Football season is winding down, with the college football national championship now decided and Superbowl LII only weeks away. Football fanatics out there (myself included) have been treated to a season with plenty of surprises, and we dread the coming months of football drought when there will be no games to watch on TV.
While most of us now participate in football by watching, many can also think back to our “playing days” in high school — when preparation for the upcoming season provided challenging conditions meant to simulate or surpass tough game situations.
I don’t know who decided that dressing up in full pads twice per day in the hot Texas sun was a good idea, but it seemed to be the thing to do in late August back in my hometown. “Two-a-days,” the tradition of having two daily football practices, one morning and one late afternoon, were a rite of passage in virtually every school district in Texas. I’m sure it was the same way in other states — it’s just hotter down here.
The “Friday Night Lights” movie and TV show attempted to shine a light on high school football in Texas, but to my way of thinking, that is how the rich kids played ball. Those of us in a small, “Class B” high school back in the 1970s had to make do with what we had, both in equipment and players. For example, our “trainer” was one guy with a roll of tape and a bottle of salt tablets, while our second string was mostly the first string in different positions. Hydration consisted of two water hoses — usually reserved for irrigating what little grass would grow on the field in those hot, dry conditions.
So, what does all of this football talk have to do with investing? In this article, I hope to highlight the importance of agility, both on the playing field and in an investment portfolio.
Perhaps the best place to start is to define what agility is. Wikipedia defines it as, “… the ability to change the direction of the body in an efficient and effective manner.” Obviously, physical agility is an important trait in football, where the object of the game is either to score a touchdown or to prevent one. When you don’t know which way your opponent is going to go, you must be prepared to react to whatever direction is taken to make the play. The same goes for investing.
The problem is that many investment portfolios today are passive, the very opposite of agile. If there has ever been a time when investment advisors should be concerned about the agility of their clients’ portfolios, it’s right now. We all know what happened to buy-and-hold investment strategies in the early 2000s and again in 2007–2009. Were your clients invested with enough agility to avoid those large losses — and those of prior bear market periods?
Failure to include agile investment strategies can be costly. In football, the lack of agility can result in an opposing team’s score, or your own team’s fumble or tackle for a loss. For an investment portfolio, the lack of ability to adapt to market conditions can result in huge losses, as seen in Table 1. Continuing with the football analogy, I would like to suggest five ways you can improve the agility of your investment portfolio:
1. Diversify. Just as it wouldn’t make much sense to field a team with players that all have the same skill sets or who all play the same position, an agile investment portfolio should also be diversified to include noncorrelated strategies, each with different strengths in the portfolio. In the role of coach, the investment advisor must select the team of available strategies best designed to meet their clients’ investment goals.
Unfortunately, when discussing diversification, most of the financial press is talking about a passive, 60/40 stock/bond type of traditional allocation, often modified for the age of the investor. While including a small allocation to a passive strategy is probably a good idea from a diversification standpoint, it should not be the only strategy employed. Why? Because passive asset-allocation portfolios have done so poorly in past bear markets, requiring years to get back to breakeven. This can become an overwhelming sequence-of-returns issue for investors, especially retirees. To say the least, passive strategies have fumbled the ball at the worst possible times.
A true story will help to illustrate this point: Back in high school I had a coach who believed that all of the plays he developed were designed to produce a touchdown every time they were run — if they were executed properly. To prove the point, he decided (seriously!) that we would play an entire game using only two plays. You can imagine the result arising from this failure to diversify. No matter how well a play is designed, if the other team knows the ball will go either one place or another, you’re going to lose. We lost.
To achieve true diversification, advisors should develop portfolios for their clients that include tactical strategies with the agility to move to cash or other asset classes as market conditions dictate. Whether you call these strategies active, tactical, or alternative, they are characterized by rules-based strategies that seek to follow market trends rather than being victimized by them.
2. Know the playbook. This may sound very basic and unrelated to agility, but no amount of speed or quickness can help you if you’re in the wrong place at the wrong time. In an investment portfolio, it’s important for advisors to communicate why each investment strategy is included and what it is intended to accomplish. In football, sometimes an aggressive passing style is called for on offense; at other times, a tightly controlled and conservative game plan. At different times in the same football game, either style might be called for.
