ETF Think Tank Spotlights Blueprint Chesapeake Multi-Asset Trend ETF

The Blueprint Chesapeake Multi-Asset Trend ETF (ticker: TFPN), which is sub-advised by Blueprint Fund Management and Chesapeake Capital Corporation, was highlighted by ETF Think Tank, a platform for ETF and investment research, data and analytics tools, and networking for financial advisors and ETF providers. The episode of “Tank Talks with Cinthia Murphy” features an in-depth conversation with TFPN’s Portfolio Managers, legendary Turtle Trader Jerry Parker and Jon Robinson. The trio discuss:

• The partnership between Blueprint and Chesapeake
• How the “plus nothing” nature of the ETF, which is expressed in its ticker (TFPN: Trend Following Plus Nothing), is a differentiator
• The important role individual stocks play in the portfolio
• How TFPN seeks to solve the drawbacks of other liquid and traditional alt strategies
• What distinguishes TFPN from CTAs

Below are some excerpts from the full interview.

‘Trend Following Stocks is Unusual,’ But TFPN is Doing It

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Jerry: “Trend following stocks is unusual and not a lot of people do it. I don’t think there’s an ETF that does it in sort of the classic trend following way that we do, where we truly let our profits run and don’t try to take small profits or smooth out the volatility so much. We try to smooth out the volatility and the bumps and the ups and downs by trading lots of different markets, long and short. And so, we think this sort of, there’s some pent-up demand for a trend-following product like this and trend follow my stocks please.

So, the typical managed futures fund – mutual fund or ETF – would trade indexes only, stock index only. And their idea would be to allocate a small percentage of your portfolio in case there’s a big stock selloff – crisis alpha type situation – and we will do well with all these different markets and short stock indexes if possible. Whereas our idea was, well, we’re actually going to go one step further, one step better maybe, to trend follow those individual stocks as well: take small losses, have a trailing stop, and have some shorts on. So, all the great things that CTAs do in the indexes, currencies, commodities, and interest rates, let’s do it for the single equities as well.”

Filters for Stock Selection Within the Portfolio

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Jerry: “So, it’s just purely a strategy that looks for stocks that are different and unusual and are not correlated to the other stocks in the portfolio, just like the same way we formulate the portfolio for the currencies and the commodities and the interest rates.

Stocks, because there’s so many of them, thousands, they give us an opportunity to go find those stocks, put them in the portfolio. A lot of the stocks we choose are, have commodities relationship, they’re related to commodities in some way. We love the commodities, we’re getting a little bit more commodity exposure. But it’s not just commodities stocks, it’s all different kinds of stocks, long and short.

And we prefer companies that are below $10 billion if possible because we think that they may give us some more outlier, bigger trade opportunities. Companies with one business line, not too diversified. You know, we don’t want to have diversified companies. We want un-diversified elements throughout our portfolio, but then we bring them together into the portfolio, then we’ll have great diversification.”

‘I Don’t Think You Can Get Too Much Diversification’ if You’re Hunting for Outliers

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Cinthia: “How do you manage diversification that is productive and constructive versus just too much?”

Jerry: “Right. I don’t think you can get too much diversification. I think the argument could be after 20 or 40 or 50, that’s enough, it’s not going to, you’re just kind of wasting your time. But we don’t think that’s the case. We are primarily trading a strategy that’s going to let the profits run. We’re not going to get out of them until the trend kind of turns around a bit. And hopefully we get our different entry and exit parameters, that they do a good job on that. Sometimes they do, most of the time they do. Sometimes, you know, they certainly could have done better.

So, we’re hunting these outlier trades trying to find the big, huge movers. And, just spreading out into lots of different markets, it means those outlier trades are going to spread out as well. Hopefully we’ll get maybe 10% of the trades each year will be the big ones and they’ll pay for all the losing trades and have something left over.”

Behavioral Finance & TFPN: How The ETF May Help Financial Advisors’ Clients Stay Invested

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Jon: “Trend following is not inherently complicated. I think those that have done trend following the best – and that’s a very subjective statement, but you know the Mount Rushmore of trend followers, let’s say – have pursued simplicity. Jerry being right on that list.

And it’s those rough edges, the smoothing out of the rough edges so that you don’t continually have to have a conversation about underperformance in a bull market, in an equity bull market, that causes people that add additional bells and whistles to the trend following. And I think that’s why it’s important to have half your portfolio of markets be geared toward stocks. Because when you get these long-running bull markets, from a behavioral standpoint, I think it’s more optimal to have an increased exposure to equities if for no other reason than to keep the investor in their seats during those times where it would otherwise be a drag on the portfolio.”

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Jon: “You can have the greatest solution to an investment problem all you want, but if the end investor can’t stick with it, what you really have is worthless. So we want people to be able to stick with this, and I think by design TFPN gives investors a higher probability of sticking with it, because of the equity allocation but also because of the longer-term timeframes employed in terms of the trend following rules that drive the decisions in TFPN.

So, my expectation would be in long-running bull markets, you’re probably going to be happy owning TFPN. And in long-running bear market, you’re probably going to be pretty happy with TFPN. And then I think it’s a random outcome anywhere in between.”

Why TFPN Breaks Apart Indexes to Trend Follow Individual Stocks

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Jerry: “I think adding so many different stocks, that it’ll help us not to really have a bad period like CTAs did for a long time. About a 10-year period, where the only thing trending was stocks, and we didn’t really maximize that opportunity because we weren’t trading very many stocks.

Trading indexes with trend following is so inferior to trading individual markets. No CTA would trade the dollar index versus all those wonderful currencies, or the commodity index rather than grains, metals, meats, softs, energy. You know, and so why trade the stock indexes?

We like to break those indexes apart, choose the right stocks, size them the way we want to size them, be long the ones that are going up, be short the ones that are going down, flat the ones that aren’t going anywhere.

Whereas the minute you buy the S&P, you know, even as a trend follower, some of those stocks are in a downtrend. So it just never made sense to me. Just because it wasn’t managed futures compliant. I was like, ‘The hell with that, I’m trend following compliant!’”

Democratizing a Robust Trend Following Strategy by Making it Widely Accessible

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Jerry: “I think there’s pent-up demand for diversified trend following amongst people, you know, retail, people who like to invest in ETFs.

You know, when I was in my mid-20s working in public accounting, I read about trend following and I thought it was wonderful, thought it was greatest thing ever. I fell in love with it, it was just so great in every way: risk-control, taking small losses, but not really compromising any ability to, you know, make a good return. And I think there’s a lot of people out there like that, and who really just love it and want to trade all these different markets – and obviously stocks as well. And I think that do-it-yourself, people, they start with their stocks trend following, you know. So they’re like, ‘I don’t know what you CTAs are talking about, but that’s all I do is trend follow my stocks!’

And so, it was a lot of pent-up demand. And I would get messages on Twitter saying, ‘Please do not water it down. You know, you have this full-fledged program and a private hedge fund for high-net-worth people, please give us up something very similar, with all the markets and the same strategy and Jerry’s best ideas.’ And that’s what we did. So, you might find one out of 20 or one out of 40 people who love trend following. That’s still a lot of people. And that’s what it’s for, for all these idealogues and fanatics, not just Jon and me. But there’s a lot of them out there.”