Golden Girl Finance
HAHN Investment Stewards & Company Inc.
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The rise of the ETF strategist

August 20th, 2013 by

Necessity, the mother of invention, has led to fundamental change in the way portfolios are managed and in the solutions advisors are offering their clients


A leader is best when people barely know he exists, when his work is done, his aim fulfilled, they will say: we did it ourselves.”        

Lao Tzu, 6th century BCE

It took nothing less than a global financial crisis to change the face of our industry. Necessity, the mother of invention, has led to fundamental change in the way portfolios  are managed and in the solutions advisors are offering their clients.

First came the shock as traditional approaches to asset class diversification proved inadequate in the market volatility accompanying the Global Financial Crisis. Then followed investor demand for products that delivered better diversification, transparency and liquidity than what they currently owned. Witness the ETF explosion - with $2 trillion in AUM (triple that of 2008) and over 4,800 ETP offerings worldwide as of June 2013.

Sea change takes time. Professional asset managers were the first to exploit the benefits of ETFs at the fringe, primarily as short-term trading or completion vehicles. Advisors and institutional communities took much longer to assess how these vehicles could fit into their existing practices and asset allocation programs.

A sophisticated portfolio management tool

In the more than five years since the advent of the Global Financial Crisis, however, it has become clear to all parties that global investing has become considerably more complex and the goal of delivering consistent investment returns to clients much harder to achieve. In this context, the greatest benefits of the ETF emerge: as a sophisticated portfolio management tool in the hands of a professional investor.

According to recent studies by Greenwich Associates in both Canada and the United States, more than a third of Canadian institutions and half of US institutions expect to increase their allocations to ETFs by the end of 2013. Not only are there a growing number and type of institutional users, but early adopters are finding new applications of both a strategic and tactical nature within the portfolios they manage.

The ETF has made it seemingly quite simple to construct a portfolio with broad geographic, asset class and security diversification. The creation of ETF portfolios, however, requires a growing amount of research effort, a rational portfolio construction methodology, ongoing monitoring and periodic rebalancing, all of which place significant demands on the investor or advisor’s time. While ETFs now provide access to new asset types around the world, the research and due diligence required for appropriate selection has also increased exponentially.

Further, the growing complexities of global financial markets and increased macro volatility since the Global Financial Crisis have made the task of portfolio management increasingly challenging even for seasoned professionals. Those with the demonstrated knowledge and experience to build a global, multi-asset class portfolio are numbered, while the effectiveness of buy-and-hold strategies to achieve client objectives is diminished.

Tactical asset allocation strategies which pro-actively position portfolios for macro-economic events have the most opportunity to add value in this environment. ETFs are the great enabler for tactical asset allocation strategies - facilitating cost-effective asset mix shifts with greater diversification and risk management opportunities than were previously available. A disciplined and effective investment process is a must, however, for success in this arena.

The rise of the ETF strategist

In response to these challenges and to the opportunities that ETFs provide, the investment industry has witnessed over the last three years the emergence of a new category of investment manager identified as having a “special expertise and deep knowledge of ETF portfolio construction and trading,” according to a 2012 research study commissioned by BlackRock.

A number of other research organizations and industry organizations have also stepped forward to offer analysis, classifications and projections on this growing trend. The Morningstar ETF Managed Portfolios Landscape Report, published quarterly in the United States, estimates the ETF managed portfolio industry at $73 billion at March 2013 and currently tracks 605 strategies from 140 firms, mostly US- based. According to Morningstar, the segment experienced 60% growth in 2012, and another 12% growth in the first quarter of 2013, making it one of the fastest growing segments of the managed account universe.

Definitions, terminology and classification systems vary somewhat and to date, most of the industry analysis has been US-based, reflecting the leading trend in that market to provide registered investment advisors with managed ETF solutions. Efforts are underway in Canada as well, however, to identify and classify the leaders and participants in the managed ETF portfolio strategist universe.

While some asset managers resist classification and others are somewhat bemused at the flurry of recent attention in this space, for those asset managers interested in growth, the opportunity to provide ETF managed solutions to the advisor community cannot be ignored. Morningstar notes that distribution platforms in the US have begun reallocating their research resources to conduct ETF strategist research, a development industry observers in Canada are also watching. Successful ETF strategists to date have been those with at least 80% ETF content in their portfolios, offering a small number of focused portfolio strategies, and with clearly articulated client service and distribution strategies. ETF Strategists with proven track records in excess of five years should also excel in this environment. Only recently have the earliest movers in this industry begun to achieve 10-year records.

