“Roxton is a very dynamic thinker who is the embodiment of passion and commitment. He loves new challenges and has a sharp eye for finding a better solution. He is always exploring the new and unknown, and looking to tackle problems in a more efficient and impactful manner than has been previously attempted. It is a pleasure to have him on the team; he challenges status-quo with enthusiasm and energy and wants to see the best outcome for the team as a whole.”
— Ernie Caballero, CIO, UPS
UPS Investment Trust Director of Multi-Asset Investment Strategy & Allocation Roxton McNeal’s innovative ideas and willingness to traverse uphill battles earned him a nomination into the NextGen series. Never content with his current investment thesis, he continually is looking for more information that may change his perspective or allow for a more effective implementation of a strategy. He is responsible for the development of relatively complex strategies that have generated strong alpha for him and his team.
McNeal joined UPS after a robust seven-year career at General Motors Asset Management, where he served as a senior quantitative analyst and a member of the fixed income markets and strategic solutions group. Prior to joining the Corporate Pension community, he worked on the “buy side” for hedge funds and private companies, including commodity trading advisors (CTAs) and private energy companies.
He has earned the Chartered Financial Analyst (CFA), the Financial Risk Manager (FRM), and the Chartered Alternative Investment Analyst (CAIA) designations. He also holds the Certificate in Investment Performance Measurement (CIPM) and the Certificate in Quantitative Finance (CQF). McNeal discusses how he braces his portfolios for the unknown going forward, his innovations and some of the ,most memorable moments in his career.
CIO: What makes 2019 an interesting investing climate? How are you handling it?
McNeal: According to the National Bureau of Economic Research, the longest expansion in US history lasted 10 years (from March 1991 to March 2001), and we know how that expansion ended. The current economic expansion will match that milestone by mid-2019. While expansions don’t die of old age, a key question for investors is whether US stocks have already seen their peak for this economic cycle.
From a known macro risks perspective, the FOMC policy shifts and the escalating trade war between Beijing and Washington have appeared recently. Both loom over corporate profits although neither of these screams major recession today but certainly falls within the “interesting climate” bucket. Against this backdrop, low volatility has persisted, and outstanding shorts on VIX futures have reached record highs, surpassing the buildup seen before February 2018’s “Volmageddon” blowup. This positioning does not seem terribly illogical given the recent global central bank dovishness and the global economy’s tepid but steady expansion with few inflation surprises.
Given the length of the current economic expansion and the current macro backdrop, there is a general air of malaise in the market, and many investors believe the risk in the market may be skewed to the downside. If “Winter is Coming,” a moderate selloff in the market may foreshadow a “Vol Squall,” which can lead to a more exaggerated correction.
On the flip side, however, the current market internal dynamics (corporate, retail, and hedge fund buying) coupled with the same low volatility and record short volatility positioning can also exaggerate equity moves to the upside. For this reason, we may be in for another surprise equity rally.
To mitigate both these risks, we are strategically adding inexpensive (positive or minimal carry) and diverse multi-asset convexity overlays to our portfolio. The convexity overlays are just one of the strategies that are integrated within our more extensive cross-asset overlay/hedging program. We are continually searching for risks in our portfolio and risks in the market that we do not see today.
CIO: After this year, what are the largest opportunities and the most significant threats you see on the horizon?
McNeal: I have no idea what the most significant opportunities and threats may be after 2019. As aforementioned, macro risks are multiple and well documented at this time. However, a well (or not so well) timed tweet may change market expectations very quickly. We continuously monitor our significant exposures to equities, rates, foreign exchange, and the credit markets across the globe. We make a concerted effort to build our investment and operational processes to allow us to implement investment decisions into our portfolio quickly and effectively. These efforts have allowed us to be “efficiently reactive” investors as opposed to requiring us to predict the future. The problem is that humans are generally terrible at predicting the future, especially when it comes to investing. Our competitive advantage in the market is our balance sheet and long investment horizon, which we continuously leverage by looking for opportunities/dislocations in the market for the benefit of our beneficiaries.
CIO: How did you arrive at your current position? And why did you choose this part of the financial services industry?
McNeal: My early career in investments was concentrated in “fast money” buy-side firms. After a brief stint as a sell-side trader early on in my career, I spent many years as a portfolio manager and a trader in hedge funds/CTAs before eventually changing directions to work into asset management. I spent the next seven years at a large corporate pension based out of NYC, and about four years ago, I was introduced to the UPS Group Trust by friends in the industry.
The asset management industry allows me to conduct investment research across the gamut of asset classes/exposures in a more impartial and meaningful manner. Every day brings different news and different investment ideas that challenge your thinking. All investment ideas are based on speculation about the future with no guarantee that the idea will play out in the market as you expected. The ability to execute on those ideas and incorporating them into a portfolio is imperative to becoming a successful allocator. This fact may seem trivial, but many people do excellent research and generate great investment ideas but struggle when it comes time to implement the investment idea into a portfolio and thereby becoming accountable for that decision. The investment idea does not necessarily have to work as expected after it is implemented. Many good investment ideas vetted with proper due diligence may not work for a variety of reasons, but all investments require continuous monitoring and managing. I find this aspect of my job very rewarding. Additionally, at the UPS Group Trust, I enjoy working with very intelligent, knowledgeable, and friendly people, all within a flat and collegial environment. Working together as fiduciaries to provide retirement benefits for many hundreds of thousands deserving UPSers is meaningful and fulfilling for myself and the entire UPS Group Trust team.
