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a bad boy for breaking her heart and I'm free.
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Falling
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yeah I'm free.
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Free falling exactly one year ago, the Free Markets ETF launched ticker symbol fmkt, designed to invest in companies expected to benefit from deregulation and free market dynamics in the second term of the Trump presidency. I was intrigued by the concept and wondered what it might look like in the second half of this term. To help us unpack all of this, let's bring in Michael Guyad. He is the portfolio manager for Tactical Rotation Management, one of the sub advisors to the Free Market etf. So Michael, I was intrigued by this concept. What was the original insight behind fmkt? How was deregulation becoming an investable theme? That perhaps markets were underpricing?
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Yeah, and it's interesting, right? So when Trump got elected, I've got this large network of advisors that I talk to, 350 advisors that I regularly talk to, which is why my calendar is always so jammed. And one of the advisors said to me, you know what it would be good at? Investment ideas. Something that focuses on deregulation and he was kind of saying it kind of off the cuff. So, yeah, and I give the guy credit for coming up with the idea. And it's like, you know, that's actually an interesting idea. I mean, deregulation arguably makes the time to market faster. It increases margins, it should benefit earnings. From a fundamental perspective, it should increase competition. So all that sounds like an interesting thesis. So I called up three other firms, one, which is the advisor title Financial Group, and then two other RIAs as sub advisors, people that I've known. I wanted to approach this more from the AVC standpoint. My other funds I launched on my own. This I wanted to actually have partners on because it's a very different way of, of my style of investing, which is more risk on, risk off historically. And came up with the idea and said, okay, well, let's go after it now. When I had the, when I kind of really was thinking through the idea, it's like, all right, Trump is making it very clear that he's going to go from this, you know, for every new regulation you want, I want to cut. He goes, goes from that to for every new regulation I want 10 cut. He's actually gotten more aggressive on that since, since he was elected. So come up with a fund idea. Figure out what sectors, what industries benefit the most from deregulation. And that has to be active because these executive orders come out and you don't know what's going to be deregulated next. So you've got to kind of focus on that as quickly as possible. Now, deregulation is a very interesting buzzword. You hear a lot of people on the media talking about deregulation as a big tailwind for the broader markets. And I do believe that if you look at why has the US outperformed Europe so much, it's not just because of tech. It's because we don't have as much regulation as Europe does. Regulation is a stopping point, is a friction that hurts earnings, time to market. So came up with the idea for free markets. It's an active fund, stock picking. A lot of the focus is around sectors like industrials, financials, cannabis, nuclear, anything in the aerospace part of the marketplace, not so much tech. Maybe we can touch on that. We believe that tech is probably going to be regulated and maybe AI in particular be regulated, especially from a regulatory perspective in our business, the investment advisory business. But out of the gate, we had some pretty strong performance. About a year ago we launched, we had four and a thousand traded shares on day one. A lot of Interest in that we had really strong performance. We were 1000 basis points over the S and P at some point. That ended up being a blessing and a curse because obviously nothing closes a sale like a chart. People started chasing the performance of FMKT and then we had a drawdown as we got back to AI is the only play in town. And right now we're kind of meandering. But I do believe that the deregulation theme is here to stay. Even if you get a Democrat as president next go around, the reality is industries that have less regulation should at least theoretically outperform.
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So let's stay with that concept of deregulation. How do you define what sectors benefit from deregulation and then how do you hone in on what companies within those sectors are going to be the biggest beneficiaries?
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So arguably it would be very hard to do either of those outside of using AI, which we actually built out a whole workflow and AI screening process to figure out exactly that. Which sectors, which industries benefit, which individual companies are mentioning deregulation the most in earnings transcripts. So we've got multiple kind of filters that are looking at valuation, that are looking at where SGA is impacted by regulatory costs. And in some ways you can argue it's obvious, right. It's like think about industry wise, sector wise, what has the most regulation? Banks. Sure.
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We're at financials.
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No doubt, no doubt. Right. Especially with Dodd Frank. And then you've got to roll back a Basel and all that, which is the deregulation side, you know, cannabis. Right. So you saw Trump obviously trying to get ahead of the Democrats. You can argue with some of this reclassification on the cannabis side. Right. So like we've got Tilray in the portfolio. Nuclear. Right. Obviously with all this AI build out, you're going to need energy. So you've got to make the time to market for getting nuclear plants up shorter to meet the growing demand of speed of importation of AI data sensors. So it's all the stuff that are bottlenecks, right. Is kind of the area the way to think about it. So we do a lot of screening, we do a lot of AI, we look at executive orders, when they come out, we determine from the AI output, does this make sense? And then we're just going granular, which companies in theory benefit the most? Right. So a good example of that is Robinhood. Robinhood is kind of at the forefront of financial deregulation, very forward thinking company. But then on top of that, on the crypto side, they're big players. So you hit on all areas of the crypt of the, of the sort of deregulatory focus from the Trump administration, which again is not going to go hard to, once you deregulate something, to re regulate it at least that quickly.
