Securing wealth with ETFs

Apr 22nd, 2016 | By | Category: Alternatives / Multi-Asset

Geneva-based Secure Wealth Management (SWM) was set up seven years ago by managing director James Dougall with the initial aim of being a full service wealth advisory business for the Asia-Pacific region. The company now services investors globally, excluding the US. Originally from a risk management background, he saw an opening in the market post-Lehman and 2008 for transparent investment with exchange traded funds and SWM was born.


Mark Browne of SWM: “ETFs gives us a core bread-and-butter solution”

He was subsequently joined by Mark Browne – formerly head of equity research and member of the Investment Banking board for both Banque Vontobel AG and Lombard Odier Darier Hentsch & Cie – who with the rest of the team helped take the business into the global B2B discretionary space for private clients and institutional investors. It now offers five managed portfolios made up from ETFs and has assets under management of $150m.

Rebecca Hampson, Associate Editor at ETF Strategy talks to Mark Browne about why they use ETFs, what investment strategy works for them and how they pick their ETFs.

Rebecca Hampson: What was behind setting up an ETF business?
Mark Brown: The idea was to have a very transparent and reproducible investment process which invested with ETFs. The characteristics we liked about them were transparency, liquidity and ability to get bulk exposure (meaning, not drilling down to the level of stock picking). The aim was to provide a core solution, which clients could then leverage with a satellite allocation, as desired. ETFs gave us the ability to offer the core bread-and-butter solution. Post-Lehman and 2008, people were more concerned about how their money was being managed and what they were being charged. We felt that by using ETFs we could wipe the slate clean, generating returns in a safer environment.

The US market has used this approach and now the use of managed ETF portfolios by RIAs (Registered Investment Advisers) there is widespread.

RH: Do you come up against any issues by using ETFs?
MB: There are challenges with ETFs. There is a perception with ETFs that they are dumbed down and investors sometimes view ETFs as a ‘cheapo’ investment fund that has no thought process behind it. This is obviously not the case, but it means we have to explain and educate.

RH: How do you choose your ETFs?
MB: When picking products we operate an open architecture service so we will look at all ETFs so long as they fit our criteria. We also use BlackRock’s Managed Portfolio Service. This is based on [BlackRock] research and includes 40-50 shadow portfolios provided to institutional clients.

When choosing ETFs we prioritise transparency and only use fully replicated physically backed ETFs. We then pick from a selection of funds that focus on liquidity and size. None of them can have a market cap below $100m or trade less than $20m a day. This results in a universe of around 450 ETFs.

In the long term we may be open to looking at more thematic strategies, depending on the availability of suitable ETFs, through which to express them.

RH: What portfolios does the firm offer and how are they managed?
MB: The firm currently offers five model portfolios. These comprise three multi asset portfolios – which are broken down into Conservative, Balanced and Growth – one Equity portfolio and one Fixed Income portfolio. These invest globally on a long-only basis, exclusively through physical replication ETFs.

We manage these under a risk budget, meaning we operate within volatility bands according to the client’s risk tolerance. For example, the Fixed Income and Conservative portfolios keep the three month volatility below 5%. The other portfolios also have a cap: Balanced at 10%, Growth at 12%, and Equity at 15%.

Our Balanced portfolio has equity exposure of 30-60%, our Growth portfolio has exposure to equities of between 60-95%, the Equity portfolio is around 80-100% and our Conservative portfolio has around 15-40% exposure to equities. Our Fixed Income portfolio also has some tolerance for equities and this is capped at 10%.  As a general rule the less conservative the investor, the bigger the equity allocation.

We manage all the portfolios actively, but we don’t trade them aggressively on the back of tactical bets every day. We don’t actively turn the portfolios unless it is required.

In addition to this, we then work with Geneva-based asset manager Sequoia for our satellite offering.

RH: What is your investment strategy?
MB: Our investment strategy is an active approach to the markets we manage with a focus on volatility. We don’t promise to not lose money, but we aim to limit this in down markets and participate substantially on the way up.

Ultimately, we take an asset allocation view driven by – roughly – a 75% focus on technical indicators and risk management and a 25% focus on fundamentals. We find this works and it has been tried and tested. However, this is not to say we don’t take tactical bets when our process supports them, e.g. at the start of the year we bet on oil and this paid off nicely, we closed this position in mid-March. This was a technical call. Similarly, we have had success calling the dollar in both directions in the past and are now monitoring to see if there is opportunity to make a move back to an overweight in it.

RH: What is your current investment position?
MB: We are currently positioned defensively and underweight in risk on assets such as equities and real estate. Instead, we like fixed income, investment grade and high yield bonds (ex-US). Risk is still on the upside.

RH: How have the portfolios performed to date?
Performance in the multi-asset portfolios can be measured by annualised net return since inception in USD after all fees:  Conservative 4.9% (inception 1/10/09), Balanced 5.4% (inception 1/10/09), Growth 4.9% (inception 1/7/10)

(Performance data for the equity and fixed income portfolios was not available at the time of publishing.)

RH: What are your costs?
MB: The service offered is effectively a discretionary management service and for this there is a flat fee of 1%. The cost of the ETFs is then on top of this, culminating in a total expense ratio for the full service of around 1.3%.

Investors can access the products directly – e.g. by going through Interactive Brokers’ online platform via a managed account.  However, for non-direct investors, i.e. where we are delegated to by the wealth manager on a B2B basis we charge 0.5%.

The portfolios are also offered through a collective vehicle, currently Swiss-listed actively managed certificates, traded on the Swiss stock exchange and with ISIN numbers. With this option there are additional fees because of the certificate wrapper.

We encourage family offices and wealthier investors to go via a managed account route, although we recognise that for some investors or advisers there is a preference for being able to ‘push a button’ and buy an ISIN numbered vehicle.

RH: Who is the business targeted at?
MB: Our service is targeted at global investors excluding the US, although of course some markets are less accessible in practice than others. The clients list includes a mix of private clients, wealth advisers, family offices, private banks, offshore IFAs and institutional investors.


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