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Join ETF Securities as we partner with Australian and international investment professionals to discuss the latest market and economic issues and what this means for investments. You’ll find the latest videos and articles on this page, or subscribe using the purple subscribe button on the top right hand side of the page to receive the weekly updates.

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ETF Securities Partner Series: Growth vs value in uncertain times
ETF Securities Partner Series: How Morningstar identify the top tech stocks
ETF Securities Partner Series: Why gold should always be a portfolio staple
ETF Securities Partner Series: Is robo-advice the future of financial planning in Australia?

Investment strategies in uncertain times

Jun 17, 2020

Uncertainty and periods of volatility are an expected part of life as well as financial markets and investors should be considering how to factor these into their investment strategies. While there’s no easy fix strategy that can be used for all investors, effective strategies tend to share a few aspects in common. Kanish Chugh, co-Head of Sales at ETF Securities, discussed investment strategies for uncertain times with Andrew Connors, Founder and Director of Quilla, one of Australia’s leading independent investment consultants serving financial advisers and institutional investors. The characteristics of a good investment strategy A good strategy will be tailored to the individual investor’s needs, goals and circumstances but there are a few aspects that should hold true regardless. “You can’t avoid diversification. It’s still the only free lunch you get with investing, and what I mean by that is you can invest in two securities that, in combination, mitigate some of the risks of each of those securities individually, without necessarily impacting the return,” says Mr Connors. He notes that diversification is more than just holding a variety of shares, it’s avoiding a concentration in one sector, region or asset class. Australian investors tend to have a home country bias where they mainly hold assets listed on the Australian stock exchange rather than spreading investments internationally and across assets. Mr Connors says, “another characteristic of a good strategy would be to manage excessive turnover in your portfolio. Turnover is one of those things that chips away at your returns in the background. So being aware of the impact of transacting and the transaction costs is important for a good investment strategy.” Understanding the products you are invested in, the risks involved and any correlation between your investments is also valuable to setting an investment strategy, for example, knowing that the performance of two particular assets is positively related may reduce the diversification benefits of both. Or alternatively, only investing in high risk investments may mean you are more exposed to volatility than you would like to be. Mr Connors also believes that investors should be aware of liquidity in their portfolios. “Liquidity was certainly impacted during the period of March when we saw the majority of the market falls… Being able to get your money out when you want it is an important characteristic of a portfolio, but also understanding those assets that don't necessarily have that liquidity. It's not necessarily a bad thing, but you need to be aware of it so that you are not surprised when we go through periods like that,” he says. Adjusting in periods of uncertainty Mr Connors has sought to incorporate investments that might perform differently to financial markets or offer stability to hedge riskier assets in the portfolios he recommends. “Cash is an asset you shouldn't be afraid to hold in your portfolio to protect wealth, and that's especially important in this current market environment given the swings we've seen in shares. Related to cash, but with slightly more risk, is bonds or bond funds. These still have a place in your portfolio, even when yields are so low, but you've got to understand they're not risk-free assets,” he says. In the current environment, Mr Connors has also seen value in foreign currencies and precious metals to support investment portfolios. “Foreign currency exposure… can insulate some of that volatility that we see from holding shares in your portfolio,” he says. Investors can incorporate such exposure by using unhedged international investments or by taking a direct currency exposure. This could be by transferring cash into other currencies or using ETFs like ETFS Enhanced USD Cash ETF (ASX code: ZUSD) for exposure. In terms of precious metals, gold has been a focus for Mr Connors. He says, “gold's been something we've used in portfolios over the last six to seven months as a tactical hedge against certain risk events… Gold has been up 9% this year to the early part of June, although it did experience some volatility throughout the pullback we saw in March.” Interested in investing in gold? Find out more about ETFS Physical Gold (ASX code: GOLD) Mr Connors uses a blend of actively managed and passively managed investments in his portfolio, with active credit managers gaining in recent times. The liquidity and ease of use of ETFs has been valuable during the past few months. “The specific benefits of ETFs, for us, include being able to use the ASX clearing house. So that means that we can implement complex transactions with multiple buys and sells, and that they all can be executed at exactly the same time. And that's a really important point, that speedier execution, especially in times of heightened volatility when the markets are going up or down by 7% in a day. So you don't want to be out of the market in that type of environment. So that's certainly an advantage compared to the slower process utilized when you're buying or selling managed funds,” he says. On the horizon for markets: time to invest or time to exit? Mr Connors considers the strong recovery in prices since March concerning and not reflected by the fundamentals in companies globally. He says, “we're still seeing the Coronavirus as not being under control, even though investors seem to have already priced in a recovery. We're also concerned about the impact of the geopolitical conflict between China and the US, and its allies, for that matter, like Australia. So that has the added potential to disrupt the fragile recovery that's underway in the US. And that would certainly add further pressure to the rally in equities that we've seen over recent months as well.” Mr Connors suggests investors go back to the basics of portfolio construction and focus on the long term, considering measures like dollar-cost averaging (i.e. consistent investing over time) as part of their strategy. “Don't expect to get the results you want in too short a time frame. You've got to let these things play out, and… complement that good investment philosophy and that good investment strategy, with an approach that perhaps sees you gradually entering back into the market,” he says. Learn more about building an investment portfolio through the core-satellite investing approach here or contact us.

