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Patron or prophet in diversification with commodities?

Join MIJ for a fascinating discussion with Auspice Capital’s founder Tim Pickering to learn about the importance of maps, process and tinkering at the edges. Tim’s unique ability to simplify complex topics like “diworsification” and skew have been honed from years of interaction with some of Canada’s leading investment institutions.

Podcast highlights

5:30 Evolution of Trading

6:45 Types of traders

8:30 Fundamental versus technical

9:00 Risk management and capital allocation

11:25 Launching Auspice – the entrepreneurial itch

13:30 Launching AB’s 1st ETF and the Pivot to institutional investors

17:55 Convergent and divergent returns made simple

21:58 Road blocks to adopting quant

25:30 Where Canada leads

27:30 Tinkering at the edges

29:37 Diversification versus diworsification

31:45 Pain and behavioural bias

34:15 Skew made simple

35:05 Alberta investors

About Tim

Tim Pickering.jpg

Tim Pickering is Founder, President and CIO of Auspice. Tim leads strategic decision making and the vision for Auspice’s diverse suite of award winning rules-based quantitative investment strategies. Tim believes that in the future, non-correlated alternative investments will be a core holding in all portfolios, regardless of investor size or sophistication. Alternatives will no longer be viewed as risky, but as conservative and prudent, given the measurable value to investment portfolios.  He is passionate about creating innovative investment strategies and products that the market needs with distribution through reputable partners at a fair price. In 2015, Tim was selected by Alberta Venture Magazine, one of Alberta’s most widely respected business publications, as one of Alberta’s 50 most influential people. In 2017, Tim was named to the University of Calgary Accounting and Finance Advisory Council and in 2019 became the Chair of the Finance Advisory Council at the Haskayne School of Business. In 2020, Tim was elected to the Board of the Calgary chapter of Pheasants Forever, a globally respected habitat organization dedicated to wildlife, land management, conservation and education.

Prior to forming Auspice, Tim was VP of Trading at Shell (North America). He began his career at TD Securities (Toronto) in their elite trading development program ultimately holding the Senior PM position for the Energy Derivatives portfolio. Outside of Auspice, Tim has been involved in grain farming in Western Canada. Through the founding of Auspice, Tim ties together a career in commodity and financial risk and portfolio management that has spanned institutional experience along with entrepreneurial vision.  

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Rod: Hello and welcome to this, The Modern Investor Journey. My name is Rod Heard and co-host with my partner, Art Johnson. We're really delighted today to have Tim Pickering from Auspice Capital. Tim is a founder, president and CIO of Auspice. Auspice does some very interesting quantitative trading. We're really delighted to have you on board, Tim.

Tim: Thanks for having me!

Art: I'm actually really excited about this. Number one, Tim's an Albertan. We're an Alberta finance company. There aren't a lot of us around. But more importantly, what I'm fascinated by is we've done a lot of work in this podcast talking to people that primarily are dealing in the retail space.

And Tim has spent the majority of his time in the institutional space. We can explore a lot of things, but I really want to just like, give a shout out to the fact that Tim's doing something that isn't oil and gas in Alberta and doing something pretty amazing. So it's a real honour to have him on.

Tim: Thank you for having me.

Rod: So Tim, why don't we start off with just getting a little bit about your background.

Tim: My background is I'm from a Saskatchewan farming family. Were schooled in Calgary since the early eighties. Went to University of Calgary and high school here. My dad was still very involved in the family farm when I was young.

And that was part of the appeal of the financial area, ironically, in that he started playing around with, at the time rapeseed futures now called canola. And that must've imprinted in my head. As I went into high school I got more and more interested in the financial markets in general. I think the first stop for every young person is stocks.

That was the onset of my journey. I was fortunate enough to have the TD Bank come recruit at the University of Calgary for what they called the Trading Development Program, where they teach you all about the different areas of capital markets and risk management. Ironically saved for equities and went straight from undergrad in Calgary to Toronto to start my training with TD Bank.

