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Thurleigh’s Mackinnon: swap-based ETFs are cheap and none have failed

by Emma Dunkley on Mar 22, 2012 at 09:42

Thurleigh’s Mackinnon: swap-based ETFs are cheap and none have failed

What type of beta products do you use and why?

We use primarily index-tracking products and these are mostly iShares exchange traded funds (ETFs). We have chosen to gain broad beta exposure rather than specific access to niche segments, so we own, for example, an ETF on the MSCI World rather than something at a sector level.

In 2009, when we decided to increase exposure to markets, we bought the iShares FTSE 100 as this was a broad and efficient way to gain access.

Why are ETFs efficient vehicles for tapping large markets?

It’s mostly because of the ease of transition. Unlike a unit trust, we can just trade into an ETF during the day, and someone can buy one share of a FTSE 100 ETF for as little as around £7. Most index funds, such as iShares, also lend out stock, which can lower the total expense ratio.

The tough thing on the active management side is that over a three-year period, only 3%
of active managers beat their index. So if we think the market is going to rally, and if we
buy the index, we will participate in this rise, whereas 97% of the time, the active manager will underperform.

We tend to buy alpha when we think there’s no beta to be had, so we buy the likes of Giles Hargreave, for example.

Are there any asset classes where you think beta products are inefficient, such as fixed income?

We own a small amount of a fixed income index. Fixed income ETFs originally were structured to give most weight to the largest issuers of debt, which meant you were buying what you don’t really want to buy – the aim is to lend to the richest people who can pay you back.

ETF providers have been good at restructuring indices so they can represent a balanced view of the fixed income markets, whereas five years ago, these indices were clumsy.

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