26 Oct 2021
Defense and consistency of returns still have a spot in the lineup
As the World Series starts today, my hometown of Atlanta seems to forget that it is a football city for at least a few weeks to back the Braves. I’ll admit that I did not watch a game all year, yet I will be one to tune in to see if Atlanta can get its first major championship in a long time (other than Atlanta United, which I count, but many don’t). It’s hard to not get nostalgic watching baseball, as many of us were baseball fans long before finding other sports. For me, baseball was king in the 80’s and early 90’s before things like juiced baseballs and juiced players crept into the game. As I think back to some of the players that made an impact on me growing up, I had a strange comparison that popped in my head and just wouldn’t leave. Frontier just may be the Ozzie Smith of investing.
For those that are too young to remember, “The Wizard of Oz” as he was called, is widely regarded as the best defensive shortstop in the history of baseball. Possibly the best defensive player the game has ever seen. 15 all-star games, 13 gold gloves – the guy could do it all. For 19 years, Ozzie was as consistent as they come at a time when people truly appreciated the fundamentals of the game. A career .262 hitter, Smith never hit more than 6 home runs in a season and finished with nearly 2500 hits, but only 28 home runs. Smith was appreciated for what he was and what he brought to the game. He was used mostly as a number two hitter in the lineup, where consistency over power is most appreciated and he struck out only 6% of the time at bat. Despite his success, when Smith signed a league-high contract in 1988 for roughly $2 million per season, it was one of the most debated contracts in baseball.1 Batting average and home runs were the stats that jumped off the page and Smith’s stats were not impressive in either category. It wasn’t until the early 2000’s (thank you Billy Beane) that advanced stats would uncover much better ways of analyzing a player’s value to the team.
After the 1996 season when Smith retired, the game started to change dramatically and we wouldn’t find out the cause until much later. Steroids caused all of the offensive stats to balloon to levels never seen before. The home run record of 61 in a year held by Roger Maris for almost 40 years was bested six times in a four-year stretch from 1998 to 2001. Who needed defense or consistency any more in an era where Nike emphasized it best: “chicks dig the long ball”. Sammy Sosa, who beat Maris’ record 3 times in four years was one of the most popular players in baseball despite striking out 37% of the time at bat in those four years. The contracts escalated as quickly as the offensive stats as baseball’s top paid players (all home run hitters) bested $5 million by 1992, and $10 million by 1997 and $20 million by 2001. By 2003, the news of steroids rocked the league and the amazing stats starting coming back down to Earth. No hitter has hit 60 home runs since 2001.
Back to the investment world where Frontier has for nearly 22 years attempted to provide risk-managed strategies that focus on defense first and consistent returns second. Our philosophy of Downside First Focus is designed around one-year loss targets. This approach matches the investment philosophy of many retirees or pre-retirees who value singles and doubles over swinging for the fences. When we surveyed advisors last year to describe their philosophy with clients, 76% of advisors said that risk management with reasonable returns was more important than beating the market or getting the cheapest investment options.3 But as we approach year 12 of this unusual bull market, it can be difficult for people to find the appreciation for defense when markets appear to never go down, or quickly rally when they do. Maybe one day we will look back at this period as the steroid era of investing. Low interest rates and a decade of never-before-seen stimulus have “juiced” returns and markets have quickly recovered without even the hint of an extended downturn. The fastest 10%, 20%, and 30% market downturns in history happened in Q1 20202, but rallied so quickly that they now appear as just a blip on the radar.
As I watch baseball again this post-season, I am once again surprised that every hitter, despite the situation, seems to be swinging for the fences. Just once I’d like to see someone get a single. Steal second. Bunt over to third and a sacrifice fly to win a 1-0 game. A philosophy that best mirrors Frontier’s approach. Maybe I’m just getting old, but somewhere I’m guessing Ozzie Smith is thinking the same thing.
Quick Takeaways:
- Defense and consistency of returns still have a spot in a lineup but don’t expect those returns to match your cleanup hitter.
- Don’t just look at batting average and home run stats. Advanced analytics may tell a bigger story when comparing investment managers.
- 76% of advisors are looking for risk management with reasonable returns. Perhaps, if we were Nike, we’d say “Investors don’t dig the long ball.”
1Wikipedia
2 S&P 500 Index
3 Frontier Asset Management “2021 Challenges and Opportunities for Clients” Questionnaire. January 15, 2021
The S&P 500 Index represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ.
Past performance is no guarantee of future returns. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. Please contact a tax professional for advice on your individual circumstances and tax consequences. Frontier may modify its process at any time without notice if it believes the change is in the best interest of our clients.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice. Frontier does not directly use economic data as a part of its investment process.
The survey cited is the Frontier Asset Management “2021 Challenges and Opportunities for Clients” Questionnaire. It was administered via Survey Monkey during December 2020 and January 2021. It was sent to a large group of advisors and had 410 respondents. Several of the questions allowed multiple answers. Full details are available upon request at no cost per the information provided within. Frontier has a reasonable belief that the responses are accurate.
Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.
Frontier’s uses of external sources in no way be considered an endorsement. Reader accesses sources at their own risk. Frontier is not responsible for any adverse outcomes from sources provided and cannot guarantee their safety. Frontier does not have a position on the contents of site sources. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.
Information provided herein reflects Frontier’s views as of the date of this material and can change at any time without notice. Exclusive reliance on the information herein is not advised. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice. This information has been prepared by Frontier based on data and information provided by internal and external sources. While we believe the information provided by external sources to be reliable, we do not warrant its accuracy or completeness. Nor should their use be construed as an endorsement.
Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from those managed by Frontier.
Frontier Asset Management is a registered investment adviser with the U.S. Securities and Exchange Commission; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Additional information about Frontier and its investment adviser representatives is available on the SEC’s website at www.adviserinfo.sec.gov.
Frontier’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and are available on our website www.frontierasset.com. They include important disclosures and should be read carefully.