ETF managed portfolio segment continues to develop

Aug 21st, 2013 | By | Category: ETF and Index News

Professionally managed portfolios that have more than 50% of assets invested in exchange-traded funds (ETFs) are one of the fastest-growing segments of the managed account universe.

ETF managed portfolio space continues to develop

Stephen Cucchiaro, chief investment officer of Windhaven Investment Management, the leading provider of ETF managed portfolio solutions.

In the US, these portfolios, which are often referred to as ‘ETF managed portfolios’, have in excess of $70 billion in assets managed across more than 600 different strategies offered by around 140 firms, according to data from Morningstar.

The range of ETF managed portfolios now available is vast, enabling advisors to gain exposure to different regions and sectors, asset classes and strategies.

Growth in assets – which in the US was 12% in the first quarter of 2013 according to Morningstar – is being driven by various considerations.

Regulatory changes favouring fee-based advisory models, combined with a lower-return environment, have tilted portfolios toward lower-cost, broad-based investments for a larger part of client portfolios, with a focus on asset allocation. At the same time, the depth and breadth of ETFs now available means that advisors can cheaply access institutional-type diversification and portfolio management, thus making them an appealing alternative to mutual funds.

In the US, where the market for these solutions is most advanced, major firms include Charles Schwab subsidiary Windhaven Investment Management with around $15.6 billion in assets under management, F-Squared Investments with around $11.5 billion, Good Harbor Financial with around $5.1 billion, Innealta Capital with around $4.2 billion, and Morningstar (including its subsidiary Ibbotson Associates) with around $3.8 billion.

Over the past week or so, a host of new portfolios have been launched. These include solutions from Canada-based BMO Investments and AGF Management, and US-based Bank of the West Wealth Management.

BMO’s new managed ETF offering includes a series of six risk-differentiated, well-diversified portfolios combining passively managed ETFs. The portfolios, all of which have a conservative bias, are named ‘fixed income’, ‘security’, ‘conservative’, ‘balanced’, ‘growth’ and ‘equity growth’.

Kevin Gopaul, BMO’s chief investment officer, said: “The customer demand for more conservative investment solutions is increasing and based on our past success with managed portfolios, we feel these new products offer more risk-based choices in a flexible way to create and manage wealth”.

BMO’s rival AGF meanwhile revealed a partnership with segment giant F-Squared Investments to make its popular ‘US AlphaSector Class portfolio’ available to Canadian investors. The US AlphaSector Class portfolio is constructed exclusively from nine ETFs reflecting the 10 sectors of the S&P 500 in addition to one short-term treasury ETF.

Howard Present, chief executive officer of F-Squared Investments, said: “Our AlphaSector strategy is ‘client centric’ not ‘benchmark centric. This partnership with AGF provides Canadian investors with a defensive complement to more volatile equity investments.”

Back in the US, Bank of the West, a subsidiary of French investment bank BNP Paribas, rolled out a series of ‘Bank of the West ETF portfolios’. These portfolios incorporate ETFs selected by the group’s investment advisory and management team to provide exposure to a global set of investment opportunities.

John Morris, head of client solutions at the group, said: “Many investors are looking for more choice and investing options that can reposition as the markets change. These proprietary ETF portfolios will extrapolate meaningful information from around the globe and use that information to align the portfolios with the current market environment.”

In Europe, the ETF managed portfolio segment is significantly less developed but, nonetheless, is steadily gaining recognition. UK firms active in the space include the likes of Evercore Pan-AssetSCM PrivateWorldTrackTCF InvestmentMarlboroughSeven, T Bailey, Assetfirst and Armstrong Investment Managers.

Of these, Evercore Pan-Asset and Seven are perhaps at the forefront of this movement having made their portfolios available via wrap platforms. Evercore Pan-Asset’s ‘PanDYNAMIC Model Portfolios’, for example, are available on the Ascentric, Novia, Transact, Nucleus, Platform One and Avalon platforms and have attracted some £300m in assets from nearly 2,000 investors.

Christopher Aldous, the firm’s chief executive, believes that “model portfolios are the future” and reckons that demand for outsourced model portfolio solutions is set to soar as advisers look for more comprehensive investment services in the wake of regulatory changes favouring fee-based advice.

However, while ETF managed portfolio solutions clearly have huge potential here in Europe, it is likely to be sometime before the segment gains the same level of traction among advisors as is currently the case across the pond. ETF providers active in Europe undoubtedly need to be more vocal in promoting their products and linked solutions to the intermediary community if the segment is to reach its full potential.

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