In Conversation with Irene Bauer, Passive Portfolio manager and ETF expert.
Linear Investments interviews Irene about ETFs and how these drive the decisions she makes when she constructs Model Portfolios.
Irene Bauer’s career began as a Quantitative Analyst at ABN Amro, modelling structured products. In her time at Barclays Global Investors Irene worked within the asset allocation team in the Active Fixed Income business, where she applied her expertise to the scientific investment approach of BGI. Her career highlights include providing portfolio solutions for iShares at BlackRock. Here she developed her expertise in ETFs, designing and researching new ETF products for iShares and distributing ETF Model Portfolios to iShares’ clients.
As a leading specialist in the research and construction of Model Portfolios, Irene provides Linear’s Discretionary Management Team with invaluable insights to manage risk whilst optimising ROI.
L: How much of your portfolio is made up of ETFs/index funds?
I: We are 100% ETFs, as they provide what I would call TLC – transparency, liquidity and low cost. An ETF is in itself already diversified – think FTSE 100 versus Vodafone, shares in a single company could go down 20% or more in one day, for an index like the FTSE 100 this is very unlikely.
L: When did you first start investing in ETFs?
I: On a professional basis, while working at iShares, I was responsible for constructing ETF model portfolios for financial advisors in the US in 2011. ETFs were already hugely successful in the US by that stage. Following this success, my colleague Allan Lane and I decided to offer ETF-only model portfolios at Twenty20 Investments when we set the business up. It made sense to offer a solution that was tried and tested in the US and made for a viable business.
L: On that note, can you tell me what the advantages of ETFs are for those who might not understand the product itself?
I: The advantages are numerous. ETFs are easy to use and trade and offer a broad and well-defined set of exposures. They typically have low fees which is a key driver for UK financial advisors in recommending ETF products to their clients.
L: Since there are so many advantages to ETFs, can you describe which asset classes you tend to invest in through ETFs?
I: Well this is easy to answer. All of them, that is Equities, Bonds, Gold & Property. We fully invest in ETFs in our diversified multi-asset portfolios and in all asset classes.
L: ESG has been notably topical in the investment world recently. How do you see this filtering into the portfolios you construct?
I: I agree, ESG is one of the big growth areas in finance. Globally, assets in sustainable investments stood at $30.7 trillion at the start of 2018* and while assets in ESG ETFs are still quite small they have grown significantly in 2019; for example, the top five ESG ETFs on the London Stock Exchange account for over £6bn in AUM**. We anticipate more and more ESG ETFs being launched as ETF providers recognise it as one of the big advancements.
When UBS and iShares launched ESG corporate bond ETFs for Europe and the US in mid to end 2015, Twenty20 was able to build multi-asset ESG portfolios just using ETFs. That decision means that we are now one of the few DFMs that have a 3-year track record in the ESG model portfolio space.
L: Your track record is excellent. Following on from your focus on the growth of ESG and the opportunities there, are there any areas you would avoid right now?
I: I wouldn’t say there are any per se. Most of our clients avoid leveraged ETFs as they are not appropriate for the investment objectives they have. With the current market conditions, where we are towards the end of the market cycle, one has to be a bit more cautious with risky assets.
L: What is your methodology for selecting ETFs?
I: In the last ten years, we have put together and refined a broad range of due diligence questions. These include the fund’s structure, liquidity, risks issues and the construction of the benchmark index.
When it comes to making a decision between different FTSE 100 ETFs, for too long the industry has presented the sole viewpoint that makes sense at the institutional level. If you were to invest £500m in a single ETF, then it is paramount to be looking at tracking error. However, this we feel is less important when a portfolio is £100k.
More often than not, we favour the ETF with the lowest management fee. This investment philosophy applies to the most familiar large-cap indices, whereas for more esoteric exposures other issues may dominate my choice.
L: Let’s move on to providers. Do you have an ETF provider preference?
I: Yes, I do, but I am not going to disclose that as we are whole of market! Joking aside, the most important thing to consider is the accessibility of the supporting content provided by the ETF issuers. For instance, does the website provide access to benchmark details and am I able to see all ETF holdings? This information certainly makes it easier to favour any ETF provider.
L: So aside from access to that information, what else can providers improve?
I: Well, I would like to see some ETF providers who are not currently providing a lot of information on their websites to extend the level of detail on offer. That accessibility is really important. Another thing I would like to see improved is consideration of language used by providers. It’s important to consider how the communication of concepts within the institutional space may be different to the retail space. Retail investors are one of the growth areas for ETFs, so It comes down to a good understanding for the end investor.
*: 2018 Global Sustainable Investment Review, Global Sustainable Investment Alliance.
**: Algo-Chain, January 2020, www.algo-chain.com.