There is an old binary adage which states “you can’t be just a little bit pregnant.” With pregnancy you either are or you are not. Such is the case with many ETF strategists and the way in which they are categorized, followed, or hired.
Many platforms and reporting agencies categorize ETF strategists as either “strategic” or “tactical.” In fact, for some in our space, the choice is one that is so important it has become like politics or religion.
There is little worse than being cornered at an industry conference by the droning idiot who believes he’s the smartest guy in the room; despite his own track record. Even when I agree with the tool, I just can’t stand the all or nothing approach. After all, where in the academic work of finance has it ever been proven that being pure tactical or pure strategic has any merit?
To illustrate this point, take a look at the 4th Quarter-2015 Morningstar ETF Managed Portfolios Landscape Report has as its number one takeaway that 154 firms are managing 755 strategies with $73 billion in assets. That would almost be impressive if we, as a group hadn’t been at over $100 billion just two years ago.
The decline in assets in Managed ETF Portfolios can’t be correlated with market declines, because we know the pure tactical managers avoid drops. Right? And, the pure strategic guys can’t be blamed because they don’t make investment decisions. They simply allocate for time-horizon and assume history will repeat itself.
As a group, we have the single greatest opportunity of our industry’s young life to exponentially increase our collective assets under management. That opportunity is the new DOL Fiduciary Rule. Nothing ever has or ever will drive business our way to the extent of the DOL Fiduciary Rule potentially can. All we have to do is behave like real money managers instead of promising undeliverable results to unsophisticated investors. In short, if we act like the responsible investment fiduciaries we are supposed to be, we could become wildly successful.
The ETF Strategist business has grown around the false promise of market-timing and phony back-tests. But the market of unsophisticated investors has seemingly reached its limit. It’s time for the industry to adopt traditional institutional consultant style investment disciplines. While we go quarter to quarter stepping over the bodies of our colleagues whose strategies “blew up”, we fail to address the root-cause of our industry’s lack of growth; that we need to be better stewards of other people’s money.
Proper portfolio management from an ETF strategist should mirror the institutional consultant style of investing combining strategic and tactical elements. At its core, every strategy should have a written investment policy statement with strategic asset allocation targets. The targets should be based on the investor’s time horizon and tolerance for volatility.
Next, a strategy should have tactical ranges by asset class and category wherein the manager is permitted to make modest tactical adjustments.
Finally, a strategy should have an opportunistic element whereby the manager can take advantage of market opportunities or dislocations. This is the very successful institutional consultant model of portfolio construction used by many the world’s largest and most sophisticated investment pools. Because ETFs have given us the opportunity to implement such techniques, we have the opportunity to fulfill the promise of the separate account industry by bringing institutional caliber investment management to the retail investor.
Asset allocation is not religion or politics. Let’s make asset allocation great again!