Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
Global X surfs ETF wave into Australia
As with everywhere else on the globe where they’ve been introduced, exchange-traded funds (ETFs) have grown like crazy in Australia. From the $48 million listing in August 2001 by State Street Global Advisors of three funds tracking the S&P/ASX 50 index, the S&P/ASX 200 index and the S&P/ASX 200 Listed Property Trust index, ETFs have swelled – despite slow inflows in the early years – to a $132 billion sector on the ASX and Cboe Australia, featuring more than 260 different listed products.
And Kris Walesby, head of global ETF provider Global X’s Australian operation, has been involved in the local ETF world virtually from the beginning. Over the past ten years in particular, he says, the evolution of the sector has accelerated hugely. “We are seeing a more diverse offering than in previous years, and new providers entering the market,” he says.
“Retail investors are increasingly using ETFs as the ‘core’ element of their portfolios, making up more than 25 per cent of their portfolio, while 60 per cent of the advice industry use ETFs, according to Investment Trends research. Australia’s ETF market achieved record growth during 2021, with total assets increasing by 44%. We expect the ETF market in Australia to continue to grow, particularly as younger retail investors embrace ETFs as building blocks within their portfolios.”
The New York-based Global X, which will launch its ETF range in Australia in the second half of 2022, is a global leader in “thematic” ETFs, with more than 30 Thematic Growth ETF strategies across the US, Europe and Asia. The company supports its range with in-depth research and an offering of model portfolios that implement thematic ETFs in a broader portfolio.
Walesby says there are four main reasons why the use of “secular” or thematic ETFs in client portfolios has grown exponentially over the last few years:
- The vehicle’s long-term growth potential is materialising: Investors who apply a thematic investment approach are often growth-focused, he says, either seeking to beat a relative benchmark (e.g., the S&P 500) or an absolute return benchmark over the long term. “Thematic investing typically exhibits an attractive risk-return profile over the long run,” he says.
- Relatable concepts: Thematic investing can make themes instantly “relatable,” by being packaged in the one product, often with a catchy “ticker” or stock code that identifies the theme. “A lot of end-clients – particularly, millennial investors – prefer making allocation decisions based on things they know and can observe,” says Walesby. “According to respondents in our 2017 Beyond Baby Boomers: The Investable Assets of Tomorrow survey, 83% of affluent US Millennials expressed that they are extremely interested or very interested in thematic investing as a part of their portfolios. Over the last five years, we have clearly seen this trend become material.”
- Portfolio hedge: Some investors have also used thematic strategies as a way to hedge portfolio risk against specific sectors or concerning trends, Walesby says. “For example, we have recently seen a large pension fund client of ours with a historically large exposure to oil, start investing in companies in the renewable energy space, as a way to hedge against the recent volatility of oil prices and ‘protect’ its portfolio against potential headwinds in the traditional energy sector.”
- Unconstrained by geography or sector: “A thematic approach diÂffers from traditional portfolio construction in that it breaks out from the ‘grid-like’ method of asset allocation. Given thematic investing’s agnostic approach to geographies and sectors, it can have low correlations to other portfolio strategies, which can be particularly useful for investment managers seeking to diversify sources of growth,” Walesby says.
Having worked for almost all of the largest and most innovative ETF providers in the world, Walesby says Global X has a “clear set of priorities” that fits very well with the current investment environment.
“For a long time, the firm has been focused on creating outcome-oriented solutions that help investors solve difficult challenges within their portfolios, whether it’s the search for yield amid a low-interest-rate environment, elevating their growth opportunities despite slowing economic activity, or precisely managing exposures across various commodities and geographies,” he says.
Also, as a thematic investing pioneer, Walesby says Global X takes a “unique and thoughtful” approach to new thematic product launches. “Thematic investing is a forward-looking investment approach that seeks to embrace the changes we anticipate happening in the world. We thoroughly examine the themes before we launch an ETF; we’re targeting companies poised to benefit from structural shifts in disruptive technology, people and demographics, and adaptations to our physical environment (for example, clean energy).
“We’re trying to look beyond traditional geographic or sector exposures, and striving to offer investors something beyond ordinary, whether it’s actively managed ETFs, exposures to the digital assets space, or one-of-a-kind covered-call options strategies such as our QYLD ETF. We’ve also got a growing model portfolio offering that both illustrates how to incorporate thematic and alternative income strategies in diversified portfolios, as well as helps advisers scale their business by partnering with us on asset allocation decisions.”
It’s this expertise and innovation that Global X will bring to Australian investors, he says, uncovering “unexplored and intelligent solutions” to the Australian market, including new asset classes like digital assets. “With share markets returns expected to be lower in the years to come, we believe that more granular opportunities and thematic strategies will gain more interest around the world.
“When conducted properly, we believe thematic investing can help position a portfolio for an uncharted era of new technologies disrupting existing paradigms, demographics reshaping the needs of the world’s population, and shifting consumer behaviours forcing changes to existing business models,” Walesby says. “As the pace of change in the world appears to only be accelerating, there will be an ever-changing landscape of thematic opportunities as new themes emerge and older themes mature.”
ETFs are becoming the investment vehicle of choice for investors around the world, he says. “The ETF industry now represents more than US$10 trillion ($14 trillion) in assets globally. It could not have grown this quickly or to these heights unless ETFs played a key role in all aspects of clients’ portfolios, whether for strategic or tactical asset allocations,” he says.
Typically, plain vanilla ETFs providing cheap beta exposure to core benchmarks are being used as key elements of a portfolio – whereas, thematic and commodities ETFs are often used as ‘satellites’ of a client portfolio as an effective way to express a tactical view. “Our ETF offering could be used for both. Products like EMBD, KRMA, PFFD and CATH could be used as key elements of a clients’ core asset allocation. However, we also see thematic and commodities strategies as a tactical play, with clients making tactical bets on industry sectors through the safe, diversified and liquid ETF vehicle,” he says.
And when it comes to new asset classes like digital assets, Walesby says the ETF structure is particularly powerful. “The ETF ‘wrapper’ gives investors cost-efficient access to Bitcoin, Ethereum and other cryptocurrencies, with the relative transparency and security of securities trading on a regulated stock exchange,” he says.
