From the March 2012 issue of Investment Advisor • Subscribe!

A Sterling Reputation

When clients lose money, these guys take it to heart and do something about it

Photography by Brad Swonetz Photography by Brad Swonetz

The boys at Sterling Global Strategies started their independent firm in late 2008; yes, 2008. You might call ‘em crazy for doing so at that time, but be sure to add “like a fox.”

Like many (or pretty much everyone), co-founders Greg Carroll, Mike Haig and Mark Eicker came from the wirehouse world, a financial planning “Band of Brothers” that moved as a tight-knit team to protect and grow clients’ assets while battling volatile markets and, sometimes, their own employers.

“These firms never wanted you to go to cash,” Carroll says. “They thought if you stayed allocated and rebalanced when necessary, over the long term you would come out fine. It worked in the past, but as things got more correlated, it wasn’t working liked it used to.”

When the bull run from 1982 to 2000 ended, he adds, you could rebalance, but you would still be losing ground.

“It was a brutal time trying to explain to your clients how, relative to the market, we were doing pretty well. But clients were getting very tired of that.”

As was Eicker, who took the loss of client assets so hard he decided to leave the team in early 2003. But the question of how to more efficiently and effectively grow client assets never left him. After spending time in Europe, he returned to the States to wholesale. But in his spare time, he wrestled with the question, eventually developing ideas and algorithms that brought the team together again in 2008.

“When that happened, we started checking out the independent RIA world and decided to start Sterling soon after,” Carroll says, before rightly adding that “it was probably the worst time you could ever try to transition away from a wirehouse with the world falling apart.”

As everyone knows, but few (wirehouse) reps admit, they are restricted to certain investment firms, mutual fund companies, annuity companies, etc. The open architecture Sterling now employs is what Carroll calls “a huge relief.”

And, he adds, they can use cash in a tactical manner to their clients’ benefit, to better protect in times of stress.

“The algorithms that Eicker developed drive our clients to cash in major market downturns,” Carroll explains. “We now have a core strategy that we began publishing on Bloomberg back in the middle of 2010. The reason is that it gives our clients a place to look and have confidence that they can compare it to other asset managers or mutual fund companies or something that might be going on at Fidelity or another wirehouse and see how well this index is doing.”

It’s a tactical strategy that they evaluate and trade as needed on a monthly basis.

“When everything seemed to be going down like in 2008, the algorithm would drive us to 100% cash. If there were certain areas of the market that were performing well we would, with a fairly concentrated portfolio, latch on to those segments with longer term up-trends. We’re not trying to capture any short-term market moves or anything like that.”

It sounds great, except cash means money markets, and money markets suffered that pesky “breaking the buck” thing. Does it ever come up?

Carroll says no, it hasn’t come up in client presentations, but it is something they look at and can protect against in each of the four strategies they offer (based on Eicker’s algorithms): the Tactical Rotation Strategy, Tactical Emerging Markets Strategy, Tactical Bond Strategy and the Global Allocation Strategy.

The Sterling Tactical Rotation Strategy seeks “to provide absolute returns during any market cycle or condition by employing an equally weighted strategic rotation model, trading between commodities, REITs, bonds, and international and domestic equities.” The firm says it strives to mitigate market volatility by utilizing a “go-to-cash risk management algorithm (previously explained). The strategy replicates the Sterling Tactical Rotation Index.

The Sterling Tactical Emerging Markets Strategy was created to take advantage of the long-term growth prospects employed by Brazil, China and India. The firm added two developed countries (Germany and Australia) to lower the correlation of the portfolio components. According to Carroll, the low correlation, coupled with the go-to-cash risk management process, is designed to capture the upside potential of these three high-growth markets while lowering overall downside risk.

The Sterling Tactical Bond Strategy was designed to outperform during a rising interest rate environment by rotating between emerging market bonds, international bonds, domestic high-yield and investment-grade bonds, TIPS and cash. The strategy employs a risk management tool that allows 100% cash exposure during declining bond markets.

Lastly, the Sterling Global Allocation Strategy combines the three investment methodologies into one all-encompassing investment vehicle. The proportional allocation of investments is 50% to Sterling Tactical Rotation Strategy, 30% to Sterling Tactical Emerging Markets Strategy and 20% to Sterling Tactical Bond Strategy.

The strategies have attracted attention. They currently reside on the Schwab platform and the team recently signed with UMA provider Placemark Investments.

“Part of our business is expanding to allow other advisors to actually access the strategies. We recently signed up with a variable annuity to be an overlay manager. The next big step is whether or not we should do an ETF.”

In the area of industry recognition, their Tactical Rotation Strategy received the “Top Gun” status by Informa Investment Solutions’ PSN manager ranking database for Q1 2011. This rank was awarded to the top 10 performers in the managed ETF, global balanced universe, where the strategy took the No. 1 performance spot for the quarter ending March 31, 2011.

“We’ve been there on multiple occasions with various strategies so word’s getting out there that we’ve done some pretty good things.”

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