Rod: Interesting that the bank at that time would be coming to Calgary to recruit traders.

Was there something going on in the market that there was a need or this niche was underserved?

Tim: You know, the program obviously drew heavily from very obvious places like the Ontario based schools, but they went across Canada. There was only a couple of us. I think two actually hired from Western Canada, myself from Calgary and a gal from Vancouver.

You know, I think Calgary as a whole, at that time, was heavily recruited for a couple of things. One, investment banking first and foremost and management consulting was big. But really, you know, investment banking was kind of the big one and lots of people went on to careers, you know, whether it was Solomon Brothers or any of the New York based investment banks.

And then the Canadian banks were doing the same. They were emulating that type of thing. And so it just happened to be one of their stops because the treasury trading business at TD was affiliated within corporate and investment banking. So it probably was a default stop on they way.

Rod: Makes sense. So how did you make it from recruited by TD on the trading floor to becoming a CTA and then an asset manager?

Tim: Through time at TD, I was there four or five years, where, you know, you get your feet wet and you figure out what type of an investor and what type of a trader you are. Or even if you are a trader. Maybe you're a better salesperson.

Ended up fortunate joining what they called the Customized Solutions Group. And really that just meant it was proprietary trading across a variety of markets. I was given training in various areas. One was option trading. Another was really driven by some of the senior people there, but also my interest.

And that was systematic or rules-based trading. I was focused not because it was a forced thing, but because the opportunity in the markets at the time. I say the Bitcoin of the time was oil and gas and oil and gas futures. They were very volatile and getting a lot of attention. And the philosophy was that if you were good at risk management then, you know, what a great area to be in because those markets move so much.

And again, there wasn't a client driven, really focus for the business. It was proprietary trading for the house's money. So you hone your skills and you get additional training and where you're weak you get support and go onto some of the desks that had a lot of experience.

Rod: I didn't think you were weak anywhere, Tim.

Art: Well we should back up a bit, sorry Tim, I think this is a really good conversation because a lot of people don't know like that whole business has kind of gone in a sense. But in the old days the firms would hire traders internally, give them a pot of money, and your job was to basically try to use the firm's capital to make money. And then on top of it you had the trading floors across Canada. You had Toronto, Vancouver, at one time Montreal, and they shut down after the bomb exploded. And so trading was very much an integral part of the market.

And I got into the trading floor. And it was a really rough and tumble world. And then they started to professionalize it with guys like Tim bringing them in from colleges and stuff, because. Literally the guys on the Alberta floor had come from Montreal and these kids were really almost like, you know, one step away from being criminals almost. Like, they were a rough crowd.

And it's kind of fascinating.

Rod: You fit in well then?

Art: Yeah, I was taken under wing.

Tim: Here's the irony of it is where I first heard Art Johnson's name. And this should have been stated. Is I was on the floor of the Alberta Stock Exchange. I was a summer student in my third year of university and I was hired by the Exchange on the regulatory side. I was a board marker, I think was the official title.

So traders would be trading and then they'd throw the sheets at you and you'd have to type them in and see them go across the ticker. And if you got that wrong, they threw something at you that elevated paper to pizza boxes to chairs.

Art: It was such a rough world. Like it was like, yeah. And it was such a hard job being a board marker.

And I'm fascinated, I guess, where I was going to go with this is what type of a trader were you? Because I was probably a better salesman than a trader. So there are different types of traders. I always found there were the guys who would blow themselves up, had huge egos. And then there were total grinders who just would work for pennies.

And then their originators, but yeah, it's interesting. Did you find that Tim?

Tim: Look, I mean, I think the trading business, I mean, like any vocation people are going to lump everybody into one way. If you're a bricklayer, you're a bricklayer. And the reality is as you're alluding to, is that a lot of different personalities, a lot of different styles.

And I think that first part of your career, at least for me, the opportunity being at TD Bank and going through training was to figure out what type of a person I was, what type of a trader I had the potential to be. And what really interested me. You know, does a person like maps? I know it sounds a little old school, but like, do you like to read maps?

