Next in the hot seat for ETF Stream's Expert Investors series, where we interview fund buyers about their ETF usage on a fortnightly basis, is Helen Bradshaw, income portfolio manager, at Quilter Investors.
Bradshaw joined Quilter in December 2018 from Henderson Global Investors where she started her career as a trainee fund of fund manager in 2006.
How much of your portfolio is made-up of ETFs/index funds?
We manage the income portfolios with a core of actively managed investments, and we then use passive and smart beta strategies to tilt the portfolios to where we believe the best opportunities are.
As such, we have roughly one-third of the portfolio invested through passive vehicles.
When did you start investing in ETFs? Why then?
I have been using ETFs for over 10 years. Initially, this was in areas where the investment was not available in any other wrapper, for example, physical gold. However, the net has widened over the years to include broad market indices as well as smart beta products.
Smart beta is an interesting part of the industry as it allows us access to different factors and styles that previously were only available in active form.
Which asset classes do you tend to invest in through ETFs?
Currently we use ETFs for equity and fixed income assets.
Which areas would you avoid?
We would typically look to active managers in areas where there are less efficient markets and where the manager is more likely to deliver outperformance.
For example, in the smaller cap or emerging market universes where we believe there to be more opportunities for active managers to find hidden gems.
What is your methodology for selecting ETFs?
When looking at ETFs on a broad market index like the S&P 500 there are a number of things we seek to assess. Firstly, we look to understand how well the ETF delivers exposure to the index it seeks to track.
The key to understanding this is the replication method used as this can influence the tracking error.
Cost is an important consideration too – not just the total expense ratio of the product but also what are the execution costs or the costs that are incurred at the time you buy or sell the ETF.
We look at liquidity, trading volumes and the average premium or discount for a particular ETF in order to form a view on the total cost of ownership.
Domicile is also important given it can impact the ETF’s tax treatment. Finally, and importantly for our portfolios, we need to understand how the income distributions are paid, both in terms of timings and the frequency.
Do you have an ETF provider preference?
We tend to favour providers that focus on passive fund management and have significant experience in managing these strategies.
What ETF products would you like to see more of?
It will be interesting to see how smart beta develops in the fixed income universe. Traditional fixed income market cap indices are usually made up of the most indebted companies, not necessarily those best placed to service the debt and we have seen a few providers develop solutions using different index construction methodologies to try and address this issue.
That said, the choice is still limited, particularly when compared to what’s available in the equity universe.
Expert investors is a 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 ecosystem.
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 have become an increasingly important part of any investor’s 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.
To read the previous edition of Expert Investors with Evangelos Assimakos, investment director at Rathbone Investment Management, click here