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Unless there's a crisis, it's almost impossible. FMKT's mandate says at least 80% of assets go into companies expected to benefit from regulatory shifts. What's the remaining 20%?
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Yeah. And arguably it goes to sort of like how do you define it? Right. In terms of what benefits from deregulation? But 5% of the portfolio can go into Bitcoin and Ethereum. That's listed in the prospectus now that was done.
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Any crypto or just those two?
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Just those two. And also we can go into gold as well. And the argument there is that those, if you talk about what a free market is, which is unencumbered by regulation, those are almost by definition free market plays. Right. When it comes to the crypto space and gold in particular. So we can do a little bit, and we've gone into that in the past, obviously momentum has been weak. So we've gotten out of it part of the active nature of it, trying to avoid these big declines in those positions. But that's for almost any prospectus. In order to be considered a theme, you have to have that 80% threshold. So part of it's kind of a, ironically, it's kind of a regulatory requirement to say that if you're going to be focused on a particular theme, you've got to have at least 80% of your portfolio in that the reality is every single holding to some extent has some kind of deregulation tie into it. Some of it's direct, some of it's more indirect. But there's always a justification for why we're positioning particular holding.
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So the fund kind of sits at the intersection of markets and politics. And I've long cautioned against allowing partisan politics to influence investing. You're really trying to walk a line where it's not a political expression etf, but rather a policy driven theme. How do you balance that? How do you keep this from becoming a darling of one side or the other?
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Yeah, it's like politics goes into policy, policy goes into profits. Right. So it's really more of the profit side, the fundamental aspect of it. So we've got that question before. It's like, all right, so you end up having a Democrat come in place and it seems like it's a Republican fund. I don't argue it's not because even under a democratic regime there will be some sectors that will be deregulated. The Democrats like, like alternative energy, in which case then the holdings change. Because now that's where the focus on deregulation might be, right?
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Solar, wind. We more a Democrat issue than Republican issue.
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Exactly. And I go back to if that's the case, and yeah, you're going to have deregulation there and then the holdings shift. Energy is a big part of the theme behind fmkt, which obviously makes sense because Trump is so focused on releasing as much domestic oil as possible and removing frictions there. So it benefits from that. But then it's just a shift. Right. You want to follow the policy because following the policy is where profits end up coming from. And policy has winners and losers and often the winners are things which are favored, which tend to be things which will get to market faster, which is exactly what deregulation is. So I don't view it as a political play. I think it's just the nature of the beast is you will have certain parties that will favor certain sectors, certain industries. How do they do it? By either providing funding directly or by resulting in less friction for those companies.
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That makes a lot of sense. It also means that trying to come up with some rational benchmark, almost impossible. How do you figure out what your frame of reference is? The S P500 doesn't seem right. What do you use for a benchmark?
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Yeah, and it's interesting. So I mean, we have to have a benchmark from a regulatory perspective because everyone. That's how the regulators think about these things. For us, it's more about, you know, the entire landscape of the equity universe. Is the fund outperforming or not? Now, again, we outperform the S and P strongly. The S and P, to your point, is not really a proper benchmark for a free markets type of fund because the S and P now I'd argue is an AI index. I mean, I'm sorry, but it's like The S&P 500 is no longer as diversified as people think it is. It is a thematic fund, right under large cap growth. Cap. Large cap growth is what? It's basically AI.
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I mean, it's AI, it's semiconductors, it's software, it's go down the whole list, the whole thing.
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Right, exactly right. So I think anybody that's looking at FMKT is looking at it from the standpoint that they believe in the thesis and a lot of small business owners believe that deregulation is more important than Taxes because that impacts their day to day activity and working. Right. And I go back to finding a benchmark is more a function of sort of your own personal financial requirements. It's not about are you beating the S and P, does it fit your objectives from a risk return perspective? Does it make the journey from an investment perspective better? And a lot of the free market positions are parts of the marketplace that the market have not rewarded. There is a value tilt, interestingly enough, when you look at the holdings of fmkt, sure, there are some of these more speculative positions that we have that you almost have to have a position in Archer. And Joby, I know your colleague Josh Brown talks about, I think Joby quite a bit in Archer as well. Those are classic deregulation plays because of the focus around flying taxis basically and deregulation as far as the FAA side goes. But there's a value tilt. So if there's an environment that favors value, it's going to favor free markets anyway.
