By Guest Blogger Doug Rowat
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Hockey used to be so easy.
Long ago, how good an NHL player was could be summed up with two data points: goals and assists. Maybe throw in penalty minutes to get a flavour for a players’ toughness and you had all you needed. In the past, the cartoons on the backs of hockey cards actually meant as much as the ‘data’. It was a simpler time.
O Captain, My Captain
Source: Google Images
Today, of course, the game has changed enormously. I now have to Google almost every advanced hockey statistic: Corsi, Fenwick, deltaSOT, DIGR, GVT, LAEGP, etc. For that last one, even Googling it—Location-Adjusted Expected-Goals Percentage—doesn’t help me.
Simply put, hockey stats have become so complex that they’re a complete mystery to most fans.
However, I despair any NHL general manager who ignores these metrics and attempts to build a team based purely on ‘gut feel’ or scouting reports. To be successful these days, general managers have to crunch numbers. And most NHL teams now employ full-time data-analytics specialists.
This data-driven approach to hockey is, of course, not dissimilar to portfolio management. For instance, it might feel like a bear market or recession is coming, but how I feel isn’t useful in terms of making an accurate forecast. The data must confirm my suspicions. Similarly with ETF selection, the numbers HAVE to support the inclusion of new positions in our portfolios, just as advanced hockey stats must justify, say, the selection of a particular draft pick.
To illustrate, let’s start with some broad, hypothetical forecasts: a bearish view of the energy sector and expectations for more overall market volatility. Therefore, we want to reflect these views with our choice of a Canadian equity ETF. Naturally, data analysis is also involved in making these broader forecasts, but let’s take the bigger-picture conclusions for granted and focus purely on the next step: the ETF selection itself. This process might be similar to a general manager who concludes that he needs a new second-line center, but must now make the correct trade or call-up from the minors.
Let’s also assume that it’s a simple swap: a Canadian equity ETF that we currently hold for another Canadian equity ETF that better reflects our new outlook. In this case, we need an ETF that fits with our overall thesis of a negative energy-sector outlook and expectations for more market volatility.
We typically begin with some simple screens in Bloomberg to narrow the enormous ETF universe—there are, for instance, more than 800 Canada-domiciled ETFs trading in the market presently. However, once we’ve refined the universe, then the more detailed one-on-one comparisons can begin. These initial comparisons might look something like this, first based on the ETFs’ energy-sector exposure and longer-term volatility:
ETF point-by-point comparison – step 1
Source: Bloomberg, Turner Investments
The point-by-point comparisons would continue until a fuller picture is realized. We look at more variables than what are shown below, but the below gives a rough example of the comparative process. The preponderance of ‘green’ for the potential replacement ETF suggests that further investigation is definitely warranted:
ETF point-by-point comparison – step 2
Source: Bloomberg, Turner Investments
Ultimately, we might end up with a short-list of 2-3 replacement candidates. The next steps would be to read more about these ETFs (websites, prospectuses, etc.) and contact each of the ETF providers to ensure that there aren’t any hidden features that we’re unaware of. It’s also useful to make all the ETF providers aware of the other options that we’re considering. This allows them the opportunity to punch holes in their competitors’ arguments, which sheds even more light on the best potential candidate.
More often than not, the ETF we select will be the correct choice, but regardless of the outcome, it’s a defensible selection, one well supported by the data and due diligence.
We also don’t lose sight of the fact that talking to real people at the various ETF companies can be just as important as the number-crunching. Getting their insight, which is largely unbiased because we’ve developed good long-term relationships, provides additional valuable information.
The data analysis itself will only take us so far. The perspectives of real people matter too.
And proof that numbers aren’t everything? I recently had a chance to meet the guy on the hockey card. And meeting one of the greatest Maple Leaf captains of all time?
Well, it’s hard to put a number on that.
Rowat meets Sitt
Source: Doug Rowat
Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.