Episode 302: Executive Spotlight: Seth D. Rosenthal, CFA - Chief Investment Officer at Academy Asset Management

 

 

 

Stewart: My name's Stewart Foley, I'll be your host. Hey, welcome back. It's great to have you and we're thrilled to have our guest here. This is an executive spotlight series with Seth Rosenthal, CFA, from Academy Asset Management. Seth, thanks for being on. Thanks for taking the time. We're thrilled to be here with you.

Seth: Stewart, thanks for having me.

Stewart: I want to get started the way we always do, which is you're the Chief Investment Officer now, but I'd love to know where you grew up and what was your first job, not the fancy one, and anything you might've learned from that job.

Seth: My first job was working as a bank teller growing up, and so maybe I just realized I always wanted to deal with numbers and money. But then fast fast-forwarding a bit after undergrad, I got a job in a middle office role supporting a portfolio management team. I always wanted to get into investment management. So actually, right out of school, I started taking the CFA exam and was able to earn that three years out of college. And in the meantime, I was working my way around the organization in various analyst roles until a junior PM role opened up about five years later. And I was able to actually work on the team that I was originally supporting. So good early start to my career. And then, back in 2005, Northern Trust reached out to me. They were looking to hire a portfolio manager, was overseeing about 5 billion.

And over time just worked my way up the organization, eventually overseeing their hundred-billion-dollar global investment portfolio. It ran the gamut around duration and different types of mandates. And I was actually a client of our sister company, my current sister company, Academy Securities, which is a broker-dealer investment bank, and was always impressed with their authenticity and capability. And so about four years ago, our CEO, Chance Mims, reached out and said: “Hey, we're looking to build an asset manager on the heels of the success of what we've done on the broker-dealer and investment bank. And four years later, here we are.

Stewart: So we've had others on from Academy Securities, and I think it might be helpful for those who might not know. Can you give us a little background on what makes Academy unique and differentiated? And I don't want to tip the hand here, but how has a veteran-led culture carried into the asset management space?

Seth: Absolutely. So, Academy Asset Management is a veteran-owned institutional asset manager. We are really focused on authenticity and capability. And as I alluded, it was launched on the heels of the success that we had on our sister company, Academy Securities, and really, our core competencies leverage my experience at Northern Trust. We're focused on public fixed income, largely through separately managed accounts, but we also have a veteran impact ETF that invests in agency mortgage and asset-backed securities. But, as I touched on at the beginning of the question, we talked about authenticity and capability. So on the authenticity side, our mission is to mentor, hire, and train military veterans. We pair a Wall Street veteran with a military veteran until they can build the skills to be successful on Wall Street. At Academy, we target a 50% veteran staffing level. And just kind of thinking about, to hit on another part of your point, is first of all, transitioning out of the military is really difficult.

So there's a huge challenge with veteran unemployment and underemployment. So every year, there are about 250,000 service members who transition out of military service, but there are really limited opportunities for veterans. Especially in industries like finance. So if you're not connected with the government, it's a lot harder. But the unique thing is these veterans have unique skills that translate really, really well to asset management. So thinking about working well under pressure, making decisions with imperfect information, having attention to detail, having integrity, and working as a team. So all these things translate really well. In this world, you have to be smart, but it's you also have to work hard. And if you have some of those tangible skills, you can be very successful. And so we see that those veterans have that skillset. And then just kind of touching on the capability of the firm, we have an investment team that has decades of experience managing large fixed-income pools. And then the unique differentiator, or a little bit of our secret sauce here, is the geopolitical intelligence group, which consists of over 30 retired admirals and generals who have their finger on the pulse of all things geostrategic risk. Their insight helps us shape our investment thesis, but it's also a resource for our clients. This unique insight, if you just reflect on the past few years, quite often market sentiment hinges on either a direct or indirect impact of geopolitical outcomes. And quite candidly, I just don't see the temperature around geopolitics dying down anytime soon.

