(April 25 – 16:15 ET) – By now you’ve likely seen the new ads from Spectrum Investment Management Ltd., touting a new investment method called Tactonics. No doubt you’ve also been wondering what it actually means.
Promotional material states Tactonics represents a “significant advance in modern investment methodology.”
“In our view, it’s a significant advance, if not a major breakthrough,” says Gary Corsi, president of Spectrum in Toronto.
Hyperbole aside, the Tactonics fund is a breakthrough in one sense in that it’s one of the first to be composed completely of exchange-traded funds (ETFs). As a fund of funds shop, it’s no surprise this product is coming from Spectrum.
The fund also distinguishes itself in that it isn’t beholden to any particular investment style.
“Tactonics has the flexibility to be invested in various countries, industries and styles. It could be growth, it could be value,” says Karen Bleasby, Toronto-based vice president, investments, and the manager of the fund. “One can think of the market as an aggregation of stocks, an aggregation of styles, and an aggregation of industries in various countries. At any time, any sector will be overperforming or underperforming the rest of the market. The point of Tactonics is to be on those sectors that are overperforming.”
Bleasby is responsible for developing Tactonics, the result she says of a decade’s worth of research.
It’s based on a principle discussed among fund managers and academics called “winners persistence,” basically the belief that stocks that have done well have a tendency to continue to do so.
Bleasby says short-term momentum is a documented phenomenon that can be used to identify stocks or sectors that are going to outperform in the future.
Efficient market theory — a belief that prices properly reflect rational decisions, a dominant investment sentiment of the 1970s, was undermined by some anomalies that it could not explain.
The most well-known anomaly was the January Effect — the tendency for the market to do well in that month as investors go on a buying spree after dumping under-performing stocks for tax purposes at the end of the year). The effect disappeared once it was publicized. Investors tried to arbitrage it and the once-obvious effect dissipated.
Winners persistence is another anomaly, but it hasn’t disappeared and its stability is proving to be useful as an indicator.
The currently dominant market ideology is behavioral — a belief that market prices are a result of the psychological behavior of investors — which seems to support the effect as well. It’s no surprise that a stock or sector that begins to do well will continue to do well as it picks up momentum, investors notice the uptick and pile into it.
“Investing in near term winners is a way of outperforming. The findings were overwhelmingly consistent,” says Bleasby.
Of course winners persistence only provides a clue as to which sector to invest in, so Tactonics also uses “risk metrics” to tell the managers to get out of a stock.
Underlying risk metrics is an implicit assumption that any sector one is investing in, whether it is under or over-performing, will eventually return to the mean. Measuring the standard deviation from that mean, says Bleasby, helps the manager to make judgements about when to sell.
With all the talk about moving in and out of sectors, isn’t this just market timing, that often disparaged strategy in the era of indexing?
“There are elements, but it isn’t just market timing,” says Bleasby. “Have we discovered a mathematical equation that allows someone to get into the market at points? No. We have discovered a method that allows us to ride some waves in the market.”
Riding those waves has become much easier in the wake of the explosive growth in the number of ETFs over the last year.
“The growth in availability of ETFs over the last 18 months has made this fund possible,” says Bleasby. “This is the first fund we know of in North America using ETFs as a core investment.”
Considering that ETFs can be bought and sold very inexpensively, moving quickly in and out of sectors or different countries is a for more profitable proposition than it was even a few years ago.
As it is, the fund is currently invested mainly in U.S. equities and weighted toward value investments, but that’s an anomaly of the current market and Bleasby expects that to change.
@page_break@She expects the MER to be between 2.4% and 2.5% and says Spectrum will market the fund as a core holding. That’s going to be a challenge, though, considering the investing knowledge necessary to understand how the fund works.
One of the problems, says Corsi, is that this is a complex product.
“One of the challenges will be explaining it. We’re talking about selling this through high end clients, who know something about investing,” he says.
First all-ETF fund launched
Spectrum’s Tactonics fund unique, for the moment
- By: Jeff Sanford
- April 25, 2001 April 25, 2001
- 15:15