Active investment management’s weekly magazine for fee-based advisors

Putting the right team on the field

by May 25, 2022UpClose

Putting the right team on the field

by May 25, 2022UpClose

Having a well-balanced and diversified “team” is as important in strategic portfolio construction as it is in building a winning baseball organization.

I​’ve always been a huge baseball fan—whether as a player myself or following a Major League Baseball (MLB) team. My “fandom” goes back to about age 6, when I started to collect baseball cards and became a “Phillie Phanatic” (though that character did not yet officially exist). I still have much of my baseball card collection, carefully filed in a binder.

The Phillies had some great teams when I was growing up, but never won the World Series when I was following them. In fact, they played a record 77 consecutive seasons before they won their first World Series in 1980. They are still remembered for one of baseball’s most notable collapses in 1964. The team was 90-60 on September 20, with a six-and-a-half-game lead in the pennant race with 12 games to play. The Phillies lost 10 agonizing games in a row and finished one game out of first place.

My family moved to the New York area the next year, where I continued to keep an eye on the Phillies, but also started to follow both the Mets and the Yankees. I eventually “converted” to being a Yankees fan. This was not too hard to do, with the never-dull teams that included Reggie Jackson, Ron Guidry, Thurman Munson, and manager Billy Martin. The Yankees won two World Series, in 1977 and 1978, before entering a disappointing period from 1982 to 1994. In 1996, they started their amazing run of four World Series championships in five years.

Fast forward to the present-day Yankees team.

The Yankees have not played in a World Series since 2009, when they beat, coincidentally, the Phillies for the championship. By Yankee fan standards, that is an inexcusably long period without a championship, let alone a World Series appearance. They have also had too many frustrating and short playoff runs during that period.

The good news is that fan optimism is running high for this season—with the Yankees off to an impressive start. Time will tell if that optimism will be rewarded.

Constructing the right team approach

One of the main complaints about the Yankees for more than a decade has centered on a team lacking overall balance and complementary parts.

Fans and analysts alike have voiced their displeasure with many elements of the team: “Too many right-handed batters.” “Poor defense up the middle.” “Too much reliance on the bullpen.” “Too many power hitters who strike out and hit for low average.” “Poor situational hitting.”

Without going into all the details, the Yankees made several major changes for this season, and some key players have come back from injuries. Many—but not all—of the previous weaknesses appear to have been addressed, with a more cohesive team that can win games with both power and finesse across all disciplines.

To paraphrase longtime Yankees radio announcer John Sterling, “That is what great teams do. They always have someone stepping up and picking up the rest of the team.” If five players are playing just OK, another four will start performing superbly. It is a pretty well-balanced team in that respect, where periods of individual inconsistency do not end up hurting the overall winning record of the team. The sum of the parts overcomes individual performance during the course of the season.

Having the right ‘team’ for an investment portfolio

As I was working on this article, I was struck by the similarity between the Yankees’ story and some principles of sound portfolio construction.

I think this is particularly important in a year like 2022, with many macro headwinds, volatile markets, and—according to Barron’s—the worst four-month S&P 500 start to a year since 1939. (However, the author also points out that “there have been 25 four-month periods since 1992 when the S&P 500 dropped 10% or more.”)

Financial advisors we have interviewed for Proactive Advisor Magazine frequently talk about using a combination of actively managed strategies that are meant to work together (with different performance characteristics) as a cohesive portfolio over full market cycles. The “sum of the parts,” they also say, can seek to achieve competitive risk-adjusted returns throughout different investment conditions.

One advisor puts it this way, “Portfolios should be well-diversified, and client assets might be earmarked for different roles, using different asset classes, types of strategies, and time frames. … Assets classes and strategies should seek not to be highly correlated—we all saw how that played out in the last two market crashes. Strategic diversification will obviously not remove all risk, but it can have a major impact on client portfolios.”

Another advisor says, “A cornerstone of my active management approach is offering a very wide potential combination of diversified strategies. In line with this overall risk-managed active approach, l will generally use several different noncorrelated strategies, in several different asset classes. While not every strategy ‘will fire on all cylinders’ at the same time, that is exactly the point.”

Flexible Plan Investments’ president, Jerry Wagner, who has authored several articles for this publication, has also commented about this same aspect of diversification. He has said, “If every strategy in a portfolio is going up or down at the same time, there is a high probability that the portfolio is not properly diversified.”

Mr. Wagner also notes that dynamic strategic diversification can be responsive to different market environments, employing higher portfolio allocations to strategic approaches that tend to perform better in a specific type of environment.

For example, a dynamic, risk-managed approach can seek to do the following:​

  • Allocate more to trend-following, high-beta, and leveraged strategies in rising, bullish markets.

  • Allocate more to inverse strategies, leveraged inverse strategies, or strategies with exposure to defensive asset classes during falling, bearish markets.

  • Allocate more to mean-reversion or pattern-recognition strategies during sideways markets, taking advantage of volatility and market swings.

The ultimate point? As one of the advisors notes, when strategies are “objectively quantified” and work in combination in a well-diversified portfolio, “emotion and ego can be put aside for the most part, and clients can more freely allow their strategies to perform as designed, without constant second-guessing.”

While it is always difficult for baseball fans, and investors, to not get caught up in the emotion of day-to-day action, it is a “long season” for both. All that really counts is achieving their respective end objectives.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.

New this week:

David Wismer is editor of Proactive Advisor Magazine. Mr. Wismer has deep experience in the communications field and content/editorial development. He has worked across many financial-services categories, including asset management, banking, insurance, financial media, exchange-traded products, and wealth management.

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