Brooke Thackray.The Globe and Mail
Most investors are told they shouldn’t try to time the markets. However, it’s Brooke Thackray’s job, which he does by predicting investor behaviour during different parts of the year.
Mr. Thackray runs the Horizons Seasonal Rotation ETF, which aims to profit from periods of the year that historically generate positive returns in certain sectors.
It’s a little more involved than “sell in May and go away.” Mr. Thackray says it’s about sector rotation and notes that historical trends don’t always repeat themselves, or their timing may vary in some years.
The ETF (HAC-T) has a disciplined approach, with a little wiggle room to adjust using technical and fundamental analysis, says Mr. Thackray, a research analyst with Horizons ETFs Management (Canada) Inc.
“The good thing about seasonal investing is that we have dates established that we have to be out of a sector, give or take,” he says, “so we don’t fall in love with a sector.”
HAC’s active strategy has provided investors with some downside protection during the recent market correction. The ETF, with about $200-million in assets, is down 4 per cent over the past year, as of Sept. 30, compared with a drop of 5.4 per cent for the S&P/TSX Composite Index and a drop of 15.5 per cent for the S&P 500 over the same one-year period. Horizons says the fund has seen an annualized return of 5 per cent over the past five years and 6.5 per cent over the past 10 years as of Sept. 30. All performance data are based on total returns, and the fund’s performance is after fees.
The Globe and Mail recently spoke to Mr. Thackray about recent activity in the fund, which has increased in recent weeks.
Describe the fund’s investing style.
When we established the fund in 2009, we put the word ‘seasonal’ in the name because the trades happen at about the same time every year. But I also wanted to have the word ‘rotation’ in there because we’re rotating between the different market sectors.
An example is energy stocks that go up at the same time every year, from February to May, when refiners perform maintenance and switch from winter to summer gas in the Northern Hemisphere to prepare for the upcoming busy driving season. When the driving season starts in May, there’s an increase in demand following a reduction in supply, helping to boost the price of oil. Investors are familiar with this trend and try to front-run it, buying energy stocks in March and April. For a seasonal investor, it is best to get in before everyone else and exit when everyone else is invested and the busy driving season starts. As a result, it is typically best to get into the energy sector in February and exit in May. So although we call it seasonal, it’s really trading on the behavioural trends of investors. Anything can overwhelm that strategy, for example, if OPEC decides to suddenly ramp up production, driving prices lower.
Another example is retail: Black Friday [in late November] is usually the biggest selling day of the year, and investors want to be in there for that because it often drives retail stocks higher. But as a seasonal investor, you’re better off being in a month early and getting out when Black Friday occurs.
Canadian banks also tend to do well from October to the end of the year, when they report their fourth-quarter earnings. It’s often when they do dividend increases and share buybacks, which help to lift their share prices.
What have you been buying lately?
We’ve been buying industrials and materials in the U.S. through the Industrial Select Sector SPDR Fund (XLI-A) and the Materials Select Sector SPDR Fund (XLB-A). We’ve also been getting into information technology through the Technology Select Sector SPDR Fund (XLK-A). All these sectors tend to do well on a seasonal basis. Generally, cyclical and growth sectors of the economy tend to perform well in the last two months of the year as investors position their portfolios for increased gains before year-end. Technology stocks have been moving a lot with the interest rates, so you have to watch out for that. But here we are in this strong seasonal period, and the sector is showing signs of stability. It’s a major sector in the marketplace and is starting to look good based on technical indicators. We’re also boosting our position in Canadian banks for reasons noted earlier.
What have you been selling?
Over the summer months, we had a lot of holdings in defensive sectors, such as health care, consumer staples and utilities, and we did have some gold. We took smaller positions in those sectors this year than in previous years and got out earlier than normal. We exited health care and utilities entirely in early September, given they were underperforming. We’ve held on to consumer staples into October because it tends to be one of the stronger months for the sector. October is a transition month from the six-month unfavourable for stocks from early May to late October to the six-month favourable period for stocks from late October to early May. In this transition period, investors tend to seek the relative safety of the consumer staples sector.
What investing advice do you give friends and family when they inevitably ask?
I try to avoid giving them advice, partly because I run an active strategy. If I recommend a sector at a barbecue in May, it might be a different answer in September. I stick to the generic advice of having a diversified portfolio structured according to their needs; that’s what they need to focus on as a base. They also need to know their risk tolerance. So I tend to give the boring answer, so I get invited to the next barbecue.
This interview has been edited and condensed.