CIO: What was the most important strategic allocation of your career?
McNeal: We set our strategic asset allocation (SAA) targets every year based on the needs of our beneficiaries and a broad set of industry capital market assumptions. The SAA tend to be long term in nature and do not change drastically over time. Therefore, the most important investment decisions for us are the tactical asset allocation (TAA) over/underweight we implement around the SAA targets. Given we have an extensive and diversified portfolio, the top down TAA asset class/exposure tilts drive our outperformance.
Many successful TAA tilts have been implemented in the portfolio over the past few years. A couple of the most important tilts related to the timely overexposure of long-duration fixed income in the portfolio. The tactical overweight to long-duration fixed assets increased the diversification benefit to the return seeking assets (RSA) in the portfolio and provided the UPS Group Trust with substantial outperformance. Additionally, with a strong momentum signal coming at the end of 2017, we added significant amounts of risk exposure into the portfolio, which contributed to the significant outperformance of our 2018 returns. The excess returns were not only reflected in the assets but also through improvement in the plans’ funded status.
CIO: Tips for money managers who want to work with you, especially what not to do.
McNeal: As previously mentioned, the critical investment decisions for us are the TAA over/underweight we implement around the SAA targets. Because we are highly diversified, this allocation decision is far more important than the manager selection decision in driving returns. For this reason, the predominant part of our portfolio is invested in internal strategies or with money managers who can get us market factor exposures (betas) in the most efficient and inexpensive way.
If we were to engage a manager with the expectation of true excess returns (Jenson’s Alpha-I will use excess returns and alpha interchangeably for the rest of this answer), it would have to be rigorously tested over a meaningful sample. At the very least, we will need to have a high-level understanding of the unique skill the manager possesses, which enables persistent outperformance. While we believe there are several inefficiencies in the market from which excess returns may be sourced, there is a range of costs to acquire the information to trade on these inefficiencies. For the most part, these costs may be prohibitive to harvesting the alpha. We also prefer non-discretionary strategies which take the human element out of investing. As mentioned, we believe the empirical evidence that humans are generally terrible at predicting the future, particularly when it comes to investing.
Tips for managers: Because alpha generation is very difficult, please do not present to us a “kitchen sink” of strategies. We will have difficulty believing that you have an alpha-generating strategy at all. Additionally, please do not state anything related to the fact that you generate alpha utilizing a discretionary strategy and your signals are based on your “gut feeling” of the markets or your decisions are effective because you are “in tune” with the markets. These will raise red flags, and you probably will not be invited back for a follow-up discussion.
CIO: Biggest goof a money manager has made with you?
McNeal: A money manager sent an investment management agreement (IMA) to be executed by the UPS Group Trust via FedEx. The IMA never got executed!
CIO: Who in the financial world would you like to have lunch with and why?
McNeal: I would love to have lunch with Jesse Livermore. How he related asset price action to a story that a market had to tell has fascinated me since my first reading of the book “Reminiscences of a Stock Operator.” I continue to be influenced by his lessons. Jesse related the importance of training yourself to be both a great observer and listener of the markets. Honing this skill will ultimately determine your success as an investor. In addition, Jesse was the first to instill in me the ultimate importance of position and risk management in investing. When an investment decision does not work the way that I expected, I expect to have minimal exposure to the position, and I look to exit the position very quickly. When I am correct about a decision, I look to add to the investment over time and maximize the exposure. Finally, the accountability Jesse exacted for each of his trades (investment ideas) by recording each trade in a journal is something that I have tried to emulate. I feel it has been an integral part of any success that I have had in my career. Of course, the Horatio Alger aspect of his life is additionally intriguing and would result in a great lunch conversation in its own right.
CIO: What are changes you’d like to see the institutional investing community make in 10 years?
McNeal: Generally, I would like to see the key investment allocators (CIOs/directors) held more accountable for their investment decisions. I want the industry to stop rewarding key decision-makers for concentrated “bets” that work and forgiving them for the bad “bets” that resulted in asset destruction. An asset allocator should be judged by the a) correlation between his forecasts and the eventual returns, and b) the number of times that the allocator used that skill.
The industry seems to reward many allocators for single big “bets” they have made in the past that worked well, albeit was most probably due to chance. Without a breadth of investment decisions to effectively ascertain the skill of an allocator, their good luck is most often confused with good decision-making. Also, allocators that have made bad “bets” in the past seem to have been forgiven and continue to be given opportunities to repeat themselves as another allocator in the industry. It is pretty obvious to see the principal/agent problem this creates.
Specifically targeting the corporate pension industry, the US accounting reporting rules (GAAP) for the plan sponsors regarding their pensions need to be changed. The current standards may foster decisions from the plan sponsor that adversely affect the plan beneficiaries.
CIO: What are your hobbies not correlated to work?
McNeal: Having three young children, most of my hobbies not correlated to work revolve around the family. I help coach my sons’ lacrosse and football teams. When the sports schedules are not conflicting, I have more than enough work around the house to get done to make my wife happy. Before going to sleep at night, I like to snuggle up to a good math book on “diffy Qs” while my wife reads about vampires.
