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If You Seek Alpha, You May Want to Look Elsewhere…

January 13th, 2009 · 14 Comments

The Wealthy Boomer recently reported the introduction of Horizon BetaPro’s first actively-traded ETF in Canada: the Horizon AlphaPro Managed S&P/TSX 60 ETF (ticker symbol: HAX). HAX, which charges a management fee of 0.70% plus 20% of the amount by which the ETF outperforms the S&P/TSX 60 Index aims to beat the index by following a tactical asset allocation strategy:

In order to improve portfolio performance relative to an index or benchmark, the Investment Manager will use both top-down and bottom-up research to allocate proportionately more of the ETF’s portfolio to stronger equity sectors and issuers and allocate proportionately less of the ETF’s portfolio to weaker equity sectors and issuers. This research is based on technical, cyclical and sentiment indicators that may include moving averages, trend lines, volumes, price patterns, and point and figure charts.

The top-down research is used to find equity sectors which are likely to outperform or under-perform the index or benchmark. The bottom-up research is used to select and assign appropriate weights to those securities with the most positive momentum within each sector.

The ETF is the third avatar for the underlying fund, which began life as the Accumulus Talisman Fund and then changed its name to the Jov Talisman Fund. The past performance record (available through SEDAR, search for “Jov Talisman”) hasn’t been much to write about. In the three years ending 2007, the fund returned 26.84%, -11.01% and 8.13% compared to 26.29%, 19.16% and 8.85% for the benchmark index. The 2008 record isn’t available but Google’s cached GlobeFund page reveals a loss of -27.69% for 1 year as of November 30, 2008 compared to -30.27% for the index.

If past performance isn’t a good predictor of future returns, two metrics are: fees and turnover. On this score, investors might be forgiven for being wary of the new ETF. HAX’s management fee of 0.70%, while a significant improvement over the 1.95% charged in the past for the mutual fund versions, doesn’t include operating expenses. Assuming that operating expenses averaged around 1% (I’m guessing here because according to the Report of Fund Performance, the Series-A funds had a MER ranging from 3.09% to 4.35% before waivers or absorptions), investors can expect the MER for HAX to weigh in at a hefty 1.7%. Investors should also note the fund’s rather high turnover — ranging from 40.44% in 2004 to 85.85% in 2006 (when the fund underperformed the benchmark index by 30%) — and realize that the after-tax performance of HAX in taxable accounts is likely to be horrible.

The AlphaPro fund family is marketed with the tag line, “Every portfolio needs alpha”. If you believe that, you may want to look elsewhere for the elusive alpha: a money manager who charges low fees and whose funds have very low turnover, for instance.

Editor’s Note: The initial version of the post called HAX the “first actively-traded ETF in Canada”. It has been corrected.

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14 responses so far ↓

  • 1 Charles // Jan 13, 2009 at 2:30 am

    “a management fee of 0.70% plus 20% of the amount by which the ETF outperforms the S&P/TSX 60 Index…”

    So if the TSX drops by 10% in one year, and the ETF outperforms by losing only 5%, they get to keep an extra 1% even though they still lost my money? Lovely.

  • 2 Fred // Jan 13, 2009 at 6:16 am

    I’m fairly certain this product is going to be a hard sell. I wonder if I should issue them a challenge to beat my HXU/XSB model. This model buys Horizons Beta Pro S&P/TSX 60 Bull (HXU) units on a long signal and then switches to iShares Short Term Bond (XSB) when a get-out-of-the-market signal is generated. The compound annual return is 24.4% since the model started on 09/05/07. Even better I could challenge them to beat my US model which is based on Proshares Ultra QQQ and Proshares Short QQQ which has a compound annual return of 53.3% since 08/02/06.

