When I first wrote about the introduction of the Horizon AlphaPro Managed S&P/TSX 60 ETF [TSX: HAX] (If You Seek Alpha, You May Want to Look Elsewhere, Jan. 13, 2009), I was skeptical that the fund’s tactical allocation can deliver outperformance. The skepticism was based on the belief that it is hard to outperform the benchmarks when saddled with high fees (compared to other ETFs) and high turnover.

Sure enough, 2009 was a bad year for HAX. The ETF returned 5.94% compared to 21.33% for the index. The ETF’s MER in its first year came in at 1.05% and the fund’s 340% portfolio turnover rate cost investors another 0.47% in trading expenses. The fund manager offers this explanation for the underperformance in their 2009 annual report (available here on SEDAR):

At the beginning of 2009, the ETF was about 14% underweight in the Financial sector and had less than 3% difference in all other sectors. In addition, there was a 5% cash position in the ETF.

The cash position was increased gradually during the first three months of 2009 since the technical picture of the markets remained weak. The ETF slightly outperformed the market during this period.

The cash position was about 35% at the beginning of March. Since less money was put to work, the swift rally that started the following weeks significantly hurt the relative performance of the ETF versus the market, even though the cash position was gradually reduced to less than 2% by early June. In addition, the main underweight sector was still the Financials while most financial stocks did well during this period.

Translation: We bet against those darned banks and they shot up like a rocket (In 2009, financials returned close to 50% between March and early June). So, sorry.

HAX’s performance thus far is 2010 isn’t much to write about either. In the first six months of the year, the fund lost 6.5% compared to a loss of 3.3% for the index.

This article has 5 comments

  1. Maybe I’m mistaken but I thought the Horizon series of funds had the 2x leverage thing happening. Perhaps it’s only some of their funds. I would only consider Horizon’s funds if I were to short the market, but so far in my investing life, I haven’t been daring enough to short any market.

  2. Canadian Capitalist

    @Phil: There is no leverage in HAX. It tries to beat the benchmark (S&P/TSX 60) by using technical, cyclical and sentiment indicators.

    I agree with you on shorting. It isn’t for the faint hearted though shorting indexes may not be as ruinous as shorting individual stocks. Also, instead of shorting, I prefer to sell and put the proceeds elsewhere.

  3. CC’s comments remind me of what Peter Lynch said in “One Up on Wall Street”. He said he had never shorted a stock or bought options, and wouldn’t know how. He was one of the greatest fund managers of all time, so I took his advice and avoided shorting and options. I’ve never really regretted never shorting a stock, though I have regretted not buying a few (and actually buying some bad ones too, of course).

    • Canadian Capitalist

      @gene: Shorting is a very difficult way to invest. I can’t imagine how people like Jim Chanos manage it. After all, markets can remain irrational for a very long time. So, no shorting or options or fancy strategies for me either, at least, none in the plans.

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