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130/30 Portfolios.

In a low return, sideways drift environment, some Investment Managers may be challenged to add value beyond the benchmark index. Individual Investors can access index-like returns through lower-cost ETFs while Institutional Investors can access index-like returns through massive index pools. So Investment Managers will have to be more creative to retain and attract investors.

In addition to Low Volatility Portfolio’s, another of the more interesting (new … ish) innovations are 130/30 Portfolios.

The 130/30 portfolio concept is described by ‘Roger Clarke of Analytic Investors in “Squeeze Play”, CFA magazine Nov – Dec 2010.’

One of the most binding constraints when managing against a cap-weighted index is not being able to short a security. You can underweight it relative to the benchmark as far as a zero weight, but that may not be a very sizable underweight position for smaller securities in the benchmark. So if you really don’t like it and you think it’s over-valued, you might actually like to underweight it further – you would need to short the security. Imposing the long-only constraint doesn’t allow you to use all of the information in your ranking system very efficiently. Out of that realization came the whole notion of the 130/30 short-extension strategies, where the investor is long 130 percent and short 30 percent of the net value of the portfolio.”

By allowing a manager to make full use of his stock ranking process, the investor can take advantage of both the best ideas and the worst. A managers long only skill is ‘extended’ by (ideally, modest) short-selling.

130/30 strategies are, at times, called core plus, enhanced equity, long-short extension … etc. A more conservative … less leverage … version might be 120/20 portfolios which combine long positions of 120% of the original investment with 20% in short positions. The portfolio is still diversified and maintains a net market exposure of 100%.

A recent Thane Stenner article in the globe and mail described 130/30 portfolios “… picture myself as a hockey player. “Imagine other teams were allowed to skate forward and backward, but you could only skate forward”.

There are only a few (easily found) ETFs that capture the 130/30 strategy.

(HAH) Horizons AlphaPro S&P/TSX 60 130/30™ ETF. The Performance track record is only available since inception on February 9, 2010.

(CSM) ProShares (Credit Suisse) 130/30 ETF. (Also ProShares RALS ProShares RAFI Long/Short).

(JFT) KEYnotes First Trust Enhanced 130/30 Large cap ETN (Exchange Traded Note). JFT Tracks the First Trust Enhanced 130/30 Large Cap Index. (This is an equal-weighted, total return index).

MER on all are minimum 0.95% and more likely ~1.70%.

Last Friday, Volume was zero on HAH and JFT.

None have much of a track record.

While interesting, Individual Investors ought to give ETFs that employ this strategy time to develop.

Next time?

Selfish money.

Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan

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