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So let's talk a little bit about some of the most recent holdings I was able to look up. Some are pretty obvious. You mentioned Robinhood, Key Corp, Citizens Financial, even Blackstone. Some of them are a little. I had to scratch my head. Palo Alto Networks, adm, Oracle. The financials are obvious because of deregulation. Oracle seems more like a political, hey, you know, Larry Ellison is a big buddy of Trump. His son is in the midst of the whole mayhem with Viacom and all of that. How do you distinguish what's the beneficiary of a deregulation and what's politically favored? How do you separate those?
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Well, to some extent, if you're politically favored, you're going to try to put deregulation in place. And the way that looks is in the speed with which government contracts take place.
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So I was thinking more along the lines of M and A and antitrust rules as well.
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For sure. Right. In the case of an Oracle, there's, there's a, there's something called FedRAMP, federal risk and Authorization Management Program, which basically is, without getting too deep to it, it's a way of getting approvals. Right. To get a government contract to sort of be in a pipeline for like an rfp. Last year the Trump administration did something that, that basically removed a lot of that friction. So it wouldn't take as long to try to apply for a government contract which directly impacts Oracle. Right. That's the kind of deregulation which is important because it's all about speed to market.
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So let's talk about palantir and Archer Daniels similar situation.
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There's an element of that as well on that. Again, AI companies tend to not be true the strongest deregulation plays. But Palantir does have an aspect of that because again, speed to market for them is around government contracts for defense. Right. So I think there's, you know, it was never sort of a major, major holding the fund, but it made sense to us to have some kind of exposure to it. And then on the energy front and Palo Alto, it's like anything that's tied to AI has to be deregulated from a bottleneck perspective, which is energy, electricity, utilities. So there is a reasoning behind data center permitting and utility usage. Right. And the deregulation comes from that. I keep going back to this idea that what you own matters a lot less than how much you own of it. A large part of the active nature of FMKT is, yes, we're being thematic on deregulation, but we're also actively trying to see is there momentum in this or that deregulation play to weight that heavier. A lot of the holdings in the top 10 are not based on how strong the deregulation fit may be. It could be just there's deregulation fit and there's strong momentum. We want to be there.
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Gotcha. It makes a lot of sense. So. So we talked about financials, technology. Health care is another deregulation issue. But I want to ask you about the defense sector and energy. When the war in Iran began, how does that affect how you look at the portfolio? And what is a potential beneficiary of this quicker, more frictionless deregulatory environment?
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Yeah.
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And when the war took place, we meet once a week, Me and the other portfolio managers, when the war took place, they said, all right, we got to get some defense companies in here and then figure out which defense companies benefit the most from deregulation. And they're kind of in bed with each other. Government defense, obviously. So it's all about speed. If you're going to go to war, you better have some faster speed of bringing things to market. So it hasn't been a major, major thematic play, but arguably it goes back to if it's about government contracts and it's about speed, then deregulation is about removing the friction to get something to the government's agency's relative hands to get approved. It's interesting. I don't view free markets as a geopolitical play. I view it more as if you believe that deregulation is how you have more profits Then you're simply trying to figure out which companies benefit from that the most. And arguably there's more art than science to that. But it's not as catalyst driven as much as it's more about executive orders that are taking place.
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All right, final question. How do you separate genuine deregulation tailwinds from talking points and narrative? More specifically, how do you distinguish a company that's talking about receiving regulatory relief from one whose margins or growth rates are actually improving?
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Yeah, yeah. And that goes back to its art versus science. I mean, to some extent there are some very clear cause effects on the deregulation side impacting certain companies. Right. But to your point, a lot of it is going to be analyzing SGA fundamental line items, looking at and seeing what CEOs and executives are saying on earnings transcripts. One of the filters is how many times is deregulation mentioned by various people at companies as a driving factor? Because they're not going to say it unless it's somewhat true, you would think.
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Right.
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So it is not as clear cut, which in white, again, it needs to be active. It's not something you can quantitatively say. This is the ISD regulation score. So a lot of this comes with judgment. A lot of this comes with. Which is why it's good that I have a team, not just me, that's coming up with these allocations and just trying to be fast in terms of figuring out where to position. This has been a very. It's been an odd environment. Right, because Trump's been talking about deregulation. A lot of people were excited about deregulation. Deregulation has a lag. Any executive orders from last year, you'll start to maybe see this year showing up in the actual earnings. The market, I think, is still largely undervaluing the impact of deregulation. And if that's the case, then towards the end of the year you have a rerating and then you start seeing it filter through in the bull market just as a rotation away from this AI focused passive bid.
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Really, really interesting. So to wrap up, if you're intrigued by the concept of deregulation, of reduction of frictions, of more opportunity for companies to throw off the yoke of big government. I say as a New York left coaster, you can actually get exposure to that through active ETFs like free markets. I'm Barry Ritholtz, you're listening to Bloomberg's at the money.
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