Reasons behind the ETF managed portfolio growth

There are a number of reasons for the growing use of ETF managed portfolios in the advisor channel. First, the popularity of ETFs has prompted clients to ask their advisors for ETF solutions, but many advisors do not have the time or expertise to become ETF researchers or ETF portfolio strategists. Second, increased regulatory requirements and scrutiny on advisors has led to a trend in outsourcing part or all of clients’ investment needs to third party discretionary managers able to meet the fiduciary standard.

With increased time constraints, advisors are increasingly turning to managed solutions, allowing them to spend more time with clients and focus on their practice. The growing trends toward fee-based advisory services and fee transparency also fit well with an outsourced investment management solution, allowing the advisor to charge appropriately for time spent providing other value-generating services such as financial planning.

Advisors who work with one or more ETF portfolio strategists can offer their clients the best of both worlds: top rated, institutional-quality asset management and first class service – a winning combination in any advisory practice.


Robyn Graham, Vice President/Associate Portfolio Manager, HAHN Investment Stewards



How the pros use ETFs to raise the bar on portfolio management

June 11th, 2013 by

When exchange traded funds and portfolio management merge, investing is taken to new global heights


With over 4700 exchange traded products (ETPs) available in the market today and the growth in assets under management from $146 billion ($USD)  to $1.839 trillion ($USD)  in the last ten years[1], increasing numbers of investors are looking for ways to put the many benefits of ETFs to work in their portfolios.

Not many years ago, investing meant taking out an annual term deposit or GIC each year with your local bank or trust company. In the 1990s, mutual funds exploded in popularity by giving smaller investors the opportunity to diversify into stocks, bonds and foreign investments by pooling their investments with other like investors.

The recent popularity of exchange traded funds has led many to draw comparisons between ETFs and mutual funds.  There are many similarities: both vehicles provide access to capital markets by pooling and unitizing a basket of securities. Both offer diversification benefits and liquidity and share similar legal and custody structures for the investor’s protection.

Taking investing to the next level

The ETF vehicle has taken the evolution of investing to the next level, however, by securitizing these diversified baskets of securities and listing them on stock exchanges throughout the world.  What this means for investors is that diversified asset exposure can now be bought and sold at a very reasonable cost, any time markets are open. Investors and advisors are availing themselves of this opportunity, building simple portfolios of ETFs inside their RRSPs and out, with better diversification than most investors could previously afford to obtain.

For most people, however, the challenges of choosing suitable investments and monitoring those investments remains daunting regardless of whether they are using ETFs, mutual funds, or individual securities. In a global investment environment where markets are increasingly driven by global macro-economic factors, the value of expertise in professional investment management is more important than ever before.  ETFs have caused a quantum shift in professional portfolio management techniques, and it is in this arena where the most value and benefit have been delivered to the investor.  Where previously the lion’s share of professional analysis would have gone into selecting one security over another, now emphasis is increasingly being placed on global macro-economic analysis and the resulting asset allocation decisions that are the key drivers of portfolio risk and return.

Accessing rare asset classes

ETFs have provided intra-day liquidity and affordable access to asset classes that were previously prohibitively difficult and expensive to access, such as commodities, precious metals and emerging market fixed income. Further, the proliferation of ETFs now makes it possible for money managers to not only access cheap beta, but to overlay thematic weightings in the portfolio using specialized ETFs, such as those focused on income generation.  As a result, it is now possible with as little as $100,000 to build a better portfolio at less cost than was possible 15 years ago with individual securities[2].  Most importantly, the liquidity of the ETF vehicle enables professional managers to employ a tactical component in their asset mix decisions at far less cost than with a portfolio of individual securities. In today’s volatile, globally inter-connected investment markets, the need for diversification has never been more acute. The potential to manage risk and generate alpha through tactically managed ETF portfolios has never been greater.


1 BlackRock ETP Landscape Report, October 31 2012.

2 Wilfred J. Hahn, co-CIO, HAHN Investment Stewards & Company Inc.


By Robyn Graham

Vice President/Associate Portfolio Manager

HAHN Investment Stewards