Stewart: No, I'm with you on that. And that actually, it was leads me into my next question. You do have 30-plus retired admirals and generals, one of whom was on our air, retired Admiral Daniel Barrett, sometime back. I will tell you, it is intimidating for a civilian to be talking with a retired admiral. I've somehow, or the other, I didn't feel quite worthy, but I do think that that's a very unique differentiator. Are there any examples that come to mind where their insight made a difference on the investment side?

Seth: Well, first of all, on your point around intimidation, I think absolutely they can be intimidating, but these are the awesomest people to travel with. I enjoy my time just sitting down with them and learning all about them because they're just like you and I, but they've had some really big jobs in the government and the military.

Stewart: She was amazing to me. I said, oh, she's great. I said, Hey, I'm intimidated, whatever. And she's like, oh, listen, there are lots of us floating around. I'm like, yeah, okay. Well, none that I've ever seen. But yeah, no, it's good. I mean, I think your point's well taken. Terrific group. Anything that comes out of that that you've been able to put in play?

Seth: Yeah, absolutely. So, as you think, you've got 30-plus retired admirals in generals, and so they've got a range of knowledge ranging from generalists to others that have subject matter expertise. So you want to dig deep on AI or cyber, or you want to focus on certain regions, such as the Asia Pacific region, or whatever it might be. It runs the gamut, as you can imagine, with having over 30 of these folks. We do this through bigger events. We'll do webinars, calls, in-person groups, one-on-one conversations, whatever it might be, as we partner with a number of different firms to help them think about geostrategic risks. So it's definitely a big thing in boards and C-suites, as you can quite imagine, given where we're at these days.

Stewart: Absolutely. And so my next question really talks about fixed income and the mortgage-backed security outlook. You're a fixed-income veteran, that's my background too. What are you seeing in the MBS space today, and why is Academy leaning into that space right now?

Seth: Yeah, so we do like MBS as an asset class. I'd say there's a handful of different components. One is just on a relative value to corporate spreads. So we look at things over longer run averages, and let's say you look over the last 10 years, credit spreads are pretty much close to the bottom quartile, whereas if you look at the spread that you earn above the risk-free rate, either on a nominal basis or when you strip out on an OAS basis, the mortgage back spreads are in the top quartile. So we think that provides some value. The second component is Fannie and Freddie. There's talk about privatization there. Depending on how that shakes out, I know that president Trump said there would be a guarantee, but where we start on negotiation end determined, but depending on how it shakes out, we think it will be good for Ginnie Mae mortgages and Legacy Fannie and Freddie MBS, because there is a scenario where Ginnie Mae could be the only agency MBS game in town.

And so those folks that have to buy agency MBS, it would shrink the supply of agency mortgages, and we think there's a potential for opportunity there. The third component, I guess I would say is some of the regulatory relief that's being talked around the banking system, the supplementary leverage ratio, and I won't get into the details there, but at the end of the day, we would allow banks to buy, it would increase demand for US treasuries within the banking system, but we could see some second order effects in an MBS demand. And even recently, some of the other regulatory relief around, we saw the asset cap on a large bank being increased, and does that bring back banks, one of the biggest buyers of MBS, back into the world? So that could be increased demand here for MBS. And then a couple of other things, I guess I'd say, is if you believe we're headed towards an economic downturn, mortgage backs have tended to perform better in, if you look at the last six risk-off events, mortgage backs have outperformed credit in those events.

So anything from long-term capital management, the .com bubble, those types of events, MBS has outperformed. So we like it for those reasons as a bit of a risk hedge. And then the last component is prepayment risk, and that's kind of one of the challenges that folks have with MBS, and they're worried about the prepayment risk of a mortgage. And given where we're at today, mortgage rates call it roughly around 7%. If you look at the entire mortgage universe, the numbers that we estimate are that about 75% of the mortgage market has about 200 basis points of prepayment protection. So rates could fall 200 basis points, and we still would be outside the economic incentive to refi, and that's less of a risk than we've seen in prior cycles. So the long and short of it, one of the risks in mortgages, being prepayment risk, is much lower, or we see it as being much lower today than it's historically.