Do you like to look at maps?

Rod: Oh, I'm a geophysicist. So I love maps.

Tim: I love maps. You know, maps kind of give you a bunch of different ideas, kind of tell you what the route could be, but it doesn't tell you everything. But at least it gives you some guidelines. It doesn't mean that route is unchangeable.

But at least you can formulate a plan of how you're going to get from A to B. And not using a map is a really romantic idea. You know, you can just throw caution to the wind and get in the car and drive. But the potential is that it's a very inefficient way. It's riddled with challenges on the journey.

And I really look at trading like that in that it's really about what are you trying to get out of it? Is it an emotional pursuit? Or is it a process driven pursuit? And for me it's all about process. And so I think most traders start down a very discretionary, fundamental path.

Rod: Discretionary I think I get. You're making your own decisions, but what do you mean by fundamental?

Tim: Well, are you fundamental or technically driven in your investment thesis? I can have an opinion about oil and get asked to commentate on oil and what's going on in the oil markets. And I can tell you why I think oil is up or down, but that is not how I make my investment decision.

I buy oil because it's physically going up. The numbers tell me it's going up. I could care less why.

Art: And technical is you're just kind of making assumptions.

Tim: It's not that there's a right or wrong. You can be a fundamentally driven investment thesis, you know, model trader investor. And that's fine. The one thing that I believe is basically non-negotiable, the part that can't be discretionary that should be rules-based regardless of if you're a fundamental investor or not, is risk management and capital allocation. That should be process driven because we're too emotional as people to make those decisions on the fly. So you can have a fundamental view.

You like oil because of this. You don't like gold because of that. And you've done your research and everything else. That's fine. I have a different way. But when it comes down to risk management and the capital allocation process, I believe those things should be very process-driven. This is no different than we can both get in the car, I can look at a map and figure out how I'm going to get from A to B. You can just say, I'm going to get there and, you know, take whatever road fits my fancy, but both of us still wear seatbelts.

Art: We have a lot of clients who are traders. You talk to anyone who's been trading. What you get to experience are these subjective ideas that you have, and then they intersect with money in reality in real time.

And you find out really quick that systematic processes are such a superior choice because until you're just destroyed all the time and you've always got these narratives in your head and you play them out and then it doesn't happen. And so I love talking to traders because having the visceral contact with the market in that way, and it's unusual to find now, it just hones how tough not using a system in the market is. Is that what you found, Tim?

Tim: I gravitated from early days when it was, again, mostly fundamental discretionary to more and more process driven. That been my journey. You know as I transitioned from TD to Shell, Shell had a similar philosophy. It was proprietary trading.

And I hired my business partner, my current business partner, Ken Corner, who we've now worked together since 2000. So pushing 20 years. He came from an engineering background, comes from an engineering background, and brought that skillset where I had sort of a, more of a base understanding, a base experience.

I'd traded many markets. I wanted to create process around them. He was part of that key to do that.

Rod: How did you come to the decision to take the risk and start Auspice?

Tim: A lot of traders at banks or investment banks, oil companies, commodity companies, talk about going off on their own ad nauseam. Everybody talks about how, you know, how they do, and they should do this on their own.

Trading's one thing. But when you go and run your business, that's a different story. And so, you know, for me, I'd gone to business school and ran businesses internally at a bank and at an oil company. But the question was could I really run a business? And that was what was nagging me. I wanted to do everything from licking the stamps to figuring out how to do payroll from a very basic level. Really start almost as a two men and a dog, a lemonade stand type philosophy and started small and figure out if I could you know, figure out how to run a business. Most people won't take that step back in their career because it is a step back in one sense. In that you go from making a bunch of money and having a fairly comforting environment where you trade and walk away and that's it. To having to think about everything from HR to tax to everything else.

And that's what I wanted to figure out if I could do, it's not for everybody. It's going to be a hard and lonely path. And I went about it a certain way. We started very small, like I said, two men and a dog, so to speak in an office and then just built it up from there. And again, we're not trying to be a hundreds and hundreds of people organization.

