We had the chance to chat with Paul Frank, Senior Portfolio Manager and Tactical Growth Strategy Lead at Stadion Money Management about Mutual Funds that invest in ETFs.
MutualFunds.com (MF.com) What is your background? What motivated you to create a Mutual Fund that invests in ETFs?
Paul Frank (PF) After graduating from business school in 1992, I spent a few years learning some practical perspectives at an asset management firm. Capitalizing on this experience the next step was to start managing money in separate accounts, which in 2004 led to launching a mutual fund to leverage its flexible delivery model. Still early in the development of ETFs, it was clear that low fees, intra-day trading, transparency, and growing choices made them an intriguing new way to access specific areas of the market to create the right investor exposure. Obviously, the ETF space has blossomed and matured since then. Hundreds of new options make it even more attractive today than it was back then. For instance, in 2004, we were tracking approximately 125 ETFs at a time when we were one of the first mutual funds to embrace this practically unheard of idea. Now we track over 1500.
MF.com: Many investors and fund managers already use the Sharpe ratio in their analysis. What makes your analysis different?
PF: Typically, investors who use the Sharpe Ratio are looking at static measures over very long periods of time. We use both long term and short term calculations and calculate the direction of each ETFs Sharpe Ratio. We want to own the ETFs that are compensating us fairly for the risk.
MF.com: What are the specific “Fund of Fund Structure” related risks that apply to your Mutual Fund?
PF: Instead of taking a passive approach to investing in active funds, the Stadion Tactical Growth Fund takes the opposite approach. We actively invest in passive ETFs, which is an important distinction.
MF.com: Given your benchmark and historical performance, why would you recommend your fund?
PF: First, consider that the logic of using ETFs is evidenced by their growing use and popularity for the reasons already mentioned. As for Stadion Tactical Growth, its 10 year track record makes it fairly unique in this space. Besides being competitive in the shorter term, the fund has been managed through all primary market conditions and cycles. At Stadion we focus on managing what we refer to as ‘serious money’ and believe that our defensive bias and long term results make us worth considering.
Second, as the ETF universe continues to expand, we expect access to a growing number of investment options and maybe even lower ETF fees over time.
Finally, we will continue to be discerning as more exotic ETFs are coming to market. We emphasize substance, sticking with what we trust versus what might seem ‘hot’. As of 3/31/15, our Fund held 12 ETFs comprising about 5,000 underlying securities, so it’s a fairly diversified product and we never have more than 25% invested in one particular sector.
MF.com: You have 10% allocation to Health Care and 5% allocation to Banks. What makes you feel bullish on these 2 sectors?
PF: Our portfolio allocation is a function of our internal, proprietary ETF ranking and analysis. We don’t make any macro investments decisions, so it’s not as if we’re making a bet on those two sectors. In many ways we’re sector indifferent. At the end of June, both Health Care and Banks ranked high according to our analysis.
MF.com: What are some major economic trends that you foresee on the global stage in the near future?
PF: We’re not a traditional, bottom-up, fundamental fund so we don’t make investments based on any macroeconomic or forward-looking market views. It’s very hard to time the market so it’s not something we attempt to do. But, we certainly keep a close eye on what’s taking place in the world and two issues on my mind right now are the potential slowdown in China and U.S. interest rates.
Given how large China’s economy is and how interconnected they are with other large countries, including the US, that’s something we’re monitoring closely. Greece has been in the headlines more this year, and some of that is warranted, but China is more of a concern to us. And as for something closer to home, the long-awaited rise in interest rates is something that’s probably on all investors’ minds. It’s a matter of when, not if, so we’re following that and it will be interesting to see how that plays out and the impact it could have on the U.S. dollar and other major currencies abroad.
There is no guarantee that the investment strategies will succeed, the strategies are not an indicator of future performance and investment results may vary. Performance data quoted represent past performance. Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. Stadion’s actively managed portfolios may underperform in bull markets. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data quoted. To review our most recent monthly performance, please visit www.stadionfunds.com..
An investor should consider the investment objectives, risks, and charges and expenses of the Stadion Funds carefully before investing. The prospectus contains this and other information about the Funds. A copy of the prospectus is available by calling Stadion Funds directly at(866) 383-7636 or Stadion Money Management, LLC, the investment advisor, at (800) 222-7636. The prospectus should be read carefully before investing.
Investment Objective of the Stadion Tactical Growth Fund: Seek long-term capital appreciation. The Sharpe ratio measures the excess return per unit of deviation, or risk. The index shown is defined as follows. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. All Benchmarks
composite data supplied by third party vendors, assumes re-investment of all dividends. All holdings information is provided for informational purposes only and should not be deemed as a recommendation to buy the securities mentioned. The Fund’s holdings are subject to change at any time.
There are additional costs and potential risks associated with investing in domestic and international Exchange-Traded Funds (ETFs). Investment in the Fund is subject to investment risks, including, without limitation, market risk, management style risk, risks related to “fund of funds” structure, sector risk, fixed income risk, tracking risk, risks related to ETF net asset value and market price, foreign securities risk, risks related to portfolio turnover and small capitalization companies risk. Since the Fund is a “fund of funds,” an investor will indirectly bear fees and expenses charged by the underlying ETFs and investment companies in which the Fund invests in addition to the Fund’s direct fees and expenses. There are risks associated with the potential investment of the Fund’s assets in fixed income investments, which include credit risk, interest rate risk, and maturity risk among others. These risks could affect the value of investments of the Fund, possibly causing the Fund’s share price and total return to be reduced and fluctuate more than other types of investments. Additional information about fixed income risks can be found in the Fund’s SAI. The Fund’s foreign investments generally carry more risks than funds that invest strictly in U.S. assets, including currency risk, geographic risk, and emerging market risk. Risks can also result from varying stages of economic and political development; differing regulatory environments trading days, and accounting standards; and higher transaction costs of non-U.S. markets. More information about these risks and other risks can be found in the Funds’ prospectus.
The Stadion Funds are distributed by ALPS Distributors