Welcome to Active, but Elevated

Hi, I'm Tim Paulin, and this is ActiveTalks, where we dive into what makes Touchtone Funds Distinctively Active.

Our approach to distinctively active investing started with decades of experience and research that I've done over the course of my career, as well as my staff and our research unit. It was really important for us that we grounded our efforts and our methodologies in academic research, that's objective, that's time tested and not focus on short term market trends.

One of the pivotal elements of our research came when we adopted the research of Martijn Cremers yet seminal research in the mid 2000 on the concept of active share, which is just a very simple way to quantify a portfolio based measure of how active a strategy is.

So as an example, 0% active share would mean complete replication of the index's holdings, as well as the weights of those holdings. On the other end of the spectrum, 100% active share means that there is absolutely no overlap between the portfolio and the index.

We adopted that strategy as an underpinning to say if we're going to be distinctive reactive, we have to make sure we're investing in active, truly active strategy.

Having said that, even when we find truly active strategies, our experience tells us that certain styles of investing go in and out of favor. And just like every other style of investing, active and passive are styles of investing. In recent years, investing based on company size alone has dominated performance in the marketplace and has made headlines. We realized, though, that if you look back over decades, you'd find that those go in cycles with active outperforming in some long periods and passive and others.

That's why, in generating our Distinctively Active philosophy, we focus on long term returns of investors. We're trying to make sure that we're focused on those objectives’ investors have that are associated with their most important lifetime goals, like retirement, like education, like leaving some kind of legacy for future generations.

Hi, I'm Tim Paulin, and this is ActiveTalks, where we dive into what makes Touchtone Funds distinctively active.

Our distinctively active approach is designed to combat three of the biggest issues facing the active investors, particularly in the mutual fund marketplace today. Those three issues are, number one closet indexing, number two asset bloating, and number three over diversification.

Collectively, if you look at the U.S. mutual fund marketplace, those three issues affect three quarters of the assets invested in U.S. large cap equity funds and in U.S. small cap equity funds. To combat these kind of issues, we developed a framework for practice consulting that is an industry leading methodology. Part of that is looking at investments through a new light. That new light is focused on a differentiated way of thinking about skill over time, and how that has been exhibited by active managers.

Then also other characteristics that are associated with future outperformance. We call this framework SCOPE, which stands for Skill, Conviction, Opportunity, Patience, and Expenses. We've worked with thousands of advisors to help them to review the investment strategies that they use in their portfolios on a day to day basis, and make sure that they're reflecting these positive elements of SCOPE within the strategies they're using to help their clients achieve their lifetime goals.

Tim Paulin
Hi, I'm Tim Paulin, and this is ActiveTalks, where we dive into what makes Touchtone Funds Distinctively Active.

Ben, how would you describe the importance of Distinctively Active in shaping Touchstone’s vision and strategy?

Ben Alge
It's critically important to our vision and strategy. The conventional wisdom in our industry states that all active is the same really one homogeneous group, and that's simply not true.

Distinctively Active allows us to differentiate what we do in our Distinctively Active strategy from several others that while they may be called active, have impediments to true long-term outperformance. 

Tim Paulin
Looking ahead, Ben, what is your vision for the future of Touchstone, applying the Distinctively Active brand? And how do you see that perhaps evolving to meet the changing needs of investors in a changing market environment?

Ben Alge
So, my vision for Touchstone is that when advisors are seeking true active management, they think of us and that when an advisor wants a differentiated experience, for their clients away from the benchmark their first thought is Touchstone Investments, because that's who we are, at our core. And that vision goes beyond just investment performance, you know, the differentiated investment experience to me is table stakes, but it also expands into meeting them where they want to be from a wrapper perspective, where the mutual fund ETF, SMA or otherwise, and meeting them for practice management perspective in the modules we offer practice analysis review, all of those rational single vision of when a financial advisor partners with Touchstone, it's the best partnership they have.

Tim Paulin
What key factors do you believe give Touchstones Distinctively Active approach a competitive edge? 

Ben Alge
It comes down to understanding what elements can truly drive future outperformance, and those typically differ from where conventional wisdom has pushed our industry, which is such an emphasis on recent returns and just recency bias in general. An easy way to think about is through the acronym SCOPE and SCOPE for us stands for skill, conviction, opportunity, patience, and expenses.

There's a tremendous amount of research behind those five elements and why they're so impactful, but those five pieces can truly differentiate Distinctively Active investment from general active investments. 

Tim Paulin
Ben, tell us about Touchstones Practice Management Consulting program and how it acts as an extension to Touchstone’s Distinctively Active philosophy and investments solutions. 

Ben Alge
So our Practice Analysis Review program, or PAR for short, is one of the most comprehensive consulting programs in the entire industry as a direct extension of our Distinctively Active brand. For us, Distinctively Active and a differentiated experience doesn't stop with investment returns, but extends into how we engage with our clients and how we help them in their business. And the results speak for themselves. After thousands of engagements, we've helped advisors across the country become more efficient, more scalable or defensible, and ultimately grow their business.