Stewart: Yeah. I just want to kind of touch base on one at the very beginning of your answer. You mentioned OAS, and just for those who might not be familiar or not know what OAS stands for, it's option adjusted spread. And what it's attempting to do is take into account the prepayment risk that you're talking about and coming up with a spread that encapsulates the embedded call options in any particular security. So that's the way it's talked about in mortgage-backed securities, and just a point of clarification there. So let's talk a little bit about VETZ, which is the Veteran Impact ETF, and I think one of the taglines here is impact without concession. It's benchmarked to Bloomberg's MBS index and launched in 2023. Can you talk a little bit about the mission behind it and how it's been going?

Seth: Yeah, and actually maybe I could just tell you how it started. We alluded, we are largely focused on separately managed accounts, and we had a client that we said, we love the mission of Academy. How do we create an SMA strategy that aligns with that mission? And I love homework assignments. And so we took that away and came up with this veteran impact strategy, which is investing in residential mortgages to veterans and their families, and then small business loans to veteran-owned businesses. And they loved it and funded the strategy, and we're like, well, this is pretty interesting. And talked to a few other clients, including a couple of high-profile insurance companies, and they said, We love it too, but really the vehicle that we would prefer is an ETF. So if you ever launch an ETF, we're really interested. And so fast forward to August of 2023, we launched VETZ.

It's got a Z on it, and it's the veteran impact ETF. As you noted, we look at it as an impact without concession. And the reason why we say that is it's delivering impact to veterans through the underlying assets that will help lower the cost to DN borrowers, being veterans and their families. The impact that we serve here at Academy in terms of we will hire more folks to more veterans to support the initiative, we've also committed to donating a portion of our management fees to veteran military-related charities. So that's the impact piece. But then the concession is that we are benchmarked against the Bloomberg MBS Index. So at the end of the day, there are other non-impact strategies that we compare ourselves to as well as the broader benchmark, and we're proud of the performance that we've had thus far. And then the last thing around vets, obviously this is insurance targeted. It is NAIC rated, so it has definitely resonated with the insurance community, and we've moved forward with the NAIC rating.

Stewart: That's terrific. And just talking about your background a little bit at Northern, you oversaw something like a hundred billion bucks. You're now building Academy Asset Management. I've obviously been an entrepreneur in this business, and I couldn't say this strongly enough. I think that when you commit to being an entrepreneur, it can be really challenging. This industry loves people who have been around for a hundred years, that manage eight gajillion dollars. There's a big headwind of like, oh, well, you guys haven't been around for years, so we can't look at you. There are a lot of headwinds to doing an entrepreneurial build. I think I know the answer to this, but can you talk a little bit about the motivation shifting from a big platform to an entrepreneurial build?

Seth: I go back to that authenticity and capability I saw when I was a client of Academy Securities. I saw that you walk on the training floor, and you've got folks who have raised their hand to defend the country. That's just absolutely really cool, and being able to mentor those folks is awesome. And we can spend a complete hour on this podcast to talk about all the cool stories of these different folks coming out of the service and doing great things. And so just that and seeing those folks on the team grow is something that's awesome. I definitely have to work harder than I ever did in any previous jobs, but I'm having way more fun. I'm having way more fun, Stewart.

Stewart: Yeah, no, I can relate to both of those. I want to talk a little bit about your role as a fiduciary. So you served on Northern's Employee Benefit Investment Committee as a fiduciary. What lessons from that experience apply to insurance investors today, and how do you think about balancing risk and return for this audience?

