Terri Spath has been passionate about investing since she was a teenager. While most girls her age were learning to drive, Spath was learning about stocks.
For her 16th birthday, her grandfather bought her Union Pacific Railroad stocks, and she never looked back.
Today, she is chief investment officer of Santa Monica-based Sierra Investment Management, a title she has held since 2015.
In this role she runs two funds of funds, the $462.6 million Sierra Core Retirement fund and the $616.5 million Sierra Strategic Income fund, as well as around 300 separately managed accounts (SMAs) based on the same two strategies.
The conservative approach of these strategies reflects their investor bases: largely clients approaching or in retirement, who need downside protection and wealth preservation.
Spath is supported by a team of two: Marshall Quan, a senior analyst who has been with the firm for 18 years; and Joseph Letts, a junior analyst who does a lot of the support work, operations and communications with fund companies.
When not picking funds, she can be found running along the Santa Monica coast in preparation for marathons – her longtime passion. Although running a fund and running a race are two different things, Spath says the underlying philosophy behind both is the same.
When gearing up for a marathon, Spath says runners can be plagued by doubts about their ability to stay the course, but that a strong process, clear plan and discipline can help them succeed. This, she says, is true of investing too, as short-term shocks can dent confidence, but a disciplined plan and process can help you reach the finish line.
Terri Spath CV
Stick to the plan
‘I trust the process. If I follow this training plan and run the number of miles it tells me to run daily, then I will be able to finish and feel good about myself. That’s maybe an analogy about how we invest,’ she says.
She highlights the short-term market turbulence that followed the UK’s decision to exit the European Union in June 2016 as an example of patience and process winning over panic.
‘Brexit was a really interesting couple of days,’ she says. ‘There was huge volatility and yet when we sat down to look at everything we owned, we learned that the volatility we were experiencing was not outside of the balance of normal. So trusting the process and following the discipline led us to make the right decisions.’
So, what exactly is this process in which she sets so much store? Spath uses a rigorous quantitative screen to select the managers for her two funds.
The Sierra Strategic Income fund invests in between 20 and 25 funds at any given time, and the Sierra Core Retirement fund invests in between 25 and 30. The core of the process is based on a proprietary quantitative system that examines every asset class and then ranks thousands of mutual funds within these categories.
The firm then uses trailing stops to indicate when to sell out of an asset class and moving averages to generate buy signals.
Spath says these systems are designed to allow the firm to completely exit asset classes during large downturns.
‘Last year, when we had the worst start to the S&P 500 ever, we were completely out of US stocks because we had gotten early warning signals from our indicators to hit sell, so we got out of them,’ she says.
As a result of this process, both funds have high turnovers. The Sierra Strategic Income fund has a rate of 115% and the turnover of the Sierra Core Retirement fund is even higher at 153%.
‘The reason for that is because we are pretty quick to pull the trigger when we see trends change to the downside and we see our indicators suggesting that to us,’ Spath says.
Spath and her team typically examine and rank every asset class on a weekly basis. They then rank thousands of mutual funds across these asset classes using a proprietary algorithm.
This assesses funds based on their momentum, level of participation in a rally and demonstrable track record of low volatility.
‘We’re looking for those managers who can deliver essentially a higher Sharpe ratio relative to their peer group, and who consistently deliver the best return versus their risks,’ she says.
She says that when the system signals a buy for a particular asset class and subsequently particular mutual funds, the team will usually add the top three or four funds in the relevant category, but only gradually. The fundamental aspect of her team’s research includes deep research into economic cycles, the behavior of asset classes in different conditions and funds’ historic volatility. Their dedication to using their system means that even where they can spot an undervalued asset class they will not buy into it until unless they get a signal.
‘We do a ton of fundamental work, but it doesn’t ultimately drive the decision of what day we are going to buy and what day we are going to sell,’ she says. ‘The quant process overrides any kind of emotional considerations or intellectual mistakes, and it allows us to see trends early which we might not always be comfortable with.’
Sierra Core Retirement Fund top 10 holdings
High yield heroes
One asset class the team has been given the green light to buy is high yield bonds. This is where Spath’s fund-picking skills come into play.
Sticking with her discipline of investing in a few funds within the category, Spath allocated assets to the $10.8 billion Pimco High Yield fund, the $10.3 billion MainStay High Yield Corporate Bond fund and the $13.3 billion JPMorgan High Yield fund.
Spath says the pair are top managers who have been involved with the asset class since its infancy.
‘It’s a relatively new asset class, and Pimco has been in it since the beginning,’ she says. ‘They know it very well and they have a deep research team. It’s the function of their size that allows them to identify the best risk/reward trade-off.
‘Additionally, they have the trading desks in place to get the best execution. They have clearly demonstrated that they have a superior grasp of the fundamentals and the different industries within high yield as well as an attractive research execution - I think that it shows their results.'
Sierra Strategic Income Fund
Another asset class she has recently started buying into is US equity. She explains that her team is very cautious around US equities, but at the same time they like the outlook and confidence that investors have about it, the improvement in the employment picture and other encouraging economic indicators.
Caution is still very much the name of the game, so her team ran a screen looking for equity funds that could capitalise on the S&P 500 rally but with low beta, and afterwards did rankings based on that.
‘We wanted to participate in the US equity rally but at the same time we were still concerned about the risks involved, so we looked for something with low beta relative to the S&P 500, and we found the Hartford Balanced Income fund,’ she says.
‘For that one in particular, how they perform in a relatively risky equity market suits our conservative plan. We really liked their risk metrics, their performance metrics historically, and what we believe they can do going forward based on that.’
What floats your boat?
Spath believes floating rate funds have been a good place to be since the election, as opposed to municipal bond funds, because as interest rates started to rise, the price of floating rates rose as well.
This outlook is reflected in the funds.
The top holding of the Sierra Core Retirement fund is the $13.8 billion Oppenheimer Senior Floating Rate fund, with an 12% allocation. It is managed by Joseph Welsh and David Lukkes.
Spath says there are some great options in the asset class as a whole, but this was the fund that topped the screening.
‘It’s been the most robust performer in terms of price performance, and at the same time it has a really well managed risk factor.
‘There are a couple of other funds that we’ve used with our SMAs and in our other fund, but in that group Oppenheimer is our top choice right now.’
She adds that her team also likes the $1.4 billion MainStay Floating Rate fund, the $2.6 billion Invesco Floating Rate fund and the $729.6 million Highland Floating Rate fund, which they have added in the other mutual fund as well as within the SMAs they manage.
Although Spath’s grandfather led her to the stock markets, it was her father who introduced her to her two main passions now: mutual funds and running.
He would pit Spath against her brother in 10km races around the neighborhood. Good practice, perhaps, for a career in the male-dominated world of asset management, in which he also sparked her interest.
‘He was the first person to give me a graduation gift from college of a mutual fund – a Vanguard fund in fact,’ she laughs.
‘Between introducing me to individual stocks, which my grandfather did, and then my father, who also taught me about compounding, I guess I liked to make money so a career in asset management really appealed to me.’ in high yield as well as an attractive research execution – I think that it shows in their results.’