is a concrete example: age is a blunt proxy for an investor’s risk tolerance, and the portfolio composition follows a simple equity versus fixed income allocation glide path as the American worker progresses towards their retirement date. While the passive allocation might consider the different risk, return, and correlation characteristics across asset class sleeves in the portfolio, the risk factors known to implicitly drive the distribution of returns in the assets themselves are all but ignored. The result is a retirement savings industry more focused on market capitalization, the value/growth factor, and the style box, rather than the underlying risk drivers in a portfolio such as equity beta or duration. The history of financial markets is rich in investment strategies, products, and advice that were humbled by risk when investors thought they had it mastered. An always helpful reminder, the most dangerous words investing are usually “this time is different”.
Before the COVID-19 pandemic even arrived, we saw challenges facing investors emerge under a new financial market paradigm following the 2008 global financial crisis. After careful thought and evaluation in the early years of this new era, we concluded that new solutions were needed to help investors navigate the challenges presented by the new landscape.
Why We’re Different
We set out to create an investment solution that would accommodate the most pressing challenges facing investors braving today’s markets: ultra-low interest rates, historically rich asset price valuations across asset classes, and headline-driven volatility in financial markets. After experiencing a challenging year in 2020, it’s difficult to cast away the notion that we are likely living through an important point of historical transition. At Build, our mission is to provide a foundational, reliable, and consistent solution to help our partners and clients emerge on the other side of this era with their retirement and savings goals either achieved or well intact on the continued path towards success.
We do things a bit differently than most of the dominant products and solutions in the financial services industry right now. Build’s approach to portfolio construction accounts for the risk factors that ultimately drive return in the overall portfolio from the ground up, while also considering the implementation structure to obtaining the risk exposures themselves. Our strategies are built from an actively managed fixed income core that seeks to preserve and protect investors’ hard-earned nest eggs, and an option overlay that seeks to participate in the growth opportunity presented in equity markets. Our differentiated approach in managing equity risk and exposure through an option overlay allowed our Conservative Indexed Risk Control™ composite to generate a nearly 8% contribution to return from its equity exposure since inception, while contributing over just -3% to the drawdown in the deepest selloff of the COVID-19 pandemic in March 2020. In comparison, the equity sleeve of the S&P Target Risk Conservative™ benchmark has delivered just north of 6% in its contribution to total return while contributing past -9% to the drawdown during the March 2020 selloff.
What to Consider
We believe a sound investment strategy starts with an examination of uncertainty in markets and our economy, and portfolio construction is a critical part of addressing it. Coordinated policy support from central banks at a massive and global scale has led to historically low nominal interest rates and upward pressure on asset prices. We have experienced the return of event-driven and systematically influenced volatility, with the recent COVID-19 pandemic serving as the most recent example. We have observed the fiscal position of governments in developed markets deteriorate to their worst levels in the post-World War II era. With the November elections, the United States shifted to unified party rule of our federal government during a period of social upheaval and economic unrest. Historical precedent would lend itself to the prospect of foundational policy changes to be taken seriously in times like these. If you are an advisor, fiduciary, or member of an investment team who carries a responsibility to evaluate and ultimately make decisions for clients as we navigate this new era, I would ask you to consider the following:
- Does your current investing framework or implementation carry risks that you’re not thinking about?
- Has your current investing framework evolved to account for the new, heightened risks in today’s market?
- Did the traditional balanced investing approach deliver for you during the most recent drawdown?
For more on our strategies see our solutions page.