Seth: I think at the end of the day, it's no matter what role you are in, it's really around, I think about it as risk management. Whether you're in a portfolio management role, whatever it might be, it's really to me, is about risk management and knowing what you're buying, right? And understanding the core underpinnings of the asset class, whether it be the asset class, the specific security that you're involved in. Having robust governance and a risk management framework is, to me, really critical. And then just more broadly, as you think about just my historical background, when you do your homework and you have good, strong conviction around a view, I mean, I think when you get environments where you have high levels of volatility, that actually creates opportunity. And some of the best trades that I've had over my career are when people are panic selling, but you feel very strong and you've done your homework and you execute on that, and it pays dividends.

Stewart: I guess as we wrap here, can you give us a couple of key takeaways? And I really think that it would be important to just reiterate what Academy's mission is and what makes you different, because I think you're clearly, I mean, lots of people talk about being different, but in your case, I think that's really true.

Seth: Yeah. So I guess maybe I touch on a couple of things. One is just our mission to mentor, hire, and train military veterans. The second takeaway, I guess I would say, is that our geopolitical intelligence group is a resource for our partners and clients. And as you think about geostrategic risk work here for those, for our partners and clients, and then third around our ETF impact without concession. So if you have MBS exposure, we think vets is a really good alternative to that, and to the extent that you want to deliver on the impact component, it fits there. If you just want MBS exposure, MBS and ABS exposure through active management, vets can serve that purpose as well.

Stewart: Yeah, that's super helpful. And normally right about now, I'm asking you about what characteristics you're looking for when you add members of your team, but I want to make it a little bit different because with your mission in mind, what do you think sets veterans apart as for those who haven't considered hiring veterans or veterans as an employee group that frankly is underrepresented? Right? I mean, I think that your point about the transition back into civilian life with gainful employment is not always an easy one. What do you think vets bring to the table in particular, and why should people be considering veterans when they're hiring?

Seth: Yeah, especially, I mean, in this industry, you look at working well under pressure. I mean, at the end of the day, the folks who have been that served our military, the decisions they make are extremely critical, and we make important decisions in the investment management world too. But it's not life or death. You can recover from those decisions. So at the end of the day, but in the military, that may not always be the case. So working well under pressure, making decisions in the world where we have to make decisions without having the most perfect information. And so both these occur here in the asset management industry, but it also through in the military. Having attention to detail is really, really critical. You don't want to be making mistakes in the asset management, as well as in the military. And then just thinking about more broadly, being a good team player, having integrity, all those things are really critical for both asset management and being successful in the military.

Stewart: That's super helpful. Okay, so the fun one on the way out the door is that you can have dinner with up to three guests. Doesn't have to be three. The rules are that you can have one, two, or three. Who would you most like to have dinner with? Alive or dead?

Seth: I like to play golf. I'd say I'd probably go Tiger Woods, although Bryce and De Shambo might be a close second; it'd be a very interesting start to my dinner conversation. I'd probably go with somebody on the investment side. And I think the stock answer for everyone is Warren Buffett, but I would probably go with Peter Lynch. He's very famous for making comments about knowing what you're investing in. As we talked about earlier in the conversation, that's really a philosophy that we abide by. And then the third one, and not because he is in the headlines right now, but just more broadly, I think it would make for an interesting dinner conversation, would be Elon Musk. He's a visionary and very much disruptive, more so as an entrepreneur. Just some of the things he's done around, whether it be electric vehicles, space exploration, and all the other projects that he's undertaken is really, really impressive. So I think that I'd round it out with Elon Musk.

Stewart: That's outstanding. Really appreciate you being on, really appreciate the conversation and the education, and thanks for coming by and taking the time, Seth.

Seth: Awesome. Thanks Stewart. Appreciate it.

Stewart: We've been joined today by Seth Rosenthal, CFA, Chief Investment Officer at Academy Asset Management. Thanks for listening. You have ideas for podcasts. Please shoot me a note at Stewart@insuranceaum.com. Please rate us like us and review us on Apple Podcast, Spotify, or wherever you listen to your favorite shows, and catch us on our new YouTube channel at Insurance AUM community. Thanks for listening. We'll see you next time at the Home of the World's Smartest Money on the insurance.com podcast.