We have a certain role to fill, but that was the quest I was on.

Rod: Who were your first clients?

Tim: High net worth individuals from the Calgary area. I had the good fortune of meeting a local entrepreneur here, actually out at my cottage who inspired me greatly. You know, he offered to give me some advice, some space, be an initial investor, and then introduced me to a couple others.

And that was my catalyst to give it a shot.

Rod: As the business evolved I know that Auspice focused more on the institutional market. And I think our listenership is more on the retail side with the advisor community. But I think all of us are interested and have a perception that the institutional investors are more sophisticated.

They are many more tools, PhDs, that sort of thing. So how did your journey move from high net worth individuals? Did you try different channels, like advisers, to get to this spot where you're at with institutions now and high net worth folks?

Tim: So there's a bit of a journey there too, because yes, while we started with high net worth individuals the second thing we did was launch a very innovative retail ETF.

Rod: You guys were the pioneers in Alberta.

Art: First ones in Alberta. Man, that's a great calling card.

Tim: We partnered with Som Seif, at the time at Claymore, and the Toronto Stock Exchange itself to publish the index underlying benchmark index. That's really what we were trying to get to is could we. Take what we've learned in the institutional side and our careers and transition it to retail. And not just high net worth retail, accredited retail, but could we take our skill set and put it into an ETF product?

We started with something very simple and in a single commodity of beta exposure, it was very difficult putting a, basically, a commodity into an ETF structure. Even in as much as your underlying market-making on the exchange is generally driven by equity traders that know nothing about commodities. You know, that was a learning process for us and for the investment bank that took on that role, which was first energy in Calgary.

And it was a learning process. It was a successful process. We then said, okay, could we take what we do in the CTA or managed futures space and put those type of almost an institutional high net worth product into a retail construct like an ETF. So that was kind of the second challenge. And we did that and we learned a lot.

The unfortunate part of it was ETF was in 2008. The first CTA style ETF was in 2010. This was really at the start of a 10 year bull run in the equity market. And from a timing perspective, you know, we don't have a crystal ball and it proved to be poor timing in the sense that it was very hard to grab the attention and compete with the returns that people were getting in traditional equity markets. That is what actually became the catalyst to looking institutional. As we became sort of more or less traded from a retail perspective, yet we were building up this track record, institutional investors were saying, hey we want that type of an exposure in this very transparent, low cost way. Let's talk about that. And as we built up enough track record these things were all sort of happening at once. So it really was a transition between, you know, you start with high net worth you'll go right after the full retail. And then realize, you know, that's maybe not where the opportunity is for us, but by that point we'd built up a track record where we could attract some institutional investment.

Rod: The word wasn't around then, but you pivoted a couple of times.

Tim: You definitely had to pivot and, you know, we've even done that recently on certain things, you know, if it's not working, it's not working.

And here's the irony is that as a quant based trader, you know, we're built to stop out. If a trade's not working, we get out of that trade and take our one unit of capital loss and move on to the next opportunity. That's very hard to do in business and in life. Because there's lots of what ifs and maybes, and maybe we could evolve things and change things, and we don't want to fade, but you have to make those pivots.

You also have to decide where you want your business to go long term. Does it make sense to have a narrow margin product that needs massive scale and massive distribution? Is that the business we want to be in? It's a lot harder than stopping out of a trade that's gone against you.

Art: Tim, could you just back up a bit and explain if someone doesn't understand what is an institutional investor?

Tim: You know, it's some entity, whether it's a company, a pension, a trust that's been set up solely for the purpose of investing.

Some beneficiaries capital, whether it's a pension beneficiaries, whether it's a family trust and there's that separation from the operating entity.

Art: Yeah, and I think for our conversation while the point I want to get across to people is that Tim is in a field where it really is professional investing that people have not only been taught about investing, they have invested themselves. So the professionalization of investing is exactly down the lane that you're going. And again, what you're articulating is even at this level, as the institutions have adopted in the retail level, it's a real tough go. So it's wonderful to have you on, you can talk about the adoption of quant by hopefully institutions and give us some insight into that.

