Mountains in Clouds


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Hall Road Investments #51 (Family Office Sherpa, Index & ESG)

The Sherpa Update

New Article – Simple has published my third article, you can find it here.

Family Office Regulation – as mentioned in this piece from the FT, the time of light oversight for a particular type of family office may be over.

VGI – has appointed Jon Howie as CEO, he’s ex head of iShares and Indexing at Blackrock. The appointment comes off the back of recent criticisms of VGO for its LIC discount and perceived lack of communication with investors. If there is anything an ex indexing executive knows, it’s the importance of communication with unit holders. When the product is almost completely commoditised like index funds are, the task of separating your strategy form the rest is extremely difficult. For active managers (especially those with strong recent performance) a lot of the communication boils down to – this is how we performed, aren’t we insightful/different with our opinion on this company.

With beta, you have to think outside the box – practice management for advisers, deep factor research for insto, lowest fees and stock narratives for direct investors. Have a look at any ETF managers recent sales email and compare. If you want someone to improve your interactions with investors, hire beta.

Performance – Speaking of performance, two funds are in the news for the wrong reasons, Magellan and Bronte Capital.

They are not the only ones that held cash or remained defensive during this rally, just those that put their heads above the parapet with printed opinions. With Magellan, the AFR has pointed out the issues that index investors have talked about for a while – despite the concentrated structure of the Magellan Global Fund (fee of 135bps, 10%), over the long term, the iShares ETF that covers that index actually provides the same level of return. Magellan will note the downside capture reduction which you don’t get with the Index, but that argument holds less water when it doesn’t benefit the long-term investor over the 3- and 5-year cycle. If the market tanks, the fund should outperform so get ready for some serious marketing spend. Then again, so too will most quality/value factor screened indices.

One of the benefits and negatives as an ETP issuer is that the world sees your flow on a monthly basis – keep an eye on their now listed fund (MGOC) in the ASX report. It’s unlikely the sticky adviser money will come out as the paperwork is a pain, but tides can turn, even for the most successful firms.

There is some interesting research on investing in funds that have underperformed, i3 even had a podcast on it which is worth checking out.

Inter-Dealer Broker – for those that don’t use firms such as TP ICAP or GFI the world of IDB is not well known. There will be a lot of interesting information on this world coming through the press due to the most recent court case. They are aggressive in hiring, lots of well publicised suing and counter suing when brokers are poached from each other. The most famous in Oz was more due to the specificity of the entertainment budget ($85K). I worked on ICAP’s natural gas swaps desk in London for a short stint and I can tell you if I continued there my liver would’ve fallen out.

Addepar – Speaking of tech platforms, this one has reached $2.5 trillion in assets. How much profit they make from that amount is wide open for debate but as Lex Sokolin says: “The firm’s historic differentiator was alternative investments, and now it is likely the scale of its data set and its aggregation technology,". The data arms race continues and Addepar is adding $10bn a week of new adviser money.

Indexing and ETFs

BlackRock – launched a new fund in the US that looks to bias those companies that will befit from a move away from oil. It received over $1.2bn inflow on its first day of trading. Bloomberg mentions that it may be insto money, but I would’ve thought they would be given pre-listing seed.

Doesn’t matter where it comes from, it was the biggest daily inflow in ETF history. ESG related ETFs in the US are now $70bn.

ETF Tax – Some fund managers in the US are using the tax benefits of in-kind transfers to “authorised participants” to avoid tax drag. Seems like a very roundabout way of doing something that comes easily in an ETF/ETMF wrapper with a broker as the AP but it does illustrate the very real benefits of passing on tax events to a counterparty outside the fund itself. The article is here for those interested in the mechanics.

Tax Effective Indexing – I didn’t realise that SMAs were first introduced to retail in the 1970s and were sold on their ability to be tax efficient and socially responsible. This research piece from Cerulli was interesting as it showed that despite the ability for managed accounts to be tax efficient, only 53% in the US receive tax treatment and only 16% receiving ongoing, systematic tax optimisation. It would be very interesting to see what that figure looks like in Oz.

So what? Well, taken a step further the benefits of direct indexing plus tax optimisation seems like it should be a product. Add low to zero transaction costs, fractional trading and an ESG overlay, and you have the makings of a very cool custom strategy that can be made specifically for each investor. The technology is there in terms of platforms, you just have to know the right questions to ask.

$100bn – Lots of press that ETFs have topped $100bn in FUM. They haven’t and it’s a shame no one bothers to point out that $75bn in actual ETFs is not such a bad figure. Some of the articles illustrate why this delineation between Exchange Traded Managed Funds and ETFs needs to be made. The advisers quoted are confused – claims that they are more volatile because they’re listed, the fact that they mention indexing as a way to gain exposure to the market when the $100bn quoted includes some very active hedge funds. If it’s hard for advisers, I can only imagine what the direct retail investor is thinking. ETFs can be active; they just need to follow the rules. ETMFs are not the same thing and don’t have the same market making, iNAV or clarity of pricing.

ESG & Philanthropy

ESG Mark 2 – the move to Index SMAs over ETFs may soon gain traction for a certain type of client. Instos have known for a long time that off the shelf indexing is not always sufficient. As hyper customisation increases for the UHNW client base, the need for separately managed accounts for their index investments will come to the fore.

My pick is ESG indices will be the first to gain traction as this is where individuals bias and preference are most obvious. Family client A has a bias to carbon reduction and for a select number of Sustainable Development Goals to be the main focus. Ok, we can build that from the MSCI World Index, optimise for lowest tracking error with the least number of stocks, have material reduction in carbon through the tools provided by Sustainalytics or sophisticated tech coming into Oz from Europe and the US and call it the Family A ESG Index. They own the stocks; technology allows for smarter rebalancing to reduce costs whilst maintaining the appropriate weights.

As always, if you want daily updates on what I’m looking at start following the Hall Road LinkedIn page




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