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Dolfin investment head comments on ETF usage


With a background in both institutional and private wealth management, Richard Gray, head of investment management, Dolfin is perfectly positioned to declare that, in his opinion, the investment thinking behind the two doesn’t differentiate between them.

Gray (pictured), who joined Dolfin in October 2018, says: “I struggle to see what the difference is between having USD20 million in the bank or USD200 million in a pension fund in terms of investment thinking.

“One of the prospects for Dolfin is the possibility that products that have only been available to the very wealthy can, in the future, be somewhat democratised using platforms.”

Gray has used ETFs in portfolios for a long time and started using them in his previous role at ACPI Investment Managers in London, where he was responsible for ACPI’s institutional client base and product offerings.

“I have a level of agnosticism of how investment procedures are utilised,” Gray says. “I have never really understood why market participants have this almost religious zeal that it has to be active or passive or in house or third party. It’s horses for courses and there are very good reasons for using one rather than the other – neither is a magic bullet.”

Gray believes that passive instruments enable either low cost access to a particular country or asset class or enable pure beta exposure.

“Or they offer an opportunity to invest in a situation where one believes it is difficult to ascertain which companies will necessarily benefit from a thematic issue one has identified,” he says, giving the example of the oil price highs of a couple of years ago.

“The oil price had reached very low levels and everyone was talking about the end of the world as far as exploration was concerned.”
A subsequently rising oil price meant rising capital expenditure (cap ex) budgets. 

“But it’s hard to know when you are sitting outside the industry exactly which oilfield services will benefit and in which sequence as not all oil companies or regions are created the same.”

Gray says that in this example, when he was confident that cap ex budgets would start to rise but he was unable to precisely identify which companies would benefit, the cheap and efficient way to play the investment theme was by looking for an ETF which represented a basket of oilfield services companies, giving beta exposure to a market or asset class or a specific expression of an investment theme.

Gray is impressed by the way the ETF industry has grown but feels a lot of the products are not necessarily what they seem.

“It’s important from our perspective that we don’t blindly apply capital to ETFs, we need to identify what we are attempting to invest in and in the most efficient way to do so. Before we deploy capital we want to understand what the ETF gives exposure to.”

Gray believes that simple themes are easily expressed through ETFs but other themes are less so.

“When one reads about AI in ETFs when 99.9 per cent of that sector is in private hands, and mostly Google, it’s hard to understand how that is a theme that can be played. You still have to do the hard work and analyse exactly what the exposure is which is true of active investments too.”

Dolfin is building a platform for other wealth management firms and has no plans to launch its own ETFs, but will offer third party active funds and third party passive funds as well as its own investment products.

“I think there is a potential sort of issue tied up within the ETF universe which may actually hamper liquidity in the event of a significant market move to the downside,” Gray says. “I don’t think that the biggest is always beautiful and that necessarily people quite understand how broad ETFs are created and that it is a market-making process that enables ETFs to trade.”

Gray warns that the tight spreads may not always be there. “It is in the back of our minds that we worry about liquidity and we are not always thinking liquidity will always be there. In terms of ease of investment that is helpful under the right circumstances.”

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