Tim: At the top level, from my experience, what institutions figured out is it definitely want what I'll call equity like convergent returns. You know, they want that gratification that the equity market gives you. But then, you know, you can't have all your eggs in one basket. So where do you get that from? Well, they've gone and looked at private equity. They've gone and looked at other alternatives, real estate, infrastructure.

And the question became, you know, what in the portfolio is truly going to yin when the other things yang. You've got all these returns that have a return pattern called convergent. They grind higher like the equity market does. And every once in a while they correct violently. And then they grind higher.

I mean, this is what the equity market does. And this is what most alternative investments do. What's going to be the offset to that? Well, it's divergent returns. It's returns that kind of do the opposite. They putter along, low volatility, with low downside volatility. And every once in a while they pop. And at times those pops coincide with the negative returns of the sort of traditional convergent return stream.

They figured that out early that they could do more of the let's call it traditional investing and traditional alternatives if they had some of this non traditional alternative stuff, because it was the backstop. Not just like gold. I mean, gold can be a great store of value, but what has the ability to capture that volatility in times of crisis and help you offset those losses you're going to take? Because you're going to be invested in those other areas. And they figured out you could do more of that if you have some of that. So, this is my opinion on the transition to this type of investing and truly non-correlated investments. It's not just non-correlated a little bit.

And when the shit hits the fan and there's a correction in the market, these things also go down. But truly non-correlated when there is crisis, whether it's 2008 or COVID in Q1, these other investments have the ability and the tendency to perform exceptionally well at those times. There's no guarantee. You're not buying S&P puts.

It's not that simple, but your return stream is truly has different return drivers than all those other things in the portfolio. And I think institutional investors figured that out from a mathematic perspective, there's a lot of academia focused on this concept and they took that academia and embraced it early.

Not that some retail advisors aren't and not that some family offices aren't. Some really focused this way. But just by and large, the institutions really led the way.

Art: I firmly believe as the business professionalizes in Canada and advisors, you know, we've got more and more portfolio managers that becoming fiduciaries.

These types of tools are really important. You had mentioned puts on the S&P and that's an option that you can have that if the S&P goes down. There was a recent research paper that it looked at the cost. They were tremendously successful, but they cost 7% and the equity premium was nine.

And that's a big factor of what Tim's trying to do in his space is that these they're super complimentary to a portfolio, but they just don't destroy returns with their costs either. It's a really interesting field.

Rod: Tim, what do you think the impedance is for both the retail investor and/or fiduciary advisor to make this transition into more quantitative investing? To understand? Is the learning curve too high? Is there too much noise and information? Is the story of cannabis or AI or battery life playing into our human biases? What's your hypothesis as to why a certain segment, a big segment of the market, is lagging the leadership of the institutions?

Tim: Well, so there's a quick answer and then a little more complicated one. But here's part of what I see. If I look at the advisor community in the US I see it far advanced from what we see in Canada in general. And I think part of the reason for that is the way the industry is set up in the States versus Canada is largely independent, registered investment advisors. As opposed to, you know, five, six, seven big Canadian banks that house the historical advisor community. And now that's starting to evolve.

So it's a bit of a blanket statement. And because we're under this large umbrella of these banking organizations that make a significant amount of their capital from wealth management, there's less of a interest. Not that there's not an interest in progress, but I think there's definitely an interest in selling your own products. When you're an independent RIA, no different than a family office or an institutional investor in the US, you know, whether you're a large RIA advisor group or an institution there's not much difference. They're really looking for the best asset allocation, the best opportunities. I think the confines of the Canadian history in the advisory business has done a lot to retard the growth and the next level advancement of asset allocation. Now that's starting to change, but it has been tougher.

