In hockey, as in portfolio management, offence is not always the best defence. A balanced two-way capability is usually most effective.
Constructing a portfolio, like drafting and coaching a hockey team, demands a fundamental understanding of what it takes to win. Portfolios built strictly to maximize gains are akin to lineups consisting of five forwards.
Any coach knows that’s risky. Investment advisors could learn something from hockey tactics, particularly when facing big volatile markets that can slam any game plan into the boards.
Getting the right lineup on the ice at the right time is a coach’s primary job. Here are two ideas to help exploit game situations and manage tactically for clients.
Battle for control
If the puck is in the neutral zone and control is at issue — trendless market, lacklustre economy — a balanced attack with a defensive emphasis may be suitable.
One strategy involves a 1-2-2 with one forechecking forward, two supporting forwards and two defensive players back. This approach was popular with Jacques Lemaire when he coached the Wild and Devils.
Diversified exposure to global and international economic growth is a good objective for the forechecking forward position. The support can be broad Canadian and U.S. equity exposure (see “1-2-2 Forecheck,” below).
1-2-2 Forecheck: Portfolio Strategy A
|Forechecking forward||Supporting forwards||Defencemen|
|iShares MSCI World (XWD)||iShares S&P/TSX Capped Composite (XIC)||Claymore 1-to-10 year Laddered Government Bond (CLG)|
|Vanguard MSCI EAFE (VEE)||Horizons S&P/TSX 60 (HXT)||Vanguard Canadian Aggregate Bond (VAB)|
|BMO International Equity (ZDM)||iShares S&P/TSX 60 Index (XIU)||iShares DEX Universe Bond (XBB)|
|iShares MSCI EAFE (XIN)||BMO Dow Jones Canada Titans (ZCN)||Claymore 1-to-5-year Laddered Corporate Bond (CBO)|
|Vanguard MSCI US Broad Market (VUS)||Powershares 1-to-5-year Laddered Investment Grade Corp. (PSB)|
There’s a lot of choice for defence. Mid-term and laddered options are versatile and broad-based bond ETFs can anchor the blue line. Short-target maturity ETFs like RBC Target 2017 (RQE) and short-term index-based ETFs could act like a hard-checking defence that minimizes risk around the net.
When playing opportunistically — low volatility, upward trending stock market, and a positive economic backdrop — coaches may favour an aggressive structure (see “Aggressive 2-1-2,” below) with two penetrating forwards on forecheck, supported by a forward and a rushing pair on defence. This tactic makes best use of goal-scoring skills and was favoured by Scotty Bowman with the Habs in the 1970s and Mike Babcock with the current Red Wings. (Ironically, Lemaire played on many Bowman teams!)
Attacking forwards can include aggressive ETFs for broad scoring punch, including emerging markets, growth, and small-cap strategies — think Guy Lafleur and Evgeni Malkin.
Aggressive 2-1-2: Portfolio Strategy B
|Attacking forwards||Supporting forwards||Defencemen|
|Vanguard MSCI Emerging Markets (VEE)||Powershares QQQ (QQC)||Claymore Advantaged High-Yield Bond (CHB)|
|iShares Dow Jones Canada Select Growth (XCG)||iShares NASDAQ 100 (XQQ)||iShares US High-Yield Bond (XHY)|
|iShares S&P/TSX Small-Cap (XCS)||iShares Russell 2000 (XSU)||Powershares Fundamental High-Yield Corporate (PFH)|
|Claymore BRIC (CBQ)||BMO NASDAQ 100 (ZQQ)||BMO High-Yield Corporate Bond (ZHY)|
|BMO Emerging Markets (ZEM)||Claymore Advantaged Convertible Bond (CVD)|
|Claymore Broad Emerging Markets (CWO)||Convertible Bond XTF (CXF)|
|Horizons North American Growth (HAW)||iShares JP Morgan Emerging Markets Bond (XEB)|
More concentrated exposure from country, region or industry-specific ETFs is also possible, like BMO Junior Oil (ZJO), BMO Junior Gas (ZJN), iShares Latin America (XLA), Claymore China (CHI), iShares MSCI Brazil (XBZ), iShares S&P CNX Nifty India (XID).
Broadly based exposure to technology-rich NASDAQ or Russell 2000 ETFs offers good support. Rushing defencemen with offensive potential like Bobby Orr, or currently Drew Doughty (Kings) and Kris Letang (Penguins), include high-yield and convertible bond funds (see “Defend Your Portfolio,” below).
Defend your portfolio
Long-term corporate bond funds may be good for a quick shift if you expect corporate-government yield spreads to narrow — iShares IG Corporate Bond (XIG), BMO Long Corporate Bond (ZLC), Horizons Corporate Bond (HAB) and any of the longer-dated target bond funds RBC Target 2020 or 2019 (RQH, RQG), BMO 2020 or 2025 Corporate Bond (ZXC, ZXD).
This is clearly an aggressive lineup with obvious risks. If the market turns nasty, the portfolio is vulnerable and may be caught “up ice.” The only stopper is the goaltender (cash and cash equivalents). Nimbleness is required to shift sufficient assets to cash if this occurs.
Controlling the puck is important, but not always possible. Similarly, controlling portfolio risk is essential, but sometimes the market dominates — usually on the downside. Having specific tactics for different market environments can be an effective way to respond.
Thanks to Dr. Jim Sugiyama, hockey savant, for his valuable contribution to this article.