Talk to Joe

I wanted to get out. More than anything, I wanted to get out.

It’s not that I had it bad. I had it pretty good, if I’m being honest. Better than I deserved. But still, I wanted to get out. The dust was settling on the global financial crisis and I was working for the wrong company, living in the wrong city, married to the wrong spouse, and I wanted to get out.

I was complaining about my situation over a few too many drinks one night. I used to complain a lot. Complaining is what I did back when life happened to me instead of the reverse. I didn’t understand that yet, so I was complaining to my friend Tim Meyer who smiled and said “Joe got out. Talk to Joe.”

Talk to Joe.

We used to wear suits. Especially in finance, we used to wear suits to meetings. So when Tim’s intro led to a lunch meeting with Joe Barrato I wore my best suit. Joe showed up in jeans and a backwards baseball hat.

Joe was a legend at Rydex Investments. He had built a bunch of massively successful funds for the company before he got out and launched Arrow Funds in 2006. And he sat there with me that day, talking in his direct no-time-for-bullshit way, explaining to me how he got out and what he was building at Arrow. We talked funds, we talked factor investing, we talked baseball, and we talked about life.

It took another decade, but I did get out. I was an asset management CEO. The whole thing was preposterous, CEOs are tall guys with great hair and Ivy league degrees, but there I was. And I was struggling. We did build the fastest growing sub-advisor in the ETF industry, but that wasn’t enough to carry us over the line of profitability. Not in the age of single-digit expense ratios.

What I needed was for the world to see what I saw in our reverse-cap strategy, but it was in the wrong part of the cycle. I tried to explain mean reversion, index concentration risk and the equal-weight premium but investors wanted to pile on the hot trends, valuations-be-damned.

The largest financial advisor platforms banned access to the fund, as they did to most small independent fund issuers – not for reasons of investment merit or client suitability but based on revenue sharing agreements with our larger competitors. And then when Blackrock and MSCI copied my idea after multiple “information gathering” calls with me, those same advisor platforms immediately granted access for their funds. This is the business I’ve chosen.

At this point everyone in my life urged me to close the fund. The steady drumbeat of passive index flows were pushing FAANGs to ever inflated valuations, and that meant reverse-cap was under-performing. No one could understand why I would stick with a failed idea.

But it wasn’t a failed idea. And reverse cap wasn’t just a fund. It was a middle finger at the market cap weighted index funds. It was an anti-monopoly statement. It mocked mega cap valuations, and big tech centralization. It was entirely contrarian. And it was built to stand the test of time.

When we sold Exponential ETFs I couldn’t get anyone to put a fair valuation on this one part of the company, so I managed to walk away with reverse-cap myself. I owned the fund, but I no longer had a fund company to support it. And supporting it would hurt.

I liquidated everything I had. I sold my boat, but that boat was a money pit, right? Then I sold my car, but that car was too fancy and conspicuous for me anyway. Then I spent the money I had set aside for camp for the kids. Then I had to borrow money. Just when performance was separating itself I was nearing the end, and I knew it.

“Hey Phil, it’s Joe. Check out the research report I just put out. It’s all about equal weight and reverse cap weighting. You’ll like it.”

Of course. Talk to Joe.

That reverse-cap fund is now the Arrow Reverse Cap 500 ETF. The ticker is now YPS. The index has beaten the S&P 500 by approximately 30% over the past six months. And if you want to know more about the fund, talk to Joe.