Hi, I'm Tim Paulin and this is Active Talks where we dive into what makes Touchstone funds distinctively active.

We think it's farfetched to think that any one firm can be all things to all people and have answers in all asset classes. That's why we focused on hiring over a dozen different subadvisors, different investment management firms to manage our 30-plus investment strategies.

We understand that the skill sets required to invest in, say, fixed income dramatically differ from the skill sets required to invest in equities or international equities differ dramatically from investing in U.S. equities.

That's why we focus on going out to find the talent wherever the talent exists globally to manage our portfolio. We certainly start with active share as a way for us to verify that a strategy is evidencing conviction over time, that the managers are truly behaving in a high conviction, truly active way. We're also looking for demonstrated evidence that the managers have delivered alpha relative to relevant benchmarks and relevant indexes. Once we've identified those underpinnings of high active share as well as demonstrated historical performance, we're also applying our multifaceted scope framework looking for skill, conviction, opportunity, patience, and reasonable expenses.

On top of that, we have a more extensive framework we call SPIDER that's looking at the qualitative elements of a firm and its people and its processes, even the infrastructure that surrounds the investment process on a day-to-day basis that allows it to work efficiently.

We believe a decided differentiator for us is how we measure skill. Typically you'll find in the industry that investors and some advisors are focused strictly on what happened through the most recent month or most recent quarter. And often it might be only over the recent one, three, five, 10 year periods.

So we look at rolling periods of return so that we're evaluating what happened through the end of the most recent quarter as well as the end of last year, the year before that, et cetera, we'll take it all the way back to the inception of a strategy.

We want to look at relevant indexes. We want to look at relative competitors. We want to look at absolute returns. Did I beat an index? As well as risk adjusted returns was I compensated for the amount of risk I took in investing the portfolio.

Of course, measuring historical performance and looking at current scope characteristics are just one part of the puzzle. It's important for us to consistently apply our research methodologies to looking at performance over time.

So we engage with our managers, at least on a quarterly basis, to talk to portfolio managers about what changes they're making to a portfolio, whether those changes and whether the portfolio's characteristics are consistent with what we understand of the process.

At the end of the day, if we see things that make us uncomfortable, it could force us into a change. After all, we employ these sub advisors. And if they do things that are not consistent with delivering value to our shareholders, we have the ability to change those sub advisors.

Hi, I'm Tim Paulin and this is Active Talks where we dive into what makes Touchstone funds distinctively active.

Brad, the Sub -Advisor model is integral to Touchstone's distinctively active approach. How does partnering with highly skilled asset managers enhance our ability to deliver on the promise of active management?

Brad Watterson: It's a real benefit to be able to go outside of those that are proprietary and find asset managers that are best in class across the globe.

Tim Paulin: As Touchstone's Director of Manager Research, tell us about Scope and SPIDER, the frameworks that guide Touchstone's investment discipline. How do these frameworks contribute to maintaining the high standards of active management that make Touchstone distinctively active?

Brad Watterson: Well, Tim, you start with the foundation elements of Touchstone's due diligence process, which is SCOPE. Those are the key characteristics we look for in sub-advisors, both our perspective as well as our existing sub-advisors. That stands for Skill, Conviction, Opportunity, Patience, and Expense.

You mirror that also with the lens in which we look through at our sub-advisors from a due diligence perspective, which is called SPIDER, which we look at as the stability of the sub-advisor, personnel, investment discipline, infrastructure, and then the results. Combining those two elements is a powerful combination we refer to as distinctively active.

Hi, I'm Tim Paulin and this is Active Talks where we dive into what makes Touchstone funds distinctively active.

Crit, as Touchstone's global market strategist, we provide guidance on market risks and opportunities in particular asset classes. How do you think about the alignment of such guidance with Touchstone's distinctively active philosophy and investment strategies?

Crit Thomas: With respect to asset allocation, what I think of as distinctively active is the portion that adds value. But there are holes in the conventional approach to asset allocation and it leads to leeway in terms of how you approach it.

So for example, within our strategic allocation, we have a very large weight towards high yield relative to what we see everybody else doing. And actually, I don't understand why everybody else has such a small weight because high yield works so well within a portfolio of stocks and investment grade bonds. It just, its risk reward profile and its low correlation with those stocks and investment grade bonds really allows it to play nicely within that portfolio where its returns are much closer to stocks, its risk profile is much closer to bonds. And so that leads us to that weight that we have that's a good two, maybe three times more than what some of our peers have.

Tim Paulin: Crit, Touchstone serves financial professionals as they guide their clients towards achieving their lifetime goals. How do Touchstone's market strategy, allocation guidance and investment strategies align with the needs of financial professionals and their clients?

Crit Thomas: There's plenty of academic research that says that the majority of return volatility comes from asset allocation. Broadridge, their work suggests that U.S. advisors allocate 70 to 80% of their portfolios to three areas, domestic equities, international equities and fixed income. We spend 100% of our time on those three areas.