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

Panellists

Nicola McMurtry

Senior Portfolio Manager at Anchor Capital
Nicola started her investment career working for a London stockbroker in 1994. After returning to SA, she joined the investment team at one of the big-four banks in 1996, where she managed portfolios for high net worth individuals, family trusts, charitable foundations and non-profit organisations and also contributed to the national investment strategy. As part of the Anchor team, Nicola contributes to investment strategy and manages retirement and discretionary portfolios locally and offshore across all asset classes. She holds a BCom Economics Degree as well as numerous industry qualifications.

Victor Mupunga

Senior Research Analyst at Old Mutual Wealth Private Client Securities
Victor joined Old Mutual Wealth Private Client Securities in 2016 and is responsible for conducting research relating to all aspects of our investment portfolios, including top down, bottom up, idea generation, macro and asset allocation research. He also serves as Portfolio Manager of the PCS Equity Income Model Portfolio. Victor was previously employed as an Investment Analyst at Maestro Investment Management, where in addition to equity research, he was responsible for managing a number of private client equity portfolios on a discretionary basis and managing the client relationships. Prior to that, he was a Fund Accountant at Investment Data Services where he prepared and reviewed valuations and accounting records of hedge funds. Victor graduated from the University of Cape Town with a Bachelor of Business Science (Hons), Finance degree in 2007. He is also a CFA Charterholder.

Struan Campbell, CFP

Portfolio Manager at PSG Umhlanga Stockbroking
Struan has been in the financial planning industry since 2003, previously as a marketing specialist for Liberty Life and thereafter with PSG. He moved across to the advising side of the table in 2013. He qualified from the University of Natal with a B. Comm degree majoring in economics. This was followed 7 years later, after a stint spent sailing professionally in the USA, with a Post Graduate Diploma in Business Management. Specific to the financial industry he has an Advanced Certified Financial Planning Diploma, as well as JSE Trader certification through the South African Institute of Financial Markets. He is a water sports fanatic, married to a banker and lives with two rescue cats, a busy Border Collie and a miniature Yorkshire Terrier.

Host

Michelle Noth, CFA

Client Coverage Executive at CoreShares Investment Managers
Michelle joined CoreShares in May 2019 as the Client Coverage Executive. Prior to this, she spent 13 years working in the Financial Services sector in London, where she specialised in ETFs and passive investment solutions (working at iShares and BNP Paribas among others). Michelle graduated with Honours in Business Science from the University of Cape Town in 2004, majoring in Finance and Financial Accounting. Later, she was admitted as a CFA Charterholder in 2010. Michelle is passionate about serving clients and creating cost-effective investment solutions that consistently achieve the best possible returns.

If you need a refresher on ETF basics, why not start at the very beginning with an Introduction to ETFs.