Interview

Expert Investors: Tristan Dolphin of Stonehage Fleming

ETF Stream

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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.

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 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 Tristan Dolphin, senior associate, investment strategy and research at Stonehage Fleming. Dolphin joined Stonehage Fleming following the merger between Stonehage and Fleming Family & Partners in 2014. Prior to this, he spent three years at Stonehage as an assistant manager.

How much of your portfolio is made-up of ETFs/index funds?

The current allocation to ETFs/index funds varies across investment mandates. Our central framework is a core allocation to high conviction active managers complemented with a smaller allocation to passive investments.

As one example, we currently have an exposure of around 26% to ETFs/index funds within the equity book of our sterling Balanced model.

Our allocation to equity ETFs/index funds will change through the economic cycle. We would look to have a higher allocation at the beginning to middle of the cycle, where we expect beta to be a key driver of returns.

As we believe we are now later in the cycle, we are not looking to add to our long-only regional equity ETFs, but are looking to rebuild positioning in equity long/short.

When did you start investing in ETFs?

We have been investing in ETFs since 2010 when our allocations were lower. Since then, ETF costs have fallen significantly more than those of active funds. This, combined with the improvement in liquidity they offer, makes them more attractive today.

Which asset classes do you tend to invest in through ETFs?

Predominantly equities, but we have some fixed income passive investments. Liquidity and costs are key factors and the equity ETFs we use score well in these areas.

However, there can be material differences at an asset class level. We would be wary of investing in a small-cap biotech equity ETF, for example, where the underlying liquidity would look very different to that of an S&P 500 ETF.

What is your methodology for selecting ETFs?

Our process is to undertake due diligence on the fund house first. Only then do we consider the underlying products for individual sign-off.

It is important to understand how the different ETFs are constructed, what the underlying instruments are, how well they have tracked their indices and the controls on stock lending.

We believe there are specific areas within asset classes that lend themselves better to passive investing than others.

In addition to liquidity and cost factors already discussed, we allocate more capital to ETFs where we deem the market structure to be more efficient.

Within equities, this means allocating more to large cap US ETFs, where we observe the high number of analysts covering each company. This contrasts with Japan, for example, which we deem to have a lower quality sell-side, as well as fewer analysts.

Are there any areas ETF providers could improve?

We are increasingly engaging with ETF providers to improve their voting practices. Although there has been a marked improvement in recent years, there is a long way to go.

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 James Penny of TAM Asset Managementclick here.

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