The challenge of creating and preserving a legacy in today’s investment landscape is as difficult now as it has ever been. Surely, there appears to be no lack of concerns regarding the investment markets and the relative health of the world economy. Rather, we seem to be facing a myriad of obstacles. From the bursting of the real estate bubble, to unsustainable government deficits, underfunded social programs, untenably high unemployment, record high bond prices with record low yields, etc. With this less than optimistic economic backdrop, where is an investor supposed to place their hard earned savings for long term growth and preservation of capital?
Over little more than a decade investors have experienced not one, but two severe US equity market declines of greater than 50% from peak to trough. At the same time, many have lost as much as 50% or more in the value of their home! During the average recession equity markets in the US drop by 40%. Having endured so much in recent years, I fear the average individual investor will not have the intestinal fortitude to hang in there when our next crisis arises.
Despite these challenges and all that we have experienced in recent years, the greater investment community continues to hold on to age old investment practices that over time have proven highly fallible, and certainly have done little to shield investors from experiencing significant losses. Investors have begun to lose confidence in the process. On the periphery, for those keen to our changing landscape, we are witnessing a Renaissance. The investment world is changing, as are the vehicles available to us to execute investment strategies that were previously impossible to implement.
According to Morningstar, “Exchange Traded Funds (ETFs) continue to command more incremental investment dollars from advisors and investors. For the one-year ended Dec. 31, 2011 Morningstar estimates that net inflows to ETFs were $121 billion compared with $56 billion for open-end mutual funds.” Within the ETF segment of the market, the most rapidly growing category is in Managed ETF Portfolios; with an estimated growth for the year ending Dec. 31, 2011 of 43% year over year.
But why is the Managed ETF Portfolios segment of the market growing so rapidly? The answer is simple: many of the best tactical managers in this segment of the industry have been able to post superior risk adjusted returns, in comparison to their long only or more traditional asset managers. ETFs provide investors with liquidity, transparency, low cost, and broad diversification. The construct of a portfolio can be dramatically changed with only a handful of trades. This provides ETF investment portfolio managers with the opportunity to implement tactical allocation shifts that can be utilized to side step prolonged declines in the investment markets; protecting the portfolio from incurring a permanent impairment of capital.
What was previously impossible is now possible. It is easy to see that this Renaissance in how we as investors mitigate risk and generate long term growth of capital is still very much in its infancy. What we are witnessing is a challenge to traditional conventions, and one that can provide investors with a more practical engine for long term sustainable growth.
Matthew P. Erickson
LEGACY Capital Partners
LCP Tactical – Senior Portfolio Manager