Scott Burns: An actively-managed mutual fund with an ETF twist. Hi, there. I'm Scott Burns, director of ETF research. Joining me today is Rob Stein, portfolio manager of the Astor Long Short ETF mutual fund. And the ticker on that fund is ASTIX. Rob, thanks for joining me.
Rob Stein: Thank you, Scott.
Burns: I think one of the most growing trends right now in the mutual fund world is actually mutual fund managers buying ETFs and generally using more of a sector theme or a macro theme. Talk to me a little bit about the Astor Long/Short ETF Fund.
Stein: Sure. And as you mentioned, we only buy ETFs. We think for our philosophy, which is an economic-based philosophy, selecting sectors that have a high probability of appreciating is much easier for us than selecting a stock and predicting a price target.
Burns: So it's easier than a stock, perhaps, but what's the secret? How do we understand? What's your method for figuring out what's the ETF that's going to appreciate?
Stein: Sure. As an economist starting my career at the Federal Reserve under the Volcker administration, we notice that employment trends and output trends really drive economic activity. What we essentially do is we look at the employment trends, and we buy the ETF that lines up with the sector that is adding the most jobs.
Burns: Wow. It seems pretty simple.
Stein: Sure. And then we check the GDP, the output trends. And if a sector was adding jobs and increasing its output, we gave it a buy rating, so to speak. And then we'd create a portfolio of the least-correlating ETFs that meet that criteria.
Burns: OK. So what do you mean by least-correlated? Maybe explain that a little bit.
Stein: Sure. If two things are moving up and down at a very similar rate, we consider that redundant exposure. Also, additional risk.
So we try to look for sectors that don't move lockstep with one another, but are experiencing the same economic fundamentals that we would consider ripe for appreciation.Read Full Transcript
Burns: I've got you. So if, say, technology was adding jobs and growing GDP and biotech was adding jobs and growing GDP, you wouldn't double up on those. You would kind of mix that together?
Stein: Correct. And we do own the QQQ, and we do own the IBB, which is a technology and biotech ETF.
Burns: Right. It's like I read your mind. [laughs]
Stein: Either that, or you noticed the employment trends are growing.
Burns: There is that, too. I'm not an economist, but I do pay attention to these things. So, when do you decide to sell or trim back a position?
Stein: Sure. And we've been doing this for 10 years on our SMA [separately managed account] portfolios with some fairly decent success with it. We look at the report every month, and we measure the correlation analysis every quarter and when we reach a particular criteria, we will enter it into the portfolio.
As the correlation changes, we would reduce if the correlation gets too high or if they reach certain triggers. The portfolio is set based on a percentage of holdings, a percentage of weightings based on the economic cycles.
Burns: Right. Now, I know we're talked about the performance more on the SMA side, because the mutual fund is pretty new. On the SMA side, I know you managed to make money in 2008. You know, what was the real secret to that?
Stein: Sure. And 2008 was identifying that there was a contraction beginning at the early part of the year. In January, February, and March we lost 300,000 then 400,000 then 500,000 jobs respectively, and GDP was starting to contract.
So we looked at the portfolio and said, "Gee, there isn't anything here that really has a chance of being up towards the ends of the year," and we purchased an inverse ETF. An inverse ETF goes up when the market goes down.
Burns: A single inverse, or were you using leverage?
Stein: Only the single inverse, and only on the broad averages, the S&P or the Nasdaq.
And then we found sectors that had lower correlation to the overall market like the GLD, which was the gold ETF, and certain currency ETFs as well. We did have some long exposure in ETFs that were a drag on the portfolio, but we were very pleased with the return in 2008. But Scott, actually the return in 2009 was something we were more proud of.
Burns: More proud than you making money in 2008? Wow.
Stein: Well, we actually broke even, lost a little in 2008. Did somewhere around zero. But because it was so challenging in 2008, running for cover was the obvious move.
Stein: But finding sectors to invest in in 2009 while you had the fresh wounds of 2008, the shock, was I think the bigger challenge, to actually step into the market. And we did that and had, you know, high double-digit returns. We were pleased with it.
Burns: Well, congratulations on that. The portfolio sounds very intriguing. I hope people check it out. I know I've looked at it. And you know, sometimes the simplest strategies are the best.
Stein: Amen to that. Keep it simple.
Burns: So thanks for joining me, Rob.
Stein: Thank you, Scott.
Burns: I'm Scott Burns, director of ETF research for Morningstar. For this and other ETF news, data, and tools, please check out Morningstar's ETF center on morningstar.com and Morningstar's ETFInvestor newsletter.