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 Hoshang Daroga, quantitative investment manager at Copia Capital Management. Daroga joined Copia Capital in 2015 from LSV Asset Management, where he was a quantitative research analyst for under a year. Prior to this, he was an equity research analyst at MLV and a senior trader at TransMarket Group.
How much of your portfolio is made-up of ETFs/index funds?
Copia Capital offers a wide range of model portfolios purpose built to achieve different client objectives and cater to different client preferences.
Our “Off-the-Shelf” ranges of portfolios are 100% built with ETFs whereas some of our custom portfolio ranges the split is typically 50/50 between actively managed funds and ETFs.
Also, the ETFs we use are not all passive (market capitalisation weighted), some of the ETFs we use track an index with a more active strategy such as smart beta products.
When did you start investing in ETFs?
Copia Capital started using ETFs since inception in 2013.
Which asset classes do you tend to invest in through ETFs?
We use ETFs for all asset classes, equities, fixed income and alternatives across all regions and sectors as long as it meets our screening criteria. We also prefer to use ETFs to gain targeted exposures which are not available through any other fund vehicle.
For example in the fixed income space, we can get very specific exposures like corporate bonds ex-financials or UK 15 year+ gilts in an ETF format but are not available in the actively managed space.
Being able to get specific exposures helps us as a DFM perform better risk management within the portfolios.
Which areas would you avoid?
We do not avoid any specific asset classes but rather prefer to avoid ETFs with certain characteristics, like those that use swaps as most of our clients are not comfortable taking on counter-party risk. We also avoid the use of leveraged ETPs as far as possible.
What is your methodology for selecting ETFs?
We have developed an ETF Screener which takes in all the ETFs and ETPs listed on the London Stock Exchange and objectively filter ETFs that meet our criteria of a minimum AUM, physical replication, liquid underlyings, low tracking error and tracking difference in relation to its index, TER/OCF, tight bid-ask spreads, sound securities lending practices, country of domicile and a whole host of other characteristics to ensure full due diligence is conducted on the ETF before its implemented within our portfolios.
What ETF products would you like to see more of?
At present, there is a gap in fixed income ESG products in the market place and we would like to see this gap close. Absolute return funds have typically been available through actively managed funds.
We would also like to see more of equity market neutral ETFs that aim to capture pure factor exposures and are uncorrelated to the equity or bond markets.
Any areas ETF providers could improve?
We would like ETF providers to engage and push retail platforms to upgrade their systems to enable efficient ETF trading. Providers also need to continue with education and build brand awareness within the advisory and retail client space.
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 Shaun Port of Nutmeg, click here.