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Beyond healthcare: the future of biotechnology

Jun 04, 2020

The search for cures and vaccines during the COVID-19 pandemic has brought the biotechnology industry into sharp focus. Beyond the COVID-19 pandemic though, what does the future hold for this industry and the broader healthcare sector? Kanish Chugh, co-Head of Sales at ETF Securities, discussed the future of biotechnology and healthcare with Scott Power, Senior Analyst covering Healthcare, Life Science and Technology for Morgans Financial Limited. Defining healthcare and biotechnology The healthcare sector represents all businesses providing medical goods and services to treat patients. “The way we look at healthcare in Australia is we put it into four buckets…Pharmaceuticals, so that’s like CSL. Medical devices, so Cochlear, ResMed. The services, so the hospital operators like Ramsay Healthcare, and the fourth bucket is diagnostics. So that’s Sonic Healthcare and some of the telehealth offerings that are out there,” says Mr Power. He notes healthcare represents about 8% of the ASX300 index within Australia, with 23 companies listed, ranging from CSL with a market capitalisation of $130 billion down to Monash IVF with a market capitalisation of $230 million. Biotechnology falls within the healthcare sector, often within the pharmaceuticals space. Specifically, though, biotechnology refers to technologies using biological processes. Biotechnology companies focus on research, development, manufacturing and/or marketing of products based on biological and genetic information to treat human diseases. This is the sub-industry covering COVID-19 vaccine development and testing. Mr Power says, “I think it’s 12 products in human testing at the moment and with over 100 in pre-clinical development…It’s big household name companies like Merck, Pfizer, Gilead, Eli Lilly are all working towards trying to find some sort of vaccine and/or therapeutic (cure).” The US and FDA approvals In terms of healthcare and biotechnology, the US is the largest market with the US Food & Drug Administration (FDA) approval process considered the gold standard. “The US FDA is one body, once you've got it, it goes right across the whole country. Their healthcare system is much more complex than ours, but again, once you have the approval and the appropriate reimbursement encoding, the ability for you to get across a larger patient population is much easier,” says Mr Power. From that perspective, many healthcare companies such as Moderna or Gilead have based their companies within the US to improve ease of access to both FDA approvals and the large US population. The COVID-19 pandemic has resulted in fast-tracked processes for testing vaccines and therapeutics for the virus but this may be a negative for non-COVID vaccines and cures. Mr Power says, “a lot of clinical trials have been put on hold. So, if you can’t recruit, because of isolation type issues, then you can’t actually conduct the trial. So a lot of companies, not only in Australia but around the world have actually put their clinical trials on hold.” While the fast-tracking during COVID-19 has given some hope for more efficient FDA processes in the future, Mr Power believes change is unlikely. “The drug approval process is well entrenched, well established, you’ve got to go through certain hoops, safety… and tested against larger population groups, that’s not going to change. Will the timing of those trials change? I think we are always finding better ways to get through these clinical trials,” he says. Ongoing evolution of the sector The COVID-19 pandemic has accelerated some change within healthcare. Mr Power says, “we are seeing some clear structural shifts, we've talked about telemedicine or remote monitoring. It's really gone from a nice to have to a must have… In terms of government policy… one of the issues previously is the reimbursement for teleconsult has been quite low. They have increased it during the COVID crisis to encourage more teleconsults but it needs to be maintained. So, I think we can definitely see a change in government policy from that perspective. In terms of other structural shifts we're seeing, we spoke about the diagnostic side, there's real trend towards rapid diagnostic, whether it's home testing, particularly with the current pandemic, but putting that to one side, that whole concept of early quick detection of conditions and diseases is certainly very much to the forefront. And that will continue.” Healthcare and biotechnology as a sub-industry have been tipped to benefit from a globally ageing population and the ongoing need for disease treatment. Biotechnology in particular is forecast to reach more than $729 billion in 2025[1]. “What we’ve seen over the last 10 years is healthcare as a sector tends to outperform most other sectors… We expect that to continue… I think it’s important for investors to make sure they have exposure to global healthcare companies,” says Mr Power. He notes that company selection from the global front can be difficult but it complements and diversifies the more concentrated Australian exposure to the sector. “Do you want to back Gilead… or Moderna, they’re working on a vaccine, they’ve got a market cap of $30 billion, but they actually don’t have a product. So that’s a highly speculative play,” he says. From that perspective, he suggests using ETFs such as ETFS S&P Biotech ETF (ASX code: CURE) or actively managed funds which capture the top companies, to assist investors to manage the risks and volatility inherent in the sector. Learn more about using global biotechnology in your investment portfolio by clicking here or contact us.

