US investment industry giant, Hartford Funds, launched its first ETFs three and a half years ago through the purchase of current head of Investment Strategies and Solutions, Ted Lucas’s ETF business, Lattice Strategies.
The firm’s huge asset base is largely in mutual funds, some USD127 billion in discretionary and non-discretionary assets. However, the ETF business was just under USD100 million at the time of purchase and now sits at USD4 billion, which Lucas modestly describes as ‘some very nice growth’.
That growth has come as general organic growth in the factor space, Lucas says, from investors and advisers who are looking for ways to change their portfolio.
Hartford has seven multi-factor ETFs and five active ETFs. The multi-factor ETFs are technically passive with a rules-based strategy index but Lucas observes that many investors regard them as active in the weight of their holdings, which is very different from a cap-weighted index such as an ETF based on the S&P 500.
“Something like that has a very concentrated portfolio whereas what we are doing is seeking to bring in a greater degree of diversification.”
The five factors to which the ETFs are exposed are value, momentum, quality, size and low volatility.
Small is comparative in Hartford’s world but Lucas confirms that the firm aims for greater diversification and less concentration of position through avoiding mega caps, such as Amazon or Microsoft.
As an active manager, Lucas confirms that Hartford has been looking at the non or semi-transparent ETF structure, all types of that structure.
“We have a very strong active equity capability with Wellington Management,” Lucas says. Also, with Schroders who are sub-advisers on their mutual funds.
“Any non-transparent would likely be in partnership with both of them,” Lucas says. “We are assessing the structures and we always assess demand through active conversations with the advisers we serve. We are seeing interest and if you can take a fund that has been successful and deliver it through the ETF structure, it should be successful because of the low cost and the tax efficiency. However, advisers aren’t saying we need it and we need it now.”
Hartford Funds has recently launched the Hartford Core Bond ETF (HCRB), sub-advised by Wellington Management, and designed to seek to provide long-term total return by investing primarily in investment-grade fixed income securities.
“Last year was the first year we saw fixed income ETF flows equivalent or greater than equities in the US,” Lucas says.
“That said the bulk of those flows have gone into passive strategies suggesting that there is a virtue to investing passively because the weights are weighted according to the issuers’ levels of debts. There’s not a lot of investment intuition behind that and recent data suggests that you can improve the investor experience with active management.”
Multi-factor equity has seen the greatest growth in their product suite.
“We’ve tried to distinguish our approach to multi-factor by targeting the factors and delivering as strong and balanced an exposure across those five factors as possible,” Lucas says. “We like to enhance the return over a cap weighted portfolio. It’s a point of distinction for us that we also equally focus on the defensive part of the portfolio. We target risk reduction, and over the turbulent periods across the suites, we have improved performance and had less downside capture than a full cap weighted approach.”