Vince Lowry gained a lot of insights on managing money from his days as a police detective.
The Senior Vice President and Lead Portfolio Manager for the Oppenheimer Revenue Weighted Strategy Team, Lowry spent the first dozen years of his career in the Philadelphia Police Department, rising to the rank of Detective Sergeant. “My job was to interview thousands of people,” under some very stressful circumstances, he recalls. He became good at staying calm and reading people, “particularly in panic times,” he says.
The skill came in handy during the Crash of 1987, when Lowry had been a retail broker at Shearson/American Express less than three years. “I would talk my clients – what few I had – through it. I found behavioral finance and the behavior of people under extreme stress to be very similar,” he says. Soon he got more clients, including institutions. In 2004, by the time he left what had become Salomon Smith Barney to form his own money management firm, his clients had $20 billion in assets under management, he says.
His road to creating a family of ETFs for his firm VTL Associates – which was acquired by OppenheimerFunds in 2015 – began when he was exposed to the work of Rob Arnott, founder and CEO of Research Affiliates. Arnott is widely considered to be the godfather of “fundamental indexing” – weighting the index not on market capitalization, but on fundamentals like a company’s book value, sales, dividends and the like.
“I came away from meeting with Arnott thinking this was a tremendous idea – this guy really cracked the code,” says Lowry. But he wanted to do even better. In an effort to weight the highest quality stocks heaviest, Arnott was using too many metrics in his indexes, Lowry thought.
The Standard & Poor’s 500 was already including only quality stocks, Lowry surmised. And by weighting those stocks based on their revenues, rather than their market cap, he could enhance returns. By rebalancing the index every quarter, he was reducing volatility and owning a larger number of cheaper stocks than the cap-weighted traditional index did.
Back-testing the idea to 1978, he found investors would have a 65% chance of beating the market in any one year, an 85 % chance over five years, and close to 100% over a decade. Lowry realized that hypothetical outperformance was even more pronounced in a revenue-weighted S&P 400 and 600. So he bought a license from S&P to lock up rights to revenue-weighted versions of their indexes, and began offering the strategy to his clients as a way for them to reduce costs.
“It improved my relationships with my clients, but I wasn’t really making money on it,” Lowry recalls. Then the ex-cop’s lawyer suggested he offer the strategy as an ETF. That led to a 24-month regulatory odyssey before he had approval to sell to the public.
Now the old buy-side guy needed a sales force. It was outsourced at first, and then brought in-house, thanks to a $7 million investment from a private equity firm. By the time OppenheimerFunds came calling in 2015, he had $1.7 billion under management across several ETFs and separately managed accounts.
What began as a simple idea has grown to suite of revenue-weighted ETFs, with more on the way. It always goes back to basics for the former detective: “You’re only as strong as your weakest stock.”
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The back-tested index results presented are not intended to depict the performance of any existing index or any investment product.
The alternate revenue weighting approach employed by the Funds, while designed to enhance potential returns, may not produce the desired results. Because the Funds are rebalanced quarterly, portfolio turnover may exceed 100%. The greater the portfolio turnover,the greater the transaction costs, which could have an adverse effect on a Fund’s performance.
These views represent the opinions of the Portfolio Managers and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.