  • 3 Andrew Baechler // Jan 13, 2009 at 9:14 am

    What I find most curious about Betapro launching the above ETF is the fact that Betapro’s President, Howard J. Atkinson, is the author of The New Investment Frontier series of books. In his books, Howard covers a number of the points that are regularly discussed on this site such as:

    1. Active managers generally underperform their benchmark index
    2. Lack of persistent manager outperformance
    3. Importance of tax and fee efficiency

  • 4 Dividend Growth Investor // Jan 13, 2009 at 11:13 am

    I seriously doubt that this etf will beat its benchmark over the long haul. I do not like annul fees on funds. That’s why I buy my own stocks using my ten free trades/month from zecco.

  • 5 Canadian Capitalist // Jan 13, 2009 at 11:22 am

    Charles: I think the 20% bonus may only apply when the return is positive but I could be wrong.

    Fred: You know my views on market timers as a group. It is entirely possible that you have invented a better mouse trap but I wouldn’t bet money on it :) (though I wish I had!).

    Andrew: The charitable explanation is Mr. Atkinson has changed his mind. The success of BetaPro funds may have something to do with the new direction.

  • 6 Charles // Jan 13, 2009 at 11:47 am

    @Dividend Growth Investor: While I appreciate your input, it is a cruel and utter tease to keep reminding Canadians of brokerage options we don’t have. None of our online brokerages have free stock trades, and we are not allowed to sign up with American sites. And I’ve seen you make comments like this on Canadian blogs before, too ;)

  • 7 Fred // Jan 13, 2009 at 11:48 am

    CC:

    I haven’t read the prospectus but I think in the industry a fee of 20% of outperformance is normal with no bonus when there is a loss.

  • 8 Matt Simms // Jan 13, 2009 at 12:46 pm

    There should be no fees when there is a loss.

  • 9 Silicon Prairie // Jan 13, 2009 at 3:02 pm

    It’s interesting to note that all it talks about is finding profitable companies and upward momentum – no mention of whether they consider if they’re paying a fair price for the investment, or one that actually leaves room for future growth. In truth if investors buy into this because they like what they hear they are as much to blame as the managers.

    There is one good thing though – the growing number of actively managed ETFs may give investors more opportunities to short them or make other trades to profit from the performance gap. Since the underperformance of active management is one of the most consistent effects in finance the emergence of these new ETFs could be a good thing.

  • 10 EconStudent // Jan 13, 2009 at 5:29 pm

    I think the intention here is to create a basic hedge fund in the form of etf. If you are not comfortable with the notion of hedge funds, you should not touch this etf either. My guess is that a fundamental index might work a bit better.

  • 11 Dillon // Jan 13, 2009 at 6:36 pm

    I think the old Accumulus Talisman fund was managed by Ross Healy. The new HAX ETF will apparently be managed based on inputs from Ron Meisels. If you watch BNN, you might be aware that the investment style of these two individuals is very different (Healy relies on fundamental analysis whereas Meisels focuses on technical analysis). Because of this change, I expect the history of this particular fund/ETF is probably meaningless.

    The fee structure, however, is not meaningless. As your post implies, investors would be well served to avoid HAX.

  • 12 Canadian Capitalist // Jan 14, 2009 at 9:30 am

    Dillion: Good point. Ross Healy was indeed the advisor to the old fund but the fund objectives are similar. Reading the past annual reports indicates that the fund employed TA and market timing in the past as well. Even if the advisor had been the same, I would discount past performance, which is a poor indicator of future returns.

  • 13 An Example of the Perils of Tactical Asset Allocation // Jan 14, 2009 at 10:20 am

    [...] Contact ← If You Seek Alpha, You May Want to Look Elsewhere… [...]

  • 14 Thicken My Wallet » Blog Archive » Are ETF’s contracting Mutual Fund-itis? // Feb 12, 2009 at 4:59 am

    [...] One of the most egregious of these offenders appears to be an actively traded ETF with a 0.70% MER and a 0.20% potential bonus to the manager. As Canadian Capitalist reported, this ETF appears to be a mutual fund in ETF’s clothing. [...]

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