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What are the blue chips of the future?

May 28, 2020

Blue chip is synonymous with quality and dividends in the mind of the Australian investor, but are the companies considered as the blue chips of today likely to remain as the blue chips of tomorrow? The ability to generate a consistent dividend stream has been a mainstay of those companies we deem blue chip but in the wake of COVID-19 related dividend cuts, does the Australian view of blue chip need to evolve? Kanish Chugh, co-Head of Sales at ETF Securities, discussed the future of blue-chip investing with Peter Green, Head of Listed Products for Lonsec Research and James Gerrish, Portfolio Manager for Shaw and Partners and author of investment newsletter, Market Matters. Defining a blue chip investment “Blue chips have been in the past large size, industry leaders, well run and in the Australian context, very much also looking at dividends and fully franked dividends. So, we’re talking companies like the big four banks, Telstra,” says Mr Green. The top 20 companies listed on the S&P/ASX 200 have often been treated as a default blue chip index and this provides an interesting demonstration on the evolution of blue chip investing. Only 20 years ago, the top 10 constituents of the S&P/ASX 200 were filled with banks, telecommunications and even news media, with Telstra topping the list [1]. While the list of today is still heavily dominated by banks, there’s a few we might not a have predicted in the past such as Australian biotech leader CSL Ltd or supermarket companies like Woolworths or Wesfarmers. Mr Gerrish finds it interesting that CSL Ltd has joined the definition of blue chip. “It’s moved the needle from thinking about dividends underpinning blue chips to more towards stocks that are delivering really strong absolute returns. So blue chip to me is something that’s reliable, generally large, robust, a leader in their industry,” he says. Both see this movement towards a view on absolute return as a trend for the future. “Increasingly blue chip is being equated with a quality style. A quality style looks at things like ROE growth, EPS growth, large investment in intellectual property and also low leverage,” says Mr Green. Dividends and blue chips COVID-19 may be driving the trend towards viewing blue chip investing as about absolute return in Australia. Investors have had to start to reconsider their understanding of blue chip investing and their strategies in the wake of many companies, including traditional blue chip investments in the form of the big banks, cutting their dividends. In this instance, we may be starting to move towards the way the US or Europe view blue chip investing. Mr Gerrish says, “The S&P 500 back in the early 1900s[2] had a dividend payout rate of about 90%. Every 90 cents in every dollar was paid out as dividends to investors. Now the S&P 500 has a dividend payout rate probably around 30%. So, the bulk of those earnings are being reinvested into future growth, and that's why you see those growth orientated companies sort of rise to the top overseas the way the market's set up. And that's probably one of the reasons why it's been outperforming a bit over Australia at a rate of one and a half times.” By contrast, he notes that the Australian market has dividend payout ratios of around 75%, slightly skewed in the current environment but overall a traditionally high ratio. Mr Gerrish sees the focus on dividends as having hampered the growth of companies in Australia. “Afterpay for instance in 2016 had a market cap of about $165 million and are an $11.5 billion dollar company now. Telstra at that same time was around a $60 billion company and it’s now a $34 billion company. They invested in growth dividends along the way but examples like that