Can the waiver wire rescue a bad draft? A fantastical approach to examining strategic and tactical asset allocationOctober 30, 2015
It’s time for the annual, “Let’s compare fantasy sports to investing” blog entry. The comparison at hand for 2015: The pairing of strategic and tactical outlooks in the context of asset allocation.
Strategic asset allocation is driven by long-term risk and return expectations across asset classes, while tactical allocation employs decision-making based largely on current events to identify asset classes which can outperform expectations over the short-term. It can be demonstrated that the efficient frontier shifts toward the favorable northwest direction when adding a tactical component to an existing strategic allocation (i.e., improving the reward-to-risk measure). Think of strategic allocations like your draft, wherein you establish the framework for your season-long roster, and consider tactical allocations like in-season team management such as trades and waiver wire additions which supplement your existing roster along the way. Common sense dictates that even with a terrific draft, one would have a difficult time earning the league championship crown without accounting for injuries and bye weeks through tactical maneuvers throughout the season. However, both successful long-term investing and the prospect of winning your league require more than common sense.
Asset allocation broadly refers to the selection of investment classes which best suits an investor’s risk and return requirements. Allocations vary by individual or institution, depending on risk and return preferences. FDx Advisors’ Investment Research Group focuses largely on actively managed strategies across equity, fixed income, and alternatives areas. A study conducted by Atlanta Capital Management showed that over a 30-year period (1980-2009) within the domestic equity space, “quality” investment strategies – those with high ROE, stability in earnings growth, and low financial leverage – tended to prevail over low-quality counterparts about 80% of the time. While there will always be exceptions to generalizations such as these, this finding helps describe why the majority of our Approved List of managers consists of quality-focused investment strategies; that is, quality strategies tend to meet our long-term performance screens, whereas low-quality strategies usually do not (keep in mind that performance is only one aspect of our multifaceted due diligence process for determining Approval considerations). Similarly, many studies, most notably “The Cross Section of Expected Stock Returns” by Fama and French, have shown that value stocks tend to outperform growth stocks across market cycles.
High-quality investment strategies, like value stocks (although the two classifications are not synonymous), can be thought of like quarterbacks, wide receivers, and elite tight ends in a fantasy football setting. They’re usually not sexy or glamorous, and they’re seldom taken early in snake drafts or sell for top dollar in auction drafts. Much like a boring dividend-paying stock or a portfolio which invests in companies with strong balance sheets, these positions tend to simply provide a high floor and return their investors’ capital over the long-run. Conversely, running backs are analogous to low-quality investment strategies – flashy, exciting, they can pop and outperform the field given the right circumstances, and they always tempt performance-chasing, but all too often over the long-run their excess volatility catches up with them and they struggle to live up to their billing. The difference between running backs and other positions in a statistical context is that selecting almost any of the top-ranked quarterbacks, receivers, and elite tight ends will yield a positive ROI over the course of the season; with running backs, one must locate the correct player within that position in order to turn a profit. Essentially, you can throw a dart at a list of top-ranked QBs/pass catchers and succeed, whereas predicting the top-producing RBs on a player-by-player basis is nearly impossible.
Disagree? Take thirty seconds to peruse your league’s standings and see where the teams rank who paid a premium for consensus first-round “no-brainers” Adrian Peterson, Eddie Lacy, Jamaal Charles, DeMarco Murray, and CJ Anderson. Then, ask any of those owners if they would pick that same player if redrafting today.
Back? Let’s continue.
For the 2014 NFL season, I conducted a study to test the theory of quality asset allocation vs. the conventional model of focusing on the running back position. Across three of the most widely used fantasy football website platforms, I drafted 60 rosters using stringent criteria, the most relevant being:
1) No running backs taken within the first three rounds
2) No trades so as to avoid subjectivity
3) Only utilizing the waiver wire for bye-week or injury replacements.
After eliminating end-of-season results from inactive leagues to account for survivorship bias, incredibly, over 80% of these rosters in active leagues made the playoffs (interestingly, the average draft grade generated by these websites was D+, suggesting that consensus opinions in the fantasy sports industry may be as useful as they tend to be in the investing business).
Surely then, the answer to hoisting your league’s championship trophy in December is to simply formulate your draft (e.g., strategic allocation) in a manner that avoids overpaying for the low-quality asset class of running backs, yes? Not so fast. Despite the regular season success, this study yielded a meager three total championship rosters, which was less than a 10% title-winning success rate. So, what was I missing? The answer is tactical allocation.
In the 2014 season, the majority of championship rosters, both within this study and industry-wide, held at least one of two players undrafted in the majority of leagues: Odell Beckham Jr. and C.J. Anderson (prior to his embalming in the ensuing offseason). By adding one of these two players mid-season, it supplemented existing rosters with an asset which nobody in the industry foresaw during the August/September draft season. However, again to minimize subjectivity, the rules of my study dictated that I utilize the waiver wire only as a last resort for bye-week or injury fill-ins rather than for the purpose of opportunism. Thus, only a small fraction of rosters in this study captured either of these two particular in-season assets. In summary, while creating a rock-solid foundation through a disciplined draft process selecting from the positions most likely to succeed (e.g., a quality-oriented strategic allocation) proved to be an excellent starting point and provided a simple and repeatable formula to consistently finish above the majority of peers, it seldom translated into postseason success. But when coupling an effective strategic allocation strategy with in-season roster management by adding one of the two aforementioned players (e.g., tactical allocation), it proved to elevate competitive rosters into prohibitive championship favorites. So while investing is infinitely more complex and considers many more factors than the relatively constrained realm of fantasy sports, proven investment principles such as beginning with a quality focus and coupling strategic and tactical allocations can effectively be applied to the latter.
FDx Advisors’ VisX program employs an approximate 80% strategic/20% tactical asset allocation approach in constructing and managing the program in accordance with investors’ needs. All products included in the VisX program are selected from our Approved List, which in turn consists primarily of quality-focused investment options. If you are interested in learning more about VisX, please contact email@example.com.
And next season, do yourself a favor: draft by allocating your most valuable roster slots to the high-floor positions that won’t haunt you, take some calculated risks in acquiring worthwhile free agent additions as the weeks pass, and let your league competitors stake their season chasing volatile performance aboard the RB Express.
By Beau Noeske, Director of Investment Analytics and Communication for FDx Advisors