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Heartwood’s Sippetts: where to find pure cheap beta
by Emma Dunkley on Jul 12, 2012 at 00:01
Alan Sippetts, investment director at Heartwood, explains why 31% of Heartwood’s Balanced strategy is in passives.
What do you use that is considered ‘smart beta’?
A good example of something we use, although we have taken profits recently and reduced our weighting, is the db X-trackers iTraxx Crossover-5 Year Total Return Index exchange traded fund (ETF).
It is too complex and costly to write over-the-counter (OTC) options on this index, so having this ETF is an efficient way to gain exposure.
The index tracks European high yield credit default swaps (CDS). We saw CDS widen, suggesting credit defaults were going to be beyond historical highs. But the reality is we don’t think defaults are as high as this CDS level suggests.
For example, the five-year cumulative default rate is 10%. But the implied cumulative default rate in this index was 44.5%.
So we could use an ETF to exploit this anomaly. This is a great example of enhanced beta and exposure you wouldn’t normally be able to achieve.
What role does beta generally play in your portfolios?
If we look at our most popular strategies, in Balanced, more than 30% of assets reside in pure passive exposure.
Passive investments are fundamental building blocks. We can access most major equity markets through cheap beta. In contrast, 10 years ago many benchmarks were uninvestable. Now we can invest almost anywhere with low-cost trackers.