Similarly, it’s equally important to make sure that multiple investment strategies are represented in clients’ allocations and not just multiple asset classes. To be effective, the overall plan for a portfolio should be like a playbook, with different strategies designed to perform during a variety of market conditions across long time frames.
Unfortunately, I have seen advisors who want to remove one or more strategies because of underperformance over a short-term period. They think that all strategies should make money in all market environments, which is clearly not the case. It would be like removing a play from the playbook just because it didn’t work against one opponent.
3. Watch the films. The Saturday morning after the game was always dedicated to watching the game films. We used an old WW II–era Bell and Howell movie camera that often resulted in pictures so fuzzy that you’d swear it was filmed from the next county. What we could see clearly would be critiqued by our coach, usually in the form of running the projector backward and forward to document a missed tackle or blocking assignment.
Returning to the investment world, reviewing the films is akin to advisors monitoring their clients’ portfolios regularly. This is not to say that anyone — client or advisor — should be overly concerned with scrutinizing performance every day or every week. Instead, advisors should review their clients’ portfolios as frequently as quarterly and no less than annually. Such a review can help to determine whether the portfolio’s constituents are performing as expected and whether the risk level is appropriate.
4. Be ready for unplanned opportunities. In my high school football days, we had an incredibly fast quarterback. Occasionally, he would call a play but then realize that a lane had opened up that allowed him to run a quarterback sneak. I remember blocking according to my playbook assignment, only to see him standing in the end zone. His vision, coupled with his agility, resulted in a touchdown. (Of course, these little excursions didn’t always work, so our coach encouraged keeping them to a minimum.)
Advisors need to be aware that their clients are the target of direct advertising for a wide variety of investments, including precious metals, real estate, and even private equity opportunities. In addition, some advisors have clients who made their fortunes in real estate, oil, or other investments and want to continue to “dabble” in opportunities that might come along.
In such cases, advisors need to again take on the role of coach and help evaluate these opportunities on behalf of their clients. Going back to the playbook, the advisor might be able to show the client how the same or similar opportunities are already present in the portfolio holdings. Most importantly, however, is the need to realize that investment products marketed directly to investors are sometimes subject to higher risks than disclosed in the flashy marketing brochures promoting them.
5. Keep fantasy football in its place. A final point in this analogy is to be wary of the investment equivalent of fantasy football. For those who do not partake in fantasy football leagues around the world, it’s a way to establish imaginary teams of actual players and then score points based on their performance during games. The athlete’s performance is real and the games are real, but the scores are nothing but pure fantasy, hence the name.
A similar exercise in “fantasy” in the investment world is known as backtested performance. Backtesting occurs when an investment manager has a strategic idea, but it has not been traded with real money in an investment account. The solution is to set up a backtest, usually consisting of hypothetical trades applied to the past performance of a financial asset such as a stock, bond, index, mutual fund, or ETF.
Backtesting can be a valid and productive analytical tool when used properly, and a dangerous tool when used improperly. And, to be fair, there are many times when backtests are the only data available, such as in a brand-new strategy just starting out. Even so, investment advisors must resume their coaching role and make sure that not only is the trading strategy evaluated but also the methodology of producing the backtest.
One solution to the backtesting question is to seek out a database service such as Theta Research that specializes in tracking and verifying the actual performance of managed account strategies. The benefit of tracking even newer strategies is that it begins the process of building an actual track record that has been third-party verified.
The Theta online database allows you to analyze performance results across time frames and market environments. It’s your key to finding high quality sub-advisors and building alternative portfolios for your clients that provide investment options and a level of service unmatched by robo advisors and low-fee investment approaches.
As an independent data publishing firm, Theta provides a third-party set of eyes that not only calculates and verifies actual performance, but also maintains a subscription-based access to its database. This way, Theta’s database services can offer a sort of “scouting report” when looking for agile investment managers.
As we begin a New Year full of promise and opportunity, I want you to have the chance to experience a free trial of the actual Theta Research Professional Subscription. This free trial offers access to real-time performance data, complete with Investment Manager names and contact information.
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Theta Research is pleased to announce the addition of five new tactical strategies to our database of tracked models. Two of these strategies come from Investment Managers who are new to Theta while three have been developed by Managers who already have active tracking accounts on the Theta database.
