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 Rory McPherson (pictured), head of investment strategy at Psigma Investment Management. McPherson joined Psigma IM at the end of 2015 having started his career at Deloitte in its regulatory consulting team.
How much of your portfolio is made-up of ETFs/index funds?
It varies across our risk profiles, but the highest weighting we have is circa 19.5%.
When did you start investing in ETFs?
We have used index funds in some shape or form since inception. I would stress, they are not a core part of our offering but we do use them where we believe there is a compelling case for passive over active.
Which asset classes do you tend to invest in through ETFs?
Currently, we are targeting inflation-linked bonds, UK equities and global equities. Inflation-linked bonds are fairly core and the equity allocations are more opportunistic.
There is a value opportunity in the UK passive space; many active managers are underweight key areas such as materials and energy sector. Moreover, we view the UK as being a hated and under-allocated-to region and believe that the money flow back into the market (when it comes!) will come into the big large caps first.
Which areas would you avoid?
We would avoid certain areas of the fixed interest markets, notably investment grade and high yield markets. Passive allocations to these areas is to us very dangerous; it exposes investors to the most indebted and potentially risky parts of the credit markets.
What is your methodology for selecting ETFs?
We have a preference for physical exposure as opposed to synthetic. After that it comes down to process, cost and whether they are targeting the benchmark exposure we are looking to access within our portfolios.
What ETF products would you like to see more of?
There is lots of product available, I’d be keen to see more that is currency hedged and competitively priced
Areas ETF providers could improve?
I think they do a good job on this front.
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 Ryan Hughes of AJ Bell, click here.