News came last week about the launch of a new investment manager launch in Italy, Investlinx, launching two new active ETFs.
Founded by Mario Bonaccorso, a long-time Exor senior executive, and led by CEO Matteo Solfanelli, Bonaccorso sat down with ETF Express for this Q&A Interview.
- Tell me about your new company? What was the driver behind launching a new investment firm?
The decision to establish Investlinx was driven by my belief that the traditional investment management industry has inefficiencies in how investors capital is managed, which I have tried to address and solve through Investlinx.
According to S&P Global, more than 70 per cent of actively managed funds in the United States underperformed their comparison index over a 15-year period, which leads to the conclusion that most investment management firms fail to generate value for their clients.
Based on my prior investment experience, there are three reasons for this inferior industry performance: too many securities held in actively managed funds, which make difficult to invest with knowledge and conviction; focus on short-term fund performances rather than long-term value creation; and lack of alignment of interest between investment firms and investors, given the capital of investment managers is rarely invested in their mutual funds or ETFs.
I have spent the past 15 years in the private equity industry, which has appropriately addressed these issues: the number of companies in a private equity fund allows the manager to have in-depth knowledge of their businesses and the industries in which they operate; the average holding period of private equity companies is typically above four years; and private equity firms usually co-invests in their funds alongside their investors. As a result of this superior investment approach, despite the high level of fees charged to investors, private equity funds have delivered a 4.2 per cent higher annualised return compared to public equity market indices since 2002, demonstrating that actively managed funds can consistently beat passive indices or benchmarks, if properly managed.
Investlinx adopts an investment approach similar to private equity within a UCITS ETF: we have set high standards and an in-depth due diligence process to invest in our portfolio companies, with equity and fixed income portfolios expected to include between 30 and 70 securities each; even if our portfolio is highly liquid and investors may redeem their capital daily from our ETFs, we invest in quality companies with attractive business models and sustainable competitive advantages and consider ourselves to be long term owners of these businesses, without being distracted by making short-term decisions based on macro or technicals; the compensation of the Investlinx investment team does not envisage annual bonuses, but long-term equity incentives to align the team’s financial rewards with the culture of long-term ownership and performance of Investlinx ETFs; and Investlinx shareholders have invested their own capital in Investlinx ETFs, creating a strong alignment of interest with our investors.
Another reason to establish Investlinx is my conviction that investments in publicly listed securities can deliver superior risk-adjusted returns than investments in private markets such as private equity, given the high option value of liquidity and the fact that public markets are more likely than private ones to offer attractive investment opportunities amidst distress or dislocations in the market.
- Why did you choose to launch ETFs as your first products?
ETFs are simple products and therefore have lower operating costs for investment managers and for investors. Given the fees charged by Investlinx ETFs are significantly lower than comparable funds in Europe, having a competitive cost structure was important for Investlinx. In addition, ETFs are convenient as they can be purchased or sold in real-time during trading hours and provide higher liquidity and transparency than traditional mutual funds.
Given these advantages, ETFs are also being increasingly used by institutional investors, which together with private investors are an important client target for Investlinx.
- Will you only offer ETFs going forward?
We offer Investlinx funds through ETFs and traditional non-ETF share classes as we acknowledge that certain investors and financial intermediaries may prefer to invest through traditional mutual funds.
Investlinx also offers individual Separately Managed Accounts to institutional investors in Europe through discretionary portfolio management services or investment advisory services, given these clients may require customised solutions or tailor-made products.
- Why did you choose to go the active route and not use a benchmark?
Actively managed funds that use a solid investment process to select companies and securities can deliver superior returns than benchmark funds, and this has been the case for the private equity industry over the past 20 years.
ETFs using a benchmark are good instruments for investors or fund managers whose investment decisions are driven by top-down, macro or technical factors, as these instruments allow to efficiently track the performance of asset classes.
Investors should have exposure to both actively managed funds and benchmark funds in their portfolios, as these investment strategies are complementary. In Europe there are few actively managed ETFs and most of them are focused on niches or specific themes. Investlinx ETFs give exposure to actively managed global and diversified portfolios and aim to be a core component of investors’ portfolios, complementing their passive or indices ETFs.
In addition, actively managed ETFs allow for better risk management compared to benchmark ETFs. We live in a rapidly changing environment, probably the most uncertain in my 25-years career, where investment decisions need to be constantly challenged and assumptions re-evaluated. A portfolio of 60 per cent stocks and 40 per cent bonds lost more than 15 per cent in 2022, the worst performance in several decades and a performance not dissimilar than equity funds. That undermined a formula at the cornerstone of portfolio construction through benchmarks based on the inverse correlation between bond and equities. Actively-managed ETFs have the flexibility to deviate from benchmark allocations and prevent these drawdowns.
Another issue with benchmark ETFs is that investors are emotional and lack self-discipline, usually buying at the top of the market motivated by fear of missing out positive returns and selling at the bottom of the market driven by fear of losing capital. This means they may forfeit a meaningful share of their returns when investing through benchmark ETFs. This behaviour is understandable as investors are aware that their capital is not actively-managed during period of market dislocations and may prefer to sell their benchmark ETFs rather than incurring the risk of additional capital losses.
- Who do you imagine will invest in your new products?
We target private investors, either directly or through financial intermediaries and advisors, and professional investors, primarily insurance companies, pension funds and family offices.
We do not see ourselves a competitor but a complement of the existing ETFs in the market as our products are unique. We also aim to provide investors currently owning traditional mutual funds (representing approx. 90 per cent of AuM in Europe) a better and cost competitive alternative to their existing investments through our ETFs.
- ETFs have been slow to attract the attention of investors in Europe – do you think that your products will have a different experience?
It will take time to develop the ETFs market in Europe and it will not be different for Investlinx.
Investing in ETFs requires asset allocation and portfolio construction skills and most private investors do not possess those skills in Europe. In addition, the selection process of ETFs is complicated for both institutional and private investors as there are thousands of ETFs available in the market and proper due diligence is required to compare products and assess ETF risks such as counterparty risk, leverage and derivatives, securities lending.
At Investlinx we have made it easier for investors to buy our ETFs by embedding asset allocation and portfolio construction in our products and by offering only two actively-managed ETFs that meet different investors’ return objectives and risk appetite: an equity fund which invests in leading global companies and a balanced fund, of which approximately half of the portfolio is invested in fixed income securities and half in equity securities. To simplify the selection process and avoid unnecessary risks and costs for our investors, our ETFs do not use leveraged positions, do not short securities, do not use derivatives and do not lend the securities.
While we have made it easier for investors to buy Investlinx ETFs, we are conscious several years are needed to develop the market in Europe, but I am confident the tipping point may not be too far in the future.