Existing Managers John Worthington and Jon Dauble, co-owners of Evansville, IN based Dauble+Worthington Equity Portfolios, have submitted two new strategies for monthly tracking by Theta. The D+W Dynamic is a relatively new strategy and Theta Research has independently verified performance since its inception in May of 2017. The D+W Equity 102 strategy has a longer-term track record with verified actual performance dating back to its inception in May of 2013.
Another existing Manager submitting a new tactical model for monthly tracking is Armando Alizo, owner and portfolio manager at Mount Dora Capital Management in Cheyenne, WY. Armando has submitted the MDCM Stock Index Futures Portfolio for tracking. Theta Research has tracked and independently verified the actual performance of this strategy back to its inception of March 1, 2016.
New Investment Managers Added to the Theta Database
New Manager, Maia McGeeHee, is founder of Hermes Econometrics in San Rafael, CA. Maia has recently submitted her Hermes Domestic Equities strategy for monthly tracking by Theta Research. We have independently verified the strategy’s actual performance back to its inception date of January 1, 2011.
Likewise, Jean-Pierre Fruchet, President and portfolio manager of Barneau Holdings, Inc. of Montreal, Quebec, Canada is new to Theta Research. While Jean-Pierre is based in Canada, the programs tracked by Theta are traded in US dollar denominated mutual funds sponsored by Guggenheim/Rydex. As a result, the CIA-Rydex strategy will be tracked on a daily basis. Theta Research has independently verified the actual performance of this model back to its inception in October of 2011.
All of us here at Theta Research would like to wish you Happy Holidays and a happy and prosperous New Year!
I recently wrote an article in Theta News regarding enhancements being made to the subscription section of our Theta website. We are now pleased to announce that these enhancements will become effective over the coming weekend of December 2nd and 3rd.
Note that these enhancements will only apply to the Professional and Basic Subscription services and not the Manager Site. The upgrade will occur automatically and there is nothing you need to do for the changes to take effect.
To recap, the subscriber website will be enhanced in the following ways:
• Complete Site Face Lift – Font sizes have been increased and color schemes standardized, making data and analytics easier to read;
• Enhanced Report Formats – Page layouts are now simple, clean and efficient;
• Faster Page Loading – Data retrieval and metric calculation speed have been dramatically increased, especially for models with long track records;
• Standardized Performance Rankings – All rankings are now based on month-end values;
• Daily Performance Still Available – For those strategies tracked on a daily basis, detailed statistics and analytics are still available on the individual program pages;
• Easy to Navigate Model Statistics – Tabbed pages make it easier to find performance and risk statistics for all models;
• Mobile Device Friendly – Now you can check in with your favorite Investment Managers and run ranking reports using your smart phone or other mobile device; and
• Expanded Analytics – Added benchmarks and statistical analytics are available to aid in evaluation and comparison of model.
We here at Theta Research are excited about our new, streamlined website and what it can mean for those seeking tactical investment managers and investment strategies. We encourage you to log into your subscription and check out the new look and feel of the Theta website.
Thank you for your business.
Theta Research is pleased to announce four new additions to our database of tracked models. One of these strategies comes from an Investment Manager new to Theta while three have been developed by Managers who already have active tracking accounts on the Theta database.
Vinay Munikoti, founder and owner of System Research, LLC of White Plains, NY is an existing Theta Manager. Vinay has recently established tracking of two new strategies named “System Research – Hydra” and “System Research – Index Trading.” Theta has tracked and independently verified the actual performance of these models going back to their common inception date of January 1, 2016.
Another existing Theta Investment Manager, David Daughtrey, CFA, CFP, founder of Copperwynd Financial, LLC has added one new model, the Monthly Rotational Strategy. Theta Research has independently verified the actual performance of this strategies back to its inception date of January 1, 2016.
A New Investment Manager Added to the Theta Database:
Our newest Investment Manager addition is Andrew Marshall, Founder of Andrew Marshall Financial, LLC. Based in Carlsbad, CA, Andrew Marshall Financial has established a tracking account for a new strategy named the AMF Tactical Trend 1 strategy. Theta Research has independently documented and verified the track record of this new model back to its inception date of January 1, 2016.