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Moving to ETFs has kept AJ Bell at the cutting edge


Educating the investing public that ETFs are not actually a trading tool has kept Matt Brennan (pictured), AJ Bell’s head of passive portfolios, busy.

Assets of GBP250 million sit in a range of AJ Bell funds that are predominantly invested in ETFs. The move out of index tracker funds and into ETFs was taken on Brennan’s arrival with the firm just two years ago.

“We think it’s a better structure for the future,” Brennan says. “We use them in our funds, MPS and Favourite funds list because they are more transparent, scalable and have a fairer structure.”
He finds that a lot of retail investors see ETFs as trading instruments because they trade daily, just like shares.
“But they are long term investments so we have been trying to do a series of educational things to explain the benefits of the funds. We say that although they are more liquid you should use them as you would other funds but take an extra layer of comfort because you can trade them.”

The last couple of years have seen ETFs overtake tracker funds in terms of new product launches and in terms of costs, Brennan says.

“The focus for ETF providers is on smart beta, thematics, ESG. All of these things come in ETF form. If you want to stay at the cutting edge and you are not using ETFs, you will be left behind.”

For Brennan, tracker funds focus more on globally regional equities. “But lots of people are thinking not about what country should I invest in but which sectors should I have exposure to and ETFs are where these product launches are coming from.”
Brennan also notes that from a cost perspective ETFs are designed in a way that gives automatic price competition.

“If an ETF provider cuts their fees, another provider has to look at their price but index tracker fund providers just bring out new share classes to protect their revenue streams.”

The fact that over time there is a natural price competition between ETF providers, means that ETFs will always be competitive without the investor have to constantly switch between provider, Brennan says.

“There is no need to constantly move that money and that’s how we work,” he says. “We have long term partnerships with ETF providers so if we need changes or they make new product launches they know we will invest and be long term investors.”

In the two years that AJ Bell has so thoroughly adopted ETFs, markets have largely gone up but Brennan observes that even in a down market, while ETFs will go down with the market, active managers will also go down and they cost more while doing it, which over the longer term really adds up.

“In the fourth quarter of last year we saw a 10 per cent drop and the active industry performed as badly as many examples of ETFs,” Brennan says.

“Less liquid managers suffered worse and active managers are often in those places, in illiquid or unlisted stocks.”

For Brennan, it’s all about trying to focus on the asset allocation and getting the tactical calls right. “ETFs have developed so far now that as an asset manager we can negotiate any downturns. ETFs will drawdown when markets drawdown but for us as stewards of how we allocate we can do as well as an active implemented vehicle.”

Since 1900, there has been no period where equities have experienced drawdowns over 10 years in nominal terms, Brennan says, also commenting that costs become even more important over the longer term.
“If you are investing over the long term, you have to accept the drawdowns and ride through them.”

Brennan also believes that the whole liquidity debate has been one of those areas where the active industry has used it as a tool to stop people switching into passive investments.
“But ETFs are designed to be liquid by buying the biggest stocks with the most traded volume out there and it is easier to raise capital than for an active manager who might be in smaller or unlisted stocks.

“You can’t create liquidity out of nowhere but we say that as long as you stick to the right areas ETFs can give you more comfort than an active equity fund.”

AJ Bell runs an adviser platform with model portfolios that cover passive, active and a combination of the two that they call the Pactive range, that selects active or ETFs on an asset class basis.

“The way we approach asset management is that we understand the different schools of thought for active and passive and even a bit of both but the most important thing from a portfolio implementation point of view is to get the asset allocation right,” he says.

“We just want to deliver good investment outcomes and serve the whole market, with feet in both camps and understanding the pinch points.”

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