The regulatory environment in Canada is definitely challenging. For alternatives as a whole. You know, what's the risk rating on our flagship managed futures product? As a hedge fund, it's likely high. And if you look at an equity index it's medium or maybe medium to low. Yet we run 30, 40% less volatility than the stock market.

And we've had half of the draw down of the stock market. And when you put it together with the stock market, you get half again because they're complimentary. Yet because we're in this regulatory hedge fund category, and partially that could be because we use instruments like futures, then we're being considered high risk. And that's trickled down regulatory to the banking system, which is almost like a regulatory body, and there's less opportunity to get the education out in these channels.

Whereas institutionally there was a lot more curiosity in the US with the RIA communities. A lot more opportunity. Canada is now playing some catch up and you see it. With large advisor groups leaving the bank channels and going to independent platforms. And that's part of what we saw in the States twenty years ago.

Art: Yeah. That's absolutely huge. And the banks' software is so bad, even if he gets a medium higher rating and I think he should be medium to low they jam them into high. And we were asking, well what do you mean? Cause this is against the rules. I was like, well, our software sucks. So we just put everything in high.

And so it's such a disadvantage.

Tim: Here's the juxtaposition. Is that while yes, maybe the advisor community is behind in this regard. There's other areas of using different vehicles, like ETFs that the Canadian advisors embraced quite quickly. And then even on the institutional side, the institutions in Canada have been some of the most sophisticated in terms of using alternatives, including the quant and CTA space.

Art: Yeah. Absolute leaders.

Rod: One of the tenants that I'm gathering from this conversation is you're really rules-based. Now how strict are you on that? Is it a hundred percent rules-based or are there certain market conditions where you break the rules or come off a trade just because your instinct or other intuition is telling you otherwise?

Tim: We are 100% rules-based.

150%. There is no deviating from that, unless there was something catastrophic in the market, like a systemic problem. There's been a terrorism incident and the exchange is no longer functioning properly, then yes, we could override things. Those incidents have happened so few times in my career. They have happened.

They happened in 9/11. Even some of those breakers hit during COVID. Where the markets weren't functioning properly and you had to step in to do the right thing, but in terms of us having an investment thesis and testing that thesis, and then going and expressing that and executing that, it is 100% rules-based.

And the reason is very simple. We are all human. We are all emotional and we will make wrong or inconsistent decisions based on our emotions. You fall in love with things. You hate things, you read things and it influences you. Nobody can say that doesn't occur. It surely happens with me. I'm a very emotional person.

And so you recognize your weakness and you turn it into a positive where you just do not deviate from it.

Art: Yeah. I love your-

Rod: It reminds me of your story. You talk about your tinker and I love it.

Art: Yeah. When Eric and I, the other portfolio manager at SmartBe, we got into quant. We thought we were pretty cool, but we figured we'd just move stuff around the edges.

You know, Tim, like, you know, nothing serious. And three years later we look back and we lost 50 basis points to our idiocy. And I love your analogy of the map. Follow the map, right? And investing is one of those things that people do not seem to understand. It is a counter-intuitive thing that doing less and following rules actually leads to so much success.

Tim: And, you know, I can really thank my business partner here at Auspice. He's all about the keeping it simple and the simplicity of things. People want more. They want reasons. They want to see more line items. And you can accomplish, I believe, a lot more with less and sticking to the rules and people say, you know, well what changes if your rule rules based?

Do you change anything? Of course we do. We're looking for edge. Most of the edge we're looking for is how to lose less and keep more of the winning trades. That's the hard part, but like signal generation, following trends, that's not the hardest part. Those trends exist. And they exist in many markets and that's why we cover all the markets we do. Whether it's commodity or financial, and even why we have a commodity tilt at Auspice is because the diversification within the commodity sector is second to none. Cotton and crude are not related. And the grains don't affect the price of silver. And the diversification of opportunities within commodities are extraordinary. And if what you're after is non-correlated return opportunities the commodity sector cannot be ignored. It just can't be. There's great trends in those markets, especially if you're agnostic up or down. You know, it's putting all of that together in a rules-based way and looking for edge, you're looking to improve, you're looking to evolve, but where's that tinker line?

