Most colleagues who enjoy each other’s company get together to talk shop and trade battle stories over a few cold ones. But not Robert Johnson, PhD, CFA®, CAIA®, Gerry Jensen, PhD, CFA, and Luis Garcia-Feijoo, PhD, CFA, CIPM®. Their idea of fun is writing a book and – six years later – establishing not one, but two finance companies based on the book’s principles, all because they missed working with each other.
Domino effect as business metaphor
The three finance professors initially co-authored Invest with the Fed in 2015, when Garcia-Feijoo was a professor at Florida Atlantic University (he was formerly a Heider College of Business professor), Jensen was teaching at Northern Illinois University (he since joined – and retired from – the Heider College of Business) and Johnson was a long-time Creighton professor.
“The book summarized our academic research on Fed policy, but it really was just an excuse to work together,” Johnson admits.
But what started as a one-and-done book project has blossomed into a new financial firm, the licensing of several active index strategies, a partnership with Nasdaq and the creation of a registered investment advisor firm.
Invest with the Fed captured the attention of Wall Street Journal columnist Jason Zweig, who featured the book in the article “Fed Up: Do Rising Rates Matter to Stock?” In turn, Zweig’s piece was read by Al Neubert, who organized exchange traded funds conferences. Johnson began speaking and presenting Invest with the Fed at these conferences, and attendees enthusiastically responded, inundating Johnson and Neubert with questions about the practical applications of the book’s principles.
Neubert saw a void and encouraged Johnson and his co-authors to fill it by creating indexes based upon their research. Initially they were not keen. They had researched the Fed’s influence on the financial market for more than 30 years and considered themselves finance academics. Yes, they were academics with industry experience, but first and foremost, they were academics.
Johnson, Jensen and Garcia-Feijoo were what Johnson calls “reluctant indexers,” and Neubert “was instrumental in convincing us to form a firm to create indexes based upon our research in which people could invest.”
Thus, Economic Index Associates (EIA) was born, with Johnson serving as CEO, chairman and co-founder; Jensen as director, chief investment officer and co-founder; and Garcia-Feijoo also assuming the role of director and co-founder. Neubert is one of their partners, and Anthony Collins, a globally experienced investment professional, is president of EIA.
The greatest satisfaction is that investment firms are developing products based on our research and that our indexes will reach a broader audience and more investors will benefit from having their portfolios properly positioned for changing market conditions. — Robert Johnson, PhD, CFA®, CAIA®
Method to their madness
Economic Index Associates uses a new paradigm in index investing, one that employs Fed policy signals to guide stock selections. The firm is both a developer and licensor of active index strategies that are replicable, investable, rules-based, transparent and supported by the co-founders’ 30-plus years of academic research.
“We believe (and our research supports this view) that Federal Reserve monetary policy is an extremely important factor that investors ignore at their own peril,” says Johnson.
Their research posits that investors should look for stocks with features that align with the prevailing monetary environment. Firms that thrive in expansive monetary policy periods, or easy money periods, vary from those that thrive in restrictive monetary policy periods, or tight money periods.
Their strategy uses a unique combination of top-down and bottom-up methodologies to form portfolios. They employ a top-down component to determine the market environment. Is the market environment expansive, restrictive or indeterminate? Then they select stocks based on twelve firm-specific characteristics by applying a bottom-up component. Firms that are best aligned with the market environment, based on those twelve firm-specific characteristics, are included in their index.
“The intuition behind our methodology is what appeals to me. For example, cash holdings is one of our firm metrics. When the Federal Reserve is pursuing an expansive monetary policy (easy money), firms with large cash holdings are not at as much of an advantage because cash (credit) is easy to obtain. But when the Federal Reserve is pursuing a tight money policy, cash is much more difficult and costly to acquire. So, in restrictive monetary environments, cash holdings is one of the factors associated with outperformance. And there is an intuitive explanation for each of the other eleven metrics in our methodology, all based on our published, peer-reviewed academic research,” Johnson explains.
Their intuition – and research – is spot on. And Nasdaq took notice, partnering with EIA in the creation of the Nasdaq IFED US Large-Cap Index™️ (Nasdaq IFED-L™️), which launched in June 2020. It has been a best-performing large-cap equity index for the past two years. Furthermore, from launch through August 2022, it outperformed the S&P 500 by 22.48% and by 13.43% in 2022 alone. Overall, the Index produced an impressive annual alpha of 7.61%, compared to the S&P 500 over its 23-year backtested history.
This July, they launched a new index, the Nasdaq IFED US Large-Cap Low Volatility Index™️ (Nasdaq IFED-LV™️, comprised of 75 companies from the 150 large-cap US stocks with the lowest volatility. A third index, Nasdaq IFED 4% Target Volatility Index™️ (Nasdaq IFED-LV4™️), will soon follow.
Additionally, the firm also licenses strategies that other investors can use. The response has been tremendous. In fact, Johnson and his co-founders have established their own registered investment advisor (RIA) firm called EIA Investments to service separately managed accounts and provide investment advisory services to other asset managers, including pension funds and endowments.
“Business is an applied discipline”
“We are very excited to partner with Nasdaq and look forward to future collaborations on a suite of products based on the IFED™️ methodology,” Johnson says. But what Jensen, Garcia-Feijoo and he are most proud of is that finance practitioners validate their work as finance academics.
“The greatest satisfaction is that investment firms are developing products based on our research and that our indexes will reach a broader audience and more investors will benefit from having their portfolios properly positioned for changing market conditions,” adds Johnson.
Practical application has always driven Johnson’s research. It’s an interest shaped in large part by his time as both an MBA student and faculty member at Creighton, especially his exposure to the late Jerome Sherman, PhD, who demonstrated that real-world application of classroom learning was central to student learning and engagement.
Sherman created the first Heider College of Business travel course, taking student to New York City to expose them to the world’s financial hub. Ensuing years would see the addition of domestic travel courses to San Francisco and Silicon Valley and Las Vegas, and international travel courses to Australia, China, South Africa, Dominican Republic and Austria.
Johnson followed Sherman’s lead when he established the Portfolio Practicum class so that senior finance undergraduates could gain much-needed experience managing a stock portfolio, thus making Creighton finance graduates much more marketable to employers who wanted to hire applicants with practical money management experience. What began with $100,000 of University endowment monies in 1992 has swelled to over $10 million three decades later. Further, new practicums, such as the iJay Practicum and the JBlue Agency Practicum, have followed.
Creighton faculty, Johnson asserts, are experts in their disciplines who remain relevant in their fields and develop contemporary courses, innovative practicums and collaborative partnerships. He shares this anecdote as proof:
“I was president of The American College of Financial Services and lived next door to a professor of finance at one of the most prestigious universities in Philadelphia. I was very much in demand on a day in December of 2015 to explain the implications of the Federal Reserve interest rate hike. I did several media interviews and came home late that evening. My neighbor was in his driveway and asked me why I was working late. I said that I was doing media on the Fed rate hike. He didn’t know that it had happened and asked me why it was important. He was theoretically oriented and published in the top academic journals. Yet he had no idea about how this important event affected real markets. My belief is that no Creighton faculty member would have asked that question, as they are attuned to the real world.”
Johnson, Jensen and Garcia-Feijoo will continue to translate their research into finance practice with additional indexes in the future. And given the strength of their research and the track record of Nasdaq IFED-L, their work will continue to enhance the work of investment professionals and investor portfolios will benefit.
Time for that (celebratory) pint now.
By: Molly Garriott