This story was originally published in May 2012.
Portfolio managers can learn from hockey. Previously, we’ve discussed balanced and aggressive attacks for neutral and positive markets, and the neutral-zone trap to defend against potentially hostile markets. This month we address the “chip and chase” and the last line of defence, goaltending.
Low-volatility chip and chase
Playing the puck deep into the opponent’s end and quickly pursuing it involves risk. Giving up control may award your opponent with possession. Some risk is mitigated by positioning so deep in the opponents’ end. A low-volatility market is perfect for taking such risks. But you need good speed and solid forechecking.
Gordie Howe and Bobby Hull rarely employed this approach; Jagr, Malkin, and Crosby use it infrequently. However, the Canucks’ line of Alex Burrows and the Sedin brothers—who don’t mind banging bodies in the corners—are extremely effective in frustrating and wearing down opponents with their “cycle”-type offence.
The “cycle” approach is like identifying uncorrelated asset classes—some will do well, while others won’t. Equities, commodities and bonds are three good examples (see “Equities, commodities, bonds,” below). Someone should always be open for a shot or a pass.
Equities, commodities, bonds
|Broad-based equities||Broad-based commodities||Broad-based Canadian bonds|
|iShares MSCI World (XWD)||iShares Broad Commodity (CBR)||Vanguard Canadian Aggregate Bond (VAB)|
|Vanguard MSCI US Broad Market (VUS)||iShares DEX Universe (XBB)|
|iShares S&P/TSX Capped Comp. (XIC)||BMO Aggregate Bond (ZAG)|
Yet asset correlations aren’t static. The relationship between stocks, bonds and commodities will change over time and must be watched carefully, particularly when volatility is high or rising. Other aspects of the chip and chase are similar to the 2-1-2 structure described in the first article of this series (see “ETF tips from the rink,”).
Last line of defence
Recent market volatility has shown that cash or short-term fixed-income instruments are occasionally the only safe havens. Diversification simply fails to control risk during periods of high volatility.
In a low-interest-rate environment, this is an even more painful realization. If investing time horizons are long—10 years or more—trying to rebalance to a fixed mix may pay off. For some individual investors, however, there is no guarantee asset-class returns will approach the long-term averages that underpin their financial plans in time to skate them back on side. Sometimes, we must rely on that last line of defence—goaltending.
Goaltending has evolved, as have the choices in short-term fixed-income offerings. Today, most goalies use the “butterfly” technique.They spend lots of time on their knees with legs splayed outward to maximize ice-level net coverage.