By Brian Butchart, Managing Director and CFP®
Global politics and economics have caused volatility in financial markets in recent times and reports of an expected slowdown have made investors very nervous. During such times of turmoil and uncertainty, an effective diversified strategy and prudent fund selection can provide assurance to manage those nerves.
A popular investment solution to reduce costs and provide effective diversification are index tracker and exchange traded funds (ETFs). An ETF is a fund which tracks a stock market index and trades like regular stocks on the exchange, whereas index funds track the performance of a benchmark index of the market. Research has shown some passive investment solutions have surpassed some of their active counterparts in terms of capital and income growth and as a result, passive solutions have become increasingly popular.
The debate between active vs passive has been raging on for decades. The late John Bogle, founder of Vanguard, was the poster boy for promoting low cost Index funds and there is no doubt based on historical evidence, Index trackers are effective as part of a long-term portfolio to provide cost effective accessibility to multiple asset classes and markets across the world. Vanguard, one of the best-known and established passive asset managers has been very successful in delivering long-term returns to their clients.
The greatest benefit of these type of products is they provide multi – company, industry, country and tradeable asset class exposure at a relatively low cost. The range of nuances within these offerings have also expanded including focus areas like dividend yield, volume, quality or geography with access to multiple themes such as renewable energy, robotics or healthcare to name a few.
ETFs and index trackers are usually low cost, with significantly lower fees than those of actively managed funds. They are easy to understand and use, and investors’ expectations are easy to manage. If you invest in a market index, you know you are going to get the market index return (less a small fee). This all means diversification or risk management can start at a much simpler level. ETFs and trackers allow clients to pool their money in order to allow smaller investors access to asset classes which may be difficult to hold in small denominations.
Although passive investing provides some obvious benefits, various index funds these days give exposure to almost anything. This means that you still need to have some sort of stock picking strategy, which then is no longer passive investing anymore. The combination of a passive selection of investments then becomes an active decision.
Passive investors can also have very different returns as there are multiple indexes that can be tracked, and an explosion of ETF’s to choose from. This is especially relevant as passive investment solutions have increased significantly over the past 10 years. This means the returns passive investors achieve, might vary across the board depending on which index, asset, ETF or market you are tracking.
Therefore, skilled active managers can still add significant value and alpha to long-term portfolios and supportive of an investment solution which combines both active and passive strategies.
There are a number of ETF and tracker funds offering a multitude of investment opportunities and solutions globally, most of which, such as the Vanguard range of index funds are not FSCA approved.
For these reasons and to further ease access to low-cost international equity solutions, Brenthurst established its own fund of this nature in 2018 in association with Momentum Global Investment Management (MGIM) called the Brenthurst Global Equity Fund.
This unique opportunity allows investment into passive ETFs and trackers, actively managed by Glyn Owen at MGIM.
This fund is used as part of our core portfolio together with other passive and actively managed funds to construct bespoke international investment strategies. This investment offers local investors exposure to the top index trackers and ETF’s in the world including Vanguard, Black Rock and other global giants. It not only offers investors exposure to global stock markets but as far as we can determine is the only Financial Sector Conduct Authority (FSCA) approved international fund investing entirely in ETF’s and trackers. The fund is the latest addition to our range of funds giving exposure to leading companies, regions, currencies and countries at a fraction of the cost of other internationally managed equity funds.
The current Top 10 ETF and tracker holdings in the fund:
These types of investments provide diverse allocation across geographies, investment styles and themes, reduces risk and the recipe has been tested over three, five and ten years. The annual volatility was shown to be substantially lower than most international equity funds due to the diverse nature of the portfolio which outperformed the MSCI world index over 10 years on a back-tested basis. In addition, the lower cost resulted in better outcomes than some of the managed general equity funds over the same period.
The fund delivered a stellar 17% YTD, with assets under management in excess of $18 million and gaining traction.
This combination of both passive and active strategies complements one another and potentially offers superior long-term outcomes as opposed to either investment strategy in isolation.
Any investment strategy, however, should be carefully considered in consultation with an advisor who can address the risks and assess suitability to individual circumstances.