Time For The ETF Strategist’s Manifesto

June 23, 2015

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Tyler Mordy, president and co-chief investment strategist of Toronto-based Hahn Investment Stewards.

 

Socrates once declared that “the unexamined life is not worth living.” As the ETF strategist industry—that still-small cohort of asset managers that specialize in managing global ETF portfolios—takes shape, it’s important to continually assess our own motivations.

 

Introspection is needed.

 

Why were these firms started? After all, many ETF strategists left lucrative careers, decamping from the cozy comforts of large organizations.

 

What problem are we solving?

 

To be sure, the ETF industry has been a veritable hotbed of financial innovation, teeming with ideas that challenge conventional practices.

 

Up From Ashes

The economic backdrop of this evolution is not a coincidence. Post-financial crisis periods, where growth is sluggish and the economy fragile like it is today, tend to be important eras of innovation. Consider the 1870s (the original “Great Depression”) and the 1930s—both slow-growth decades following credit crunches.

 

Each crisis spurred a period of incredible inventiveness, both in terms of new technologies and the ability to make use of them in productive systems. A perfect example of this was the huge spike in patented technologies that manifested during the 1870s and 1930s.

 

Of course, the ETF vehicle arrived long before the global financial crisis. But a focus on the actual investment processes used to build ETF portfolios only began in earnest after the 2008 crisis.

 

This is also not a coincidence.

 

 

Old Approaches Failed

During the difficult period of 2008–2009, many traditional investment practices failed to protect clients, naturally ushering in a frantic search for better solutions.

 

Indeed, the world has changed since the financial crisis. It’s now clear that the new investment landscape demands additional sources of diversification. Portfolios must be positioned to navigate muted growth in Western economies, recurring balance sheet issues and an emerging world that is swiftly moving to parity with the developed one.

 

This is the problem facing clients today.

 

Meeting A Need

ETF strategists have responded in force. They have taken the ETF—a “financial technology” really—and used it to build more robust portfolios. Rather than “picking stocks,” ETF strategists actively select themes, trends and sectors for outperformance.

 

This approach has become difficult to ignore. In a globalized world, the drivers of portfolio returns have increasingly been guided by macroeconomics and other “big picture” trends.

 

Looking ahead, the ETF strategist is moving from the boutique, entrepreneurial period to the institutionalization phase where they become formidable competitors to large-scale asset managers. This success was born of independent thinking, challenging conventional portfolio management practices.

 

Socrates would approve.

 

Big Changes In Money Management

And as these beliefs proliferate, they are driving significant organizational change in the asset management industry—moving away from siloed products using specialist managers to more holistic portfolio solutions featuring multi-asset-class managers using ETFs. The ultimate result is differentiated client portfolios that can thrive and withstand the shocks of a globalized, modern world. That’s real progress.

 

Where to next?

 

The medical industry has its own “Hippocratic Oath,” designed to uphold certain ethical standards. We need one too—a symbolic pledge that can be our North Star. Our hope is that this one will serve as a guiding light for the ETF strategist industry to the benefit of our clients.

 

So, without further ado, here is my industry’s equivalent of the “Hippocratic Oath.”

 

 

The ETF Strategist’s Socratic Oath

I swear to fulfill, to the best of my ability and judgment, this covenant:

 

I will respect the important financial innovation of the ETF structure and the repeatable investment processes of those successful ETF strategists whose steps I walk.

 

I will endorse an asset allocation process that is not backward-looking and purely statistically driven but that is forward-looking and informed by a top-down, macro world view.

 

I will apply, for the benefit of client portfolios, all available and known behavioral finance controls, avoiding those persistent twin traps of greed and fear.

 

I will remember that there is art to portfolio management as well as science, and that low costs, tax efficiency and suppressed turnover can outweigh the benefits of active management.

 

I will not be ashamed to say "I know not" and remain broadly diversified, nor will I fear the career risk of contentious investment postures in the name of outperformance or downside protection.

 

I will respect the privacy of my clients, for their portfolios are not disclosed to me that the world may know. If it is given me to steward a person’s life savings, all thanks. But it may also be within my power to cause large portfolio losses; this awesome responsibility must be faced with great humbleness and awareness that, in the short run, asset values are based on ephemeral opinions, herding and momentum, and not efficient market theory.

 

I will remember that I am not working with just secular and cyclical investment concepts, but individuals whose financial outcomes will impact their family, economic stability and life experience.

 

I will prevent capital losses whenever I can, for the way to win in this business is to avoid large, singular portfolio drawdowns. ETF strategists know that success requires a near-fanatical avoidance of the big mistakes.

 

I will remember that I remain an advocate of the democratization of global investing (made possible by the ETF vehicle), with special obligations to all my fellow human beings, including both the privileged 1 percent and the remaining 99 percent.

 

If I do not violate this oath, may I enjoy life and art, respected while I live and remembered with affection thereafter. May I always act so as to preserve the finest traditions of the ETF strategist industry, and may I long experience the weight of responsibility and privilege of stewarding the assets of those who seek my help.

 

June 2015, Tyler Mordy


Tyler Mordy, president and co-chief investment officer of Hahn Investment Stewards, is an expert in the design and application of global macro ETF managed portfolios. He is interviewed by the financial media for his global investment strategy views, as well as ETF trends. CNBC has called him one of the “best independent ETF experts.” Contact Hahn at hahninvest.com/contact.

 

 

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