Fund selectors are facing up to a changing role for passive products. While they become more prevalent, what is the ideal way to deploy them? Here, HSBC Private Banking’s head of fund selection how – and where – to best put them into practice.
Selector: Dr. Eckhard Weidner
Company: HSBC Private Bank (UK)
We think ETFs are a good addition to your arsenal of investment options, and are ideal for shorter term, tactical allocations because they are available, transparent, and are liquid.
While we are generally less convinced about smart beta ETFs, as their price advantage compared with clean share classes of actively-managed funds is not that significant, they can be a useful tool to obtain specific exposures, for instance to a specific style or factor.
The US has been one of our preferred markets and the mid-cap segment has been a focus, using active funds and ETFs. Everyone is conscious that valuations in this market are fairly high.
We don’t necessarily think it is a red flag because we have had these valuations for a while and prices have been going up with earnings but taking some profits may not be the worst thing to do.
Hence, more recently we have been reducing our allocation to the US and at the same time have become more constructive on European equities.
The positioning in European equity markets is now equally important to our US equity overweight as the results of elections in Europe, on the continent and in the UK, have reduced tail risks.
Independent of that we see an improvement of the European economy, both in soft and hard data, which led us to increase our allocation, especially seeking exposure to more cyclical types of companies.
The latter generally means using more value-biased strategies with the right type of sector exposure, so not just energy and materials, but also industrials and financials, to gain exposure to an economy which seems to be improving if you look at PMIs and other indicators.
ETFs can be useful to gain suitable exposure, either on the sector or style level. Our positive view on Europe is also driven by emerging markets (EM) economies picking up again. This is indirectly positive for European companies, as they are more exposed to EM than a lot of US companies are.
We have considered the EM side of this equation and while we remain selective in terms of EM equity exposure this has been broadening out to more countries as we see the data in these markets coming through.
While EM country ETFs can be more costly and often track their index less well this can still be a viable investment product for expressing our more granular EM equity views.