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Marc Knowles

Quality strategy brings in the income

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Last November saw BMO Global Asset Management, part of the Bank of Montreal, open the European arm of its ETF business in London. 

Marc Knowles (pictured), director of ETFs, BMO Global Asset Management says: "The Canadian ETF business has been up and running for seven years, gathering USD23 billion of assets across 66 ETFs. Launching and developing the ETF business in Europe is part of the firm's strategy to build a global ETF business."

Since landing in London, the firm has launched nine income orientated ETFs, including five equity 'Income Leader' ETFs which combine two strategies, quality and yield. With this range of ETFs investors benefit from investment in quality companies that generate high levels of sustainable income. 

Knowles says: "Investors are searching for yield in fixed income and now, increasingly, the equity space. Our Equity 'income leader' ETFs are focused on those types of investors. However dividend strategies alone can deliver 'yield traps', from high income generating but highly indebted companies for example. This can be mitigated by applying a quality screen which is what we have done through the development of our 'income leader' indices with MSCI."

MSCI takes the stocks in their parent universe and selects the securities that score most highly against three quality variables, Return on Equity, Earnings variability and financial leverage. The top 50 per cent securities by descending order are selected and then ranked again in descending order of their dividend yield. Finally, the top 50 per cent of stocks are selected for the "Income Leaders" indices.

Given the currency volatility expected post Brexit, an important feature of the ETF range is that the ETFs come in both Sterling hedged and un-hedged forms. This enables investors to remove currency volatility from the ETF performance if desired.

The Income Leader ETFs are suitable for investors from institutional to discretionary fund managers right through to IFAs.

"We are talking to investors across the spectrum and have seen a high level of interest from discretionary fund managers, who are increasingly focused on using low cost ETFs in the risk rated portfolios."

BMO have continued the income theme with the launch of three Global Investment Grade ETFs with maturity brackets or one to three, three to seven and seven to ten years and a global high yield ETF.

Knowles explains. "Given the current low yield environment, there is a greater need for investors to have the flexibility to position where they want to be on the yield curve and to change the overall duration of their portfolios to manage yield and to reduce volatility. We have launched a suite of innovative investment grade global corporate bond ETFs offering a spectrum of maturity bands allowing investors to precisely position their portfolios on the yield curve. Additionally, a high yield bond ETF compliments this product suite. These innovative instruments can help absorb interest rate moves effectively. These fixed income ETFs are hedged into Sterling to remove currency volatility from the performance."

Knowles believes that the ETF industry is going to continue to grow in assets. "Wherever you look research indicates significant growth for ETFs over the coming years. Investors of all types and size are increasingly using ETFs in their portfolios as they look for low cost exposure across asset classes. BMO Global Asset Management is focused on bringing ETFs to market that provide innovative solutions to real investor challenges.

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