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OakTree’s Brady: how we generate low cost alpha
by Danielle Levy on Mar 29, 2012 at 10:28
OakTree Wealth Management CIO Ian Brady outlines his approach to using passive products and explains why he shies away from swap-based exchange traded funds (ETFs).
What type of beta products do you use and why?
Ironically, we use allegedly passive products in order to generate alpha at a lower cost.
Like all our investments, the product will have a specific role to perform within our overall portfolio. If we can fulfil the role at a lower cost, then we will obviously use that option – but we won’t buy for cost reasons alone.
We do attempt to control the ‘all in’ total expense ratio (TER) to our clients, including ongoing advice fee, discretionary fee, fund charges and platform charges, to 2%, so appropriate use of passives helps us achieve this.
We are intellectually indifferent between ETFs and index funds (including SPDRs) and will allocate to whichever product best fits our investment criteria.
How do you choose the type of beta products to implement your views?
We choose the type of beta product to suit the specific role it has to play. In March 2009, we met with the management of five oil and gas companies, who said they needed between $70 and $80 [per barrel] oil before they would drill again. Oil was trading under $40 at the time, so we decided that a bet on rising oil prices was one worth taking.
However, we wanted to avoid issues with rolling over underlying positions every few months on a futures-based contract, so we decided to buy the Energy Select Spider in the US. This gave us exposure to a variety of US energy shares and provided us with a dividend too. It wasn’t pure oil exposure, but the share price had collapsed from over $80 to below $40 in six months as the oil price corrected.
We therefore felt confident it would provide meaningful upside if oil approached $70 again. This did happen and we made good money, but I have to admit the dollar fell over the holding period and took away some of the profit we made on the underlying share.
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