Managers at newly launched Integral believe rapid-growth of ETFs is key to unlocking opportunities for investor asset allocation
There have been a number of recent fund manager launches focused on using ETFs. Many of these actively use different ETFs within a fund structure to take views on sectors and countries.
However, a new manager launched earlier this month with the aim of providing an asset allocation service while avoiding setting an actual fund around the strategy.
Integral Asset Management is aimed directly at private clients but also offers a white-label service to advisers. The firm is run by ex-CEO of Fabien Pictet & Partners Richard Yarlott, ex-GSAM MD Hywel George and Nick Dewhirst, who has run his asset allocation business Investors RouteMap since 1998.
“We are getting to a world where asset allocation is going to come to the fore. People realise focusing on this works, and we have proven it,” explains George.
“We think the industry is going to shift this way. We are seeing a lot of players entering this space.”
Rapid growth
The partners at Integral believe it is the advent and rapid-growth of ETFs that has been the key to unlocking the asset allocation market.
Dewhirst says: “Before, if you wanted this kind of asset allocation it was difficult, because you did not have the tools to do it – to express yourself on a country-by-country basis. Now you can.”
He says the increased depth and liquidity of ETFs means stockpicking is no longer always the best way to express an investment conviction.
George explains: “We do not recommend stocks and do not have funds. It was a big step to set up and not launch a fund, because it is what I have always done. But by not launching a fund I do not impose a solution on the client.”
He admits this is not a completely new model, but says it is relatively new in the evolution of the private-client market. The firm goes from advice to implementation to the actual selection of the instrument. George says: “We do global asset allocation, then try to implement this within the client’s constraints and finally the investment committee recommends what its choice would be at the actual ETF level.”
Mandate prospects
The firm recommends funds based on the prospect of the mandate rather than past performance of a manager.
“Fund managers are fascinated by stocks and funds of stocks, which means they spend a lot of time administrating fund structures. What ETFs do is allow us to take all the admin off the shelf and get it done by another provider.
“Now we do not have to occupy a third of our resources worrying about the fund itself because there is no need to.”
He says this has had the effect of expanding the time available to thinking about investment, starting with asset allocation.
George says he believes investors want managers to take a holistic approach to managing money rather than just providing a house view on Japan or the opinion of an individual analyst.
“By taking a client portfolio and transposing it to a recommended ETF portfolio you get more diversification and lower cost,” he says.
A typical portfolio run by Integral Asset Management will take a position of around 20 to 25 ETFs with direct exposure bonds and currencies. These will be the positions that capture the firm’s view of the world. Dewhirst says they generally do not use fixed income ETFs as they feel the choice of products is not appealing enough.
Process
The investment process starts by generating recommendations on 50 stock markets, 40 bond markets and 30 currencies across 66 different sectors.
“You start off with a recommendation of which asset class and sub-asset class you want to invest in and you go down into the second or may be even the third level there, says Dewhirst.
“Once we have decided on this we look at the options available to the client within their packaging.”
But, given the thousands of ETFs now available, how do they choose between them?
Questions of liquidity
If there is to be an allocation to US large-cap equities there are probably half a dozen funds available.
“We then ask questions about liquidity and which ETFs provide the best fit in terms of a mandate,” says Dewhirst.
“For example, if we were bullish on technology stocks, you could buy a NASDAQ ETF or an S&P technology sector ETF. But what you find is you get the purest fit with the S&P ETF because the NASDAQ has other things in it as well.”
George says it is a question of looking at the assets in the ETF and trying to get the best fit between the mandate of the ETF and the desired asset class.
Integral also favour cash-based ETFs, given what they see as the extra the risk with derivative-based structures.
He says commodity-based and swap-based ETFs are relatively unattractive to them, preferring Ucits structures as a general rule.
There is a complete avoidance of the use of leveraged ETFs or leveraged short ETFs. However, they will use short funds.
“I do not think they are ideal but sometimes there is no alternative,” says George.
“They come with a health warning of not being suitable for everybody. This is a great example of where it is good to have three people bringing different brains to bear on this problem because customer suitability is not a joke,” says George.
Leverage
Dewhirst believes if there is going to be a scandal in the ETF space it is going originate among the leveraged, leverage short or more esoteric products.
“We are also sensitive to what we believe is the rather over-stated risk of stock-lending in the ETF structure,” he says.
“Here the issue is the ETF provider has lent out the stock and then for some reason cannot get it back. We believe that is a relatively low risk, especially if it is just one stock in a basket.”
Integral have developed a system that provides them with monthly updated recommendations from a total of 1,100 ETFs quoted in New York, London, Tokyo and Frankfurt.
“This means we have pretty good coverage of everything that matters.”
One big exception to this is commodities. Dewhirst explains: “The reason for this is the contango/backwardation can really eat you up in some things. With gold it is not too much, but if you start doing oil it can be difficult. You do not reflect the price of the cash market.”
