You are predominantly an active manager, but how do you use exchange traded funds (ETFs) or index trackers?
We have used them recently to supplement our active holdings in the US, because it is a large and liquid market.
Over the past couple of years, it’s been very hard for active managers to outperform and differentiate themselves because the markets have been driven by government action, rather than economic fundamentals. So it’s hard for active managers to do consistently well.
In those conditions, we used S&P 500 trackers to broaden our exposure. When we take the view conditions are changing, one of the benefits of ETFs is that it’s easy to switch out of them and move into active funds.
We are actually in the process of doing that right now. We felt the decisions at the start of January by the US Federal Reserve now mean the market is being driven more by fundamentals.
Do you use ETFs for tactical exposure?
We have a physically backed gold exchange traded commodity (ETC), which we have opted for rather than a product backed by a swap, as it’s less risky.
We also have a physical silver ETC. These enable us to have short-term tactical exposure, whereas the S&P 500 is more of a way to continue to execute the strategy with a long-term view.
The gold and silver ETFs are a short-term tactical way of taking advantage of positive price movements.
Do you ever use swap-based products?
We prefer to go for physical products in order to mitigate counterparty risk. One of the things I would say about ETFs is that there is a perception they are very simplistic, as they are traded like a stock.
But we would say they are more like a hedge fund when you look under the bonnet, so we have put a lot of effort into looking at them. We scrutinise them at least to the level of a mutual fund, but more akin to a hedge fund.
What are the factors you look out for when analysing ETFs?
We look at provider, cost, liquidity, how easy it is to trade in and out and how closely it does what it is designed to do (for example, track an index), among other factors.
A lot of new products have come up recently, such as leveraged ETFs, offering two to three times enhanced exposure, rather than a single price movement.
We look at how that leverage is calculated, because it can differ from product to product.
On a very occasional basis, we will use leveraged products, but we would use them more for sophisticated clients.
Do structured products have a role in your portfolio?
We use structured products for more sophisticated clients where we are more likely to design a specific product, but it does require a large asset size.
One example is in the US market. We have a number of clients that are keen to get reinvested rather than sit in cash, but as the market has rallied, they are worried they are going to get into the market at too high a level.
As a result, we have a lookback note on the S&P 500 so that clients can invest today, but the note invests at the lowest point of the market over the next three months. This has 100% participation on the upside, but you are locked into the note.
The note has a 60% European barrier so if the S&P falls by more than 40% of where we are today, clients will fall in line with the market on a one-for-one basis. But you cannot buy an ETF that offers this sort of investment.