Fund selection plays a crucial role in portfolio construction. Once the asset allocation decision has been made, these individuals need to decide how they want to be exposed, be it through a mutual fund, investment trust or ETF.
Over the years, ETFs are becoming an increasingly important part of any investors’ toolkit. This series will show how the key players across the fund selection space use ETFs in their portfolios while asking what more can be done by the ETF providers to help with this increasing adoption.
Next in the hot seat is Dan Kemp, CIO, EMEA, at Morningstar. Kemp joined Morningstar in 2014 as co-head of investment consulting and portfolio management, EMEA, before being promoted to CIO, EMEA, in 2015. He has held a number of roles across the wealth management industry including partner at Albemarle Street Partners and head of fund research at William de Broe.
How much of your portfolio is made-up of ETFs/index funds?
We offer a range of managed portfolios at Morningstar Investment Management some are composed of passive vehicles only, but even some of our active portfolios have approximately 40% in passive funds. As a core value, we strive towards being focused on lowering the cost of investments.
When did you start investing in ETFs?
I started investing in ETFs in 2005 when my remit was expanded to include fund management.
Which asset classes do you tend to invest in through ETFs?
We typically use ETFs to access individual sectors, assets with a low probability of alpha and ESG assets. The latter reflects the fact that we have just launched the ESG Managed Portfolios. With these funds, we are looking to select funds with a high Morningstar Sustainability Rating and Low Portfolio Carbon Risk Score.
Which areas would you avoid?
There are no areas that we specifically avoid, but we tend to use ETFs and passive funds to a lesser degree for UK, emerging markets and Japanese shares where we see a higher opportunity for alpha generation by good active managers in these markets.
What is your methodology for selecting ETFs?
We work closely with Morningstar’s passive research team who are looking to evaluate funds based on five key pillars; process, performance, people, parent, and price, similar to how we rate active funds.
This approach focuses on the quality of the process, the people managing the fund and the investor-centric nature of parent company alongside the more typical measures of price and performance. We look towards selecting ETFs that are positively rated by this team.
Do you have an ETF provider preference?
No, we are aware that providers have different strengths and weaknesses and so we look for the best provider in the asset class we are seeking to access.
What ETF products would you like to see more of?
We would like to see more ESG fixed income products to improve our choice in that area.
Areas ETF providers could improve?
Our focus is on empowering investors and so we are always seeking better and lower cost products to improve the returns on our portfolios.
Expert investors is a new series brought to you by ETF Stream where on a fortnightly basis we interview the key individuals from across the fund selection and research space about the ETF industry.
To read the previous edition of Expert Investors with Rory McPherson of Psigma Investment Management, click here.