If tinkering is well I think I should wait on this signal, you know, another day. Well, that's counter-intuitive.

Rod: Makes sense. Makes perfect sense. I've heard it said by some experts that diversification is the only free lunch and a couple of the themes that you've brought up are around diversification. Can you help me understand is it a new entrant into the industry and not deepen in the academic side of things? What that whole concept is?

Tim: Well there's diversification. And then there's di-worse-ification. And, you know, I really believe that too much diversification is really pointless. And we get into this debate with people in our industry.

They say, well, we trade like 200 markets. You know, why are you only trading 50? My answer would be the only reason you need to be trading 200 markets is because some of those markets are extraordinarily, highly correlated is really from a liquidity or an execution perspective. Maybe you're not getting the liquidity you want in a smaller number of markets.

We believe that concentration and having a certain level of diversification, I'll get what to what type in a second, is beneficial diversification is. But overdoing it really now from an incremental basis, isn't adding a ton of value. Now, when I talk about diversification, I talk about that broad diversification, just as commodity. People say commodities, they lump it all into one thing.

Commodities is one thing. Clearly it's not. Commodities bring this diversification in itself. And when you compliment that with your typical traditional financial areas of equities, currencies, and interest rates or bonds, that's diversification. Ignoring commodities, or focusing on resource equity and not actual commodities is a disservice to diversification. Do you need a thousand line items? Is that diversification? No, all you've probably done is spread yourself more thinly across actually concentrated things, equity, fixed income and currencies maybe. Or just more equity line items, but really, is it adding much more value than just going and buying an equity benchmark and having proper risk management around?

Art: That's a great point because I think to a lot of people, diversification is having the five best things that are moving up. And what Tim is really alluding to is that when he took something that is absolutely fundamentally different than something else and put them together and you actually got a free return of choosing these things that were extremely different.

And it sounds just like, oh boy, no problem. The problem is when the thing that's not doing. great is in your portfolio. We behaviourally go, well this is stupid. I just want that thing that's going up. And as a human being we're heard, like our genetics is so against us.

It's a free lunch, but it's one of the hardest free lunches to eat.

Tim: So let me riff on that for a second, because I think you've brought up an incredibly important point. And I think this comes back to the advisors and even what the job they have, that's hard to illustrate a portfolio and asset allocation to a client.

People want everything in their portfolio to be up all the time. If you have everything up in your portfolio up all the time, you're either really lucky or you've built the wrong type of portfolio. Because that's typically not how it works. One of the things I learned to say to investors, and it took many years to come to this point.

I will not make you money every month, every quarter, or every year. If you need somebody who's going to make you money every month, every quarter, or even every year do not hire us. Because we won't. But what we have a history of is making money at times. And sometimes that doesn't fit into nice yearly buckets or quarterly buckets, surely not monthly buckets, but we show up at those right times to dampen that negative effect in your portfolio when something else is happening.

That's my job. Now to do that job, I have to be very disciplined because I could get sucked into the same patterns and want to have the, you know, the slow, easy, low vol equity ride, like a 2019. I can get sucked into that. I could change the way I'm doing things and experience that ride. But then Q1 of 2020 comes along.

And if I'd gone down that path, I would have given you the same thing you already had. I have to be extremely disciplined and non-emotional to provide that return stream. So part of my path has been finding the clients that understand that concept. I can't be everything to everybody.

Rod: Do they all have a long investment horizon?

Tim: Not all.

Rod: Or is it all around crisis protection is the common theme?

Tim: It's not just crisis because that's at the extreme, but they're looking for true non-correlated returns. What I call divergent returns. And if you get technical, you know, most investments are convergent. They grind up higher in a low volatility way.

They've got what's called negative skew. The down moves are very violent. The up moves are very low. That's negative skew. We do the opposite. It's very low downside with big positive. And when you offset those things, that's kind of, if there is a free lunch, that's it. But to get that type of a return stream, you have to be disciplined as an investor at my end.

