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 Irene Bauer, founding partner and CIO of Twenty20 Investments. Bauer is a big advocate of ETFs having previously worked at BlackRock's iShares business where she provided solutions for the firm's client group. She joined BlackRock following the acquisition of Barclays Global Investors in 2009, where she was a quantitative researcher.
How much of your portfolio is made-up of ETFs/index funds?
Having seen how successful ETFs had been in the US, we took the decision to offer ETF only model portfolios. ETFs have many advantages like ease of use, a broad and well-defined set of exposures, transparency, liquidity and low fees
On the topic of low fees, as every week passes this is now making the decision easier for UK financial advisers to start recommending ETFs.
When did you start investing in ETFs?
In 2011 I personally first started investing in ETFs in my ISA. Funnily enough, while working at iShares, I would have loved to invest in ETFs via the company pension scheme but this was not an option, an often discussed missed opportunity for an ETF provider.
A lot has changed since then, both in the retail and the professional investment world. While at iShares I had been involved in constructing ETF model portfolios for the financial advisers in the US and after launching Twenty20 Investments, we started investing in ETFs from 2013 onwards.
Which asset classes do you tend to invest in through ETFs?
All of them. As we invest fully in ETFs for our diversified multi-asset portfolios, we invest in all asset classes. And while interest in our range of ESG portfolios has been small in the past, I definitely think that this is the biggest growth area in the ETF space.
Which areas would you avoid?
None in particular. For most of our clients though, we would avoid leveraged or inverse ETFs, as they are simply not appropriate for the job in hand.
What is your methodology for selecting ETFs?
There are a range of due diligence questions that we have refined over a ten-year period, which cover such topics as the construction of the benchmark index, the fund’s structure, liquidity, risks issues, just for starters.
As for choosing between different FTSE 100 ETFs, the industry has for too long only presented a viewpoint that makes sense at the institutional level.
If you have £500m investing in a single ETF then the issue of tracking error is very important but might only be fifth place or so when a client’s model portfolio comprises just £100k.
Take it as read, we would favour the ETF with the lowest management fee, by the way that thinking I should add, applies to the most familiar large-cap indices, where for more esoteric exposures other issues may dominate my choice.
Do you have an ETF provider preference?
Of course, but I am not going to tell you as we are whole of market. Joking aside, what matters the most is the accessibility of the supporting content, for example, does their web site provide easy access to the benchmark details, can I see all of the ETF holdings? These are the type of things that make it easier to like any ETF provider.
What ETF products would you like to see more of?
Assets in ESG ETFs are now above $45bn. While relatively small, I believe there will be big growth in that area. For example, I definitely would like to see more granular exposures in ESG ETFs. Money market exposures for lower risk portfolios, ESG for different countries, and specifically an ETF with ESG screening around lower carbon footprint companies to name but a few.
It is worth noting once UBS and iShares started with their corporate bond exposures, Twenty20 was able to put multi-asset ESG portfolios together. Haven taken that decision we are one of the few DFMs that have a 3 year track record in the ESG space
Areas ETF providers could improve?
As mentioned earlier, some ETF providers give you a lot of information on their website, whereas I would like to see the others catch up on that front.
Likewise, the continued use of language and concepts from the institutional space is counter-productive in the retail space as they often confuse the end investor. On that basis, I would like it if more of the marketing literature took on board that point.
Last but not least, the debacle around the demise of Neil Woodford’s business suggests more education in savings and investments is needed across all levels of the school system.
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 Niko Fagernäs of Taaleri, click here.