Active strategies take the lead in portfolio construction

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Global Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

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Greg Gipson, managing director and head of ETFs at CIBC Global Asset Management 

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When we look across the ETF market globally, and particularly here in Canada, what we see is a move from what has traditionally been more of a passive approach to managing ETFs — think of these as broad index ETFs or sector-based ETFs that follow a specific index — and what we’re seeing is a move to, and an appreciation of and use by investors of more actively managed strategies. 

Now, the first generation of these active strategies were more on the covered call or derivatives-type strategies. But now what we’re seeing is the incorporation of traditional, fundamentally driven active strategies in an ETF wrapper. And this is truly exciting for us, for the industry, as ETFs are really a delivery mechanism of exposure for investors. And broadening out and offering Canadian investors the opportunity to gain access to managers that have traditionally been only available to institutional investors is truly a unique opportunity, and a trend that we see continuing in the future. 

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From a portfolio-construction perspective, it’s often prudent to really focus on the overall objective of what you want your investment portfolio to accomplish. This overall objective typically leads to the core or the foundation of your portfolio. So, think of it as the foundation of a house. It’s where everything sits upon. Then having the ability — and this is really where ETFs have grown and resonated with investors — to tilt your portfolio towards areas of the market that you feel are going to be rewarded. 

Think of this — again, in the house framework — every house has a foundation, but every house is unique, and it’s truly tailored to the needs of, in this case the family that lives there, but in the case of a portfolio it’s really allowing investors to curate a more bespoke solution, tilting along areas in equity markets like geography, so U.S. versus Canada versus international. Or things like size — large cap and small cap. Or styles — value versus growth versus income. 

Having levers to adjust positioning, then enables investors — empowers investors — to truly create a portfolio that meets their interests and their needs. 

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The research process that sits behind the four Counterpoint Global ETF funds are anchored in three specialized research pillars: 

• the first, disruptive change; 

• the second, tailwinds; 

• and the third, consilient research. 

Each of these pillars provides a unique perspective for portfolio managers and analysts to then identify emerging trends and opportunities in the market. 

There’s a strong emphasis across the three pillars on a bottoms-up fundamental analysis, including regular management meetings and primary research, which is complemented by a systematic bias analysis and pattern recognition. The focus is on high-conviction, long-term value creation, and constructing portfolios around the team’s highest-conviction ideas, while continuously monitoring for the integrity of the thesis underlying the positions. 

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The two styles — growth and permanence strategies — differ in a number of ways. The growth strategy targets innovative high-potential companies at the forefront of change. The strategies themselves are invested in a concentrated portfolio, aimed at providing higher upside, while also experiencing the potential for a greater degree of volatility or risk in the portfolio. 

The permanence strategies focus on more resilient established businesses with proven durability, while emphasizing stability, steady compounding and, generally, a lower risk profile across market cycles than the growth strategies. 

These two approaches are then reflected in portfolio construction. You will see that the growth strategies tend to be more concentrated and more dynamic, while the permanence strategies tend to be more diversified among quality leaders, and general greater consistency and longevity of positioning in the strategies. 

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With investors thinking about how these strategies work, and in particular how they work in the current market environment, we would say that growth strategies are really suitable for investors who are seeking exposure to early-stage innovators, and are perhaps willing to accept a greater degree of volatility or variability for the potential of higher long-term return. Conversely, the permanence strategy offers more of a quality-oriented approach, appealing to those investors who put a greater priority on stability and resilience amidst market uncertainty. 

Both of these strategies can really offer complementary exposure and work together. Think of them as balancing the pursuit of long-term upside with the need for a more durable or consistent performance that one would see in a permanence strategy. 

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These four ETFs really offer a number of different ways to fit into a broader, more core equity portfolio. For those advisors who manage their own direct equity portfolios, something like the growth strategies can really offer a similar concentrated approach, while offering exposure to names that may not be on an advisor’s radar. 

Both the growth and permanence strategies can serve as diversifiers or completion tools, offering the ability to add exposure or gain exposure to high-conviction ideas, sectors or regions that are often underrepresentative in a typical core portfolio. 

All four ETFs are actively managed, research-driven, and offer investors the ability to enhance the overall quality, conviction and return potential from their core allocation. With the introduction of these four strategies in ETF form in Canada, they offer the ability to flexibly integrate any or all of them as strategic tilts, or satellite holdings or blended components, and empower advisors to tailor portfolios that truly meet their clients’ unique objectives, whether that is looking for high-conviction growth opportunities in global markets, or a more consistent or persistent exposure and resilience that’s seen in the permanence strategies. 

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As I mentioned, this trend of increasingly offering active strategies in ETF form is a trend that we see continuing into the future. 

So, if we look out over the next five to 10 years, what do we think? We think that the use of ETFs, and the delivery mechanism — the liquid, transparent, continuously priced vehicle for investors to implement their view — will only continue to grow. Because of that growth, we see and believe that ETFs will only become an increasing proportion of the average investor’s portfolio. 

With that growth comes innovation. 

Forecasting the future is incredibly challenging, but I believe what we can comfortably say is that the options that are available to investors in ETF form will only increase over time, and will likely also continue to see that pricing efficiency, cost-effective exposure, liquid, transparent and readily available opportunities for investors to truly continue on their investment journey.

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