FA Talks is an interview series where industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing.
Tell us about indexing and ETFs as a set of tools for advisers to use and master. What are some of your best ideas for use? And what are some potential benefits of use?
Terence: We use indexing and ETFs in order to focus on the key component of portfolio performance – asset allocation. Indexing and ETFs enable us to allocate funds in the various asset classes consistent with a clients’ circumstance or stage in life. We believe the potential advantage of this approach is that it helps eliminate risks to the portfolio associated with manager selection. Furthermore, portfolios can be constructed where there is a lower cost, comprehensive asset exposure and transparency. Our preference is to use indexes and ETFs for the core of the portfolio and then add various satellites for exposure to themes and/or managers with a particular style.
Jon: I think it is not done as often as it should be, but anyone who is going to manage a portfolio, whether it is their own or someone else’s, should complete a thorough process of articulating their investment philosophy and core beliefs. In the process that we followed, we determined that getting asset allocation right was the most important aspect, closely followed by the ability to allocate dynamically between assets over time, based on our long-term forecasts. It was then simple to identify how the historical advantages of ETFs would allow us to manage portfolios more efficiently. Using ETFs means our investment committee can spend its time on the most consequential decisions where we will have the most impact on long-term portfolio outcomes.
Andrew: Our business has always had a niche bias towards listed Australian equities. Whilst we have delivered consistently strong income returns, the capital (and therefore total return) has been volatile. In a macro environment where volatility is heightened, we are using ETFs as a tool to diversify client portfolios and to smooth out total return.
