SPDRs, index funds, investment research and fantasy football kickersAugust 28, 2013
Are you “that guy” in your fantasy football draft? There’s one in every league – the guy who selects the top-rated kicker five rounds too early or pays any value beyond $1 in your auction draft. Why draft a kicker so early? Maybe it’s to fill out the last position in the starting lineup. Maybe it’s because the field of kicker sabermetrics is “the new black.”
Whatever the reasoning may be, “that guy” is wrong. Or, to be fair, “that girl” – my wife, she of the I-no-bother-with-stats mindset, crushed the league last year with a 13-1 mark en route to the league title (admittedly, the fact that our joint bank account swallowed her winnings healed my pride). Shall we say, “that player” is dead wrong for precisely the same reason that FDx Advisors Investment Research Group issued notification to our clients on February 22, 2013, that we would be changing the process for ongoing research of passively-managed products:
“Index funds available on the FDx platform are evaluated for their effectiveness in tracking the performance of their target benchmarks during the initial research process. Relative index fund performance, thereafter, typically deviates only marginally from that of its benchmark, and can be largely attributed to the level of the fund’s operating expenses. ”
FundFire reported on May 10, 2013 that consultants have boosted active manager due diligence. Likewise, at FolioDynamix we believe that value-added processes exist among active managers, and we enact our own proprietary screening procedures in order to provide our clients with a robust offering of quality managers. As depicted in the Q4 2012 Quarterly Platform Report (available exclusively to FDx Advisors clients), our due diligence screening process consists of more than 20 criteria, covering aspects such as management tenure, performance history, sources of alpha, and risk management controls. Should a manager under review appear deficient across any of these criteria, the research group may issue a Non-Approval recommendation. This stringent process assists in maintaining a robust offering of products available to FolioDynamix and FDx Advisors’ clients. According to the FDx Platform Scorecard, published quarterly in our Platform Report issued to our clients, actively-managed strategies on the FDx Advisors Approved list have outperformed their respective benchmarks by a mean value of 190 bps per trailing year since inception, with an average of 130 basis points stemming from stock selection skill.
Liken researching an active manager to drafting a quarterback in your fantasy league. Studies bear out that the quarterback you draft matters with regard to your team’s winning percentage. Conversely, exhibits which effectively map t-stats of players as a measure of weekly point production consistency can illustrate that none of the NFL’s 32 starting kickers are likely to sniff the list of elite players a fantasy owner can count on for predictable point production. Said more succinctly, researching kickers for your draft is a waste of resources because the end-of-season results will be random.
The salient point, however, is that while both actively-managed and passively-managed portfolios can be appropriate for suiting specific investor goals, a consultant’s resources are disproportionately allocated in focusing on active managers more than passively-managed index funds or ETFs, akin to the fact that your time is better spent poring over quarterback rankings than it would be on kickers.
Granted, a fantasy football player’s objective is simply to maximize points scored, whereas long-term investment goals vary on a client-by-client basis. Customizing portfolios requires deeper insight and knowledge of a client’s investment objectives, and passive vehicles can be an attractive option to supplement portfolios in various formats, be it a 401k or via the ever-expanding universe of ETFs.
FDx Advisors – a subsidiary of FolioDynamix – offers consulting services to customers, utilizing expertise and sophisticated analytics tools to create and propose optimized portfolios in accordance with the client’s investment objectives. If you’re interested in advisory consulting, looking to expand your current investment research base or augment your research team, contact FDx Advisors today to get started.
And please, do yourself a favor in your upcoming draft: This year, let someone else be “that guy” who drafts the top-rated kicker five rounds too early.