And for you, the client, you also have to be very disciplined because you can't get that gratification all the time.

Art: I just like to talk about Alberta. You're one of the pioneers of being an asset manager in Alberta. What's happening in this province that we're down on our knees with oil and gas?

Traditionally, Alberta investors have bought oil and gas. How should they be thinking about their portfolios and how should the province kind of move forward? What are your thoughts there?

Tim: It reminds me of an article I read yesterday and you may have seen it too. It was put out by Terry Edam and he talked about the talent pool that is in the province of Alberta and in the energy business.

And it's an extraordinary talent pool and yes it's been focused on the energy space. Can we make the transition to more of a financial centre if you will? I think there's the potential. I think there is some of the right initiatives out of our provincial government at this time. But it's a hard transition, you know, we're talking about generations that have been focused on the oil and gas space and we can't exactly ignore that because again, we are the third largest reserves in the world.

So to ignore it would be at the peril of not only the province, but the country. Having said that, you know, how do we make the transition? Well, it's efforts like you guys have made at SmartBe to bring in thought leaders in the space. You know, you put on one of the best events I've ever been to last year. Brought in very smart people and getting the dialogue going and just doing more of that and getting some of that leadership through our business schools, I think, will be paramount.

I think that even from an institutional perspective, there's quite a bit of focus on Canada and the energy space within it. And I think that's part of our challenge. And I think many of those institutions, without naming names, generally look outside of our prvince, maybe not to their fault, because historically there hasn't been, you know, a big financial asset management community in Alberta. You know, it's our job to remind them that there are opportunities and we've had some success with that.

But it takes a lot of hard work and it takes time. But this is where a community needs to develop to do that. Think the potential's there, but it's going to take a lot of hard work.

Rod: Well, I for one Tim, I'm appreciative of all of your hard work. I know you do some volunteer work up at the U of C on the finance committee and your leadership there is just outstanding.

And I know, you know, we have like-minds as to try and improve the robustness of the education community around quant finance. And it makes a lot of sense to me.

Art: To organize the financial community here is a real privilege. And they're just wonderful people too. But it's, as you said, like Toronto is a pretty big place, but I really want Alberta to thrive.

Tim: If I look at our business, you know, we've done a couple significant transactions this year, one, a partnership with a Montreal based private equity firm. We're very proud of. We're the first investment they made in Western Canada with this current entity, the family business, as history in Western Canada.

Very familiar with it. The second thing is of capital that we've raised here in 2020, which has been fairly significant for us, a big boost in assets. And even here just recently, this fall, almost all of it is from Western Canada. And so I think the message is starting to get out. I think it's just, again, I come back to timeframe.

I mean, you know, when I started out, you know, you just didn't have the track record, you didn't have the credibility and it takes time. It takes a lot of effort and it just takes time. These histories in Montreal and Toronto and big US centres is undeniable, but you got to start somewhere.

Rod: Tim, I gotta say, it's been such a pleasure to have you on the show.

You know, if I had some takeaways, it hadn't connected my dots before but it makes a lot of sense to me you and Art's kinship. In the fact that you both started as traders and the message I got out of that was really about risk management, and rules-based, and some diversification. I think I also really enjoyed your commentary around how Alberta and Canada's institutions are fully adopted in quant strategies and understanding some of the nuance of the mathematics. Thank you so much for your time. Thank you so much for all you're doing to promote early stage asset management firms in Alberta. And for our listeners, you've been listening to the Modern Investor Journey.

My name's Rod Heard and I'm co-founder of SmartBe Wealth. I'm with my partner today, Art Johnson. Art, thanks so much for your typically great insights. We really enjoyed it. And we've been talking with Tim Pickering, who is President and CIO of Auspice Capital.

Art: True. Thank you. Like, I mean, it was people like you that got Rod and I interested to start an asset management business in the province and you've just been a tremendous backer and godsend to us.

Tim: Thanks for the opportunity guys. I really appreciate it.

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