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Selectors weigh in on persistent passives market

Fund buyers from across Europe reveal how they are using passives in portfolios.

Persistent passives

There’s not an asset manager or selector around who hasn’t been asked about the impact and popularity of ETF or passive products. With recent market volatility hitting some of the world’s biggest indices, are they sustainable investments or could drive a highly-correlated crash?

One example would be the huge outflows which have been seen from the SPDR S&P 500 ETF, which over the past week has seen $17.4 billion pulled from the tracker, with $8 billion being removed on Tuesday. This marked the biggest daily withdrawal in the post-crisis era.

In this gallery, Citywire Selector hears how top fund selectors from across Europe are positioned regarding passives, or if they think we could be picking up the pieces from the popular investment vehicle.

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Ian Crispo

Deutsche Bank (UK)

'We are mainly using passives in the main plain vanilla core markets when we require more traded oriented approaches and need to go in and out of certain sectors many times.

'For example, you can allocate to passive strategies on a short-term basis in the US large-cap sector. On the long-term basis, we have fund managers offering strategies that should offer more protection on the downside when these markets correct.

'It doesn’t mean these have to be liquid alternative strategies. We are rather looking for equity strategies that are more unconstrained, have the ability to be more defensive at times or are managed in a more conservative fashion.

'But we certainly use more passive strategies for short-term oriented trades and active managers for long-term bets.'

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José María Martínez-Sanjuán

Santander AM (UK)

'I don’t consider passives to be a threat, but rather an opportunity. The active vs passive debate is not new and it has been around for many years.

'It is a cyclical story and actually, despite a few years being great for passives, this one is precisely the opposite. Bear in mind that the less active managers are the more alpha opportunities there are for those who remain active.'

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Marta Campello

Abante (Spain)

'We are quite particular in terms of how we use passives. We are really keen to use active managers as much as possible but that is not always the case. But then we have to look at how efficient that is, for a market like EM, there are a lot of inefficiencies, so that makes more sense to be active with a carefully selected manager.

'We do find there are areas where we want beta as we don’t want to lag the market. Take the US, for example, if you had had zero in technology equities last year or 2016, you would have lagged.

'So, in that case, it made sense to have some passive beta exposure to capture that and then have a selective manager doing something different in tandem to generate alpha elsewhere. Japan is a similar story.

'In the beta range of our funds, we have 30-40% in passives to capture that beta, which can be either through futures or ETFs. We are very comfortable explaining that thinking to our clients.'

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Daniel Feix

C-QUADRAT (Austria)

'C-QUADRAT has been implementing and using ETFs for quite a long time now and we do have an above average exposure to ETFs in our asset allocations.

'We are not seeing ETFs as a threat. Where markets are very liquid or rather efficient and there is little chance of outperforming the market - for instance the S&P 500 - then we buy ETFs.'

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Guendalina Bolis

Inversis Banco (Spain)

'We have always been selecting and recommending passive instruments. We are constantly looking for the best way of representing an idea and we do not mind selecting an ETF when it is the case.

'As an example, since 2014 when I joined the company, we have recommended the SPR as the best way to implement exposure to the S&P 500.

'In doing so, we have developed a proprietary scoring model for ETFs and we carry out a specific due diligence on these instruments, on our platform there are currently available 3,000 ETFs.'

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Uwe Ketelsen

Coutts (UK)

'Passives is a key question, especially with the pressure being placed on the AMC. However, it is something we would always look to avoid in fixed income because the indices are weighted towards the most indebted issuers, which is not ideal.

'We see value-added in active management and research, so we focus our attentions there on improving and refining our research efforts. In certain regions there is a clear case to be passive because of the market efficiency and there we would look to use them more tactically.

'We would always prefer to work with an active manager but we would not want to inundate a manager with questions or demands once we started working with them.

'For a market like the US, we would ideally have a 50/50 split where we have a decent active manager and an index for our equity allocation. This is the best way in which we can approach the passives market. What we still avoid is what people are calling ‘smart’ ETFs.'

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