Investment professionals are increasingly using exchange-traded funds (ETFs) alongside their high-conviction stock picks to build robust and diversified portfolios for their clients.
Michelle Noth, Client Coverage Executive at CoreShares, sat down with stockbrokers and fund managers in a recent webinar to discuss their approaches to blending active and passive strategies.
ETFs continue to grow in relevance amongst both institutional and retail investors. Globally, these funds now account for about R130 trillion in assets under management.
While South Africa lagged developed markets initially, it is fast catching up. Local investors now have access to around 150 ETFs, which account for R125 billion in assets under management – roughly 0.1% of the world total.
Fund managers use ETFs to enhance diversification, generate healthy and more predictable returns, and reduce overall fees. These products are also easily tradeable and highly transparent in terms of both cost and composition.
One common approach to using them in a portfolio is the ‘core-satellite’ model, with ETFs at the core to provide low-cost broad market exposure and diversification. Satellite investments, including individual stock selections, are then added with the aim of generating outperformance, Noth said.
Nicola McMurtry, Senior Portfolio Manager at Anchor Capital, said during the webinar that to construct an effective multi-asset portfolio, a manager first needs to understand the client’s specific requirements, their objectives, and their appetite for risk.
After determining the appropriate weightings towards each asset class, Anchor Capital’s portfolio managers then consider the optimal mix between individual holdings and ETFs.
McMurtry noted that offshore portfolios, which target geographic diversification and sometimes also themes, tend to have higher allocations towards ETFs than local ones. Among other products, Anchor Capital uses the CoreShares S&P Global Dividend Aristocrats ETF and the CoreShares Total World Stock Feeder ETF in its offshore portfolios.
In 2020, only a handful of active managers managed to significantly outperform the market, McMurtry said, with most generating returns that were almost in line with the benchmarks that ETFs track.
Victor Mupunga, Senior Research Analyst at Old Mutual Wealth Private Client Securities, explained that ETFs are particularly useful when targeting broad themes. Old Mutual Wealth uses ETFs to gain exposure to the semiconductors value chain, and to the burgeoning biotech industry, for instance.
Mupunga said that when analysing an ETF, fees and liquidity are important considerations. Managers also need to carefully evaluate the components of the ETF.
Struan Campbell, Portfolio Manager at PSG Umhlanga Stockbroking, also pointed out that ETFs are used more in the offshore space, with clients preferring more active stock selection for their local portfolios. In both cases, however, ETFs are preferable when clients have limited capital to start with as they provide diversification.
We invite you to watch this on-demand webinar to explore these concepts further:
| Featuring |
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Panellists
Nicola McMurtrySenior Portfolio Manager at Anchor Capital
Victor MupungaSenior Research Analyst at Old Mutual Wealth Private Client Securities
Struan Campbell, CFPPortfolio Manager at PSG Umhlanga StockbrokingHost
Michelle Noth, CFAClient Coverage Executive at CoreShares Investment Managers |
If you need a refresher on ETF basics, why not start at the very beginning with an Introduction to ETFs.