start to change investment mentality,” he says. That’s not to say that we’ll see the current blue chips disappear. “There’s always going to be a role for the big four banks and Telstras in portfolios. I think people are increasingly aware of the total return of investing but this is more of a focus on capital growth than income returns. Over time, that sort of earnings growth will lead to dividend growth as well,” says Mr Green. Turning to Asian blue chips Mr Green notes that the composition of Asian markets has seen the rise of different blue chips compared to Australia. “Asia certainly is showing strong growth in the tech sector but also we’ve seen in Asia, you’ve got the rise of the middle class there. So, when you look at the financials and consumer discretionary sectors there, they are a large part of those indices and they have much greater EPS growth trajectory compared to the Australian context, just because of those demographic factors that are driving those stocks and earnings,” he says. Consumers have embraced technology across Asia, with blue chip companies like Alibaba and Baidu a prime example of this . {Note: these companies are included in the ETFS FANG+ ETF (ASX code: FANG)}. Both Mr Green and Mr Gerrish find including international blue chips is an important way of diversifying their clients’ portfolios, particularly given the dominance of financials in Australian blue chips compared to internationally. They’ve used direct investments or ETFs depending on client needs. An example of an ETF focused on Asian blue chip investing is the ETFS Reliance India Nifty 50 ETF (ASX code: NDIA) which invests in the 50 largest and most liquid Indian domiciled companies. The future of blue chip investing Mr Green views the future of blue chip investing as linked to some of the rising global themes. “I think the market is really taking a good, hard look at things such as we’ve just seen with COVID-19, all of a sudden, we’re working online and this happened quite seamlessly. The whole idea of the digital economy is a very interesting area. We spoke about Asia before and the rising middle class and also what they’re calling the fourth industrial revolution, the automation, the AI, the machine learning,” he says. Some of companies following the trends might not be blue chips now but could be down the track, such as Afterpay. Mr Gerrish notes payment platforms have huge potential. “We’ve got the incumbents, these being Visa, Mastercard which are really dominant over in the US, but I think there’s other kinds of payment platforms that are interesting… You need to wait to see what companies get to that point of reliability of earnings before they become a blue chip,” he says. Interested in investing in the trends of the future? Learn more about our future present range of ETFs here or contact us. Sources: [1] https://www.spindices.com/documents/education/education-marking-20-years-of-the-sp-asx-index-series.pdf [2] While the S&P 500 began in 1957, the S&P Weekly Index has been used as a substitute for earlier years.

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ASX update: COVID-19 - transforming the investment space

May 20, 2020

COVID-19 has been responsible for significant changes in the way we live and work, but it is also influencing the ways we invest. After significant volatility in March, Australian markets posted gains in April with the S&P/ASX 200 returning 8.7%, the largest monthly gain in its history. Investment activity increased too, with even largely dormant investors returning to the fold[1]. Kanish Chugh, co-Head of Sales at ETF Securities, spoke to Anastasia Anagnostakos, Business Development Manager in the Investment Products Division of the ASX, on her views about how COVID-19 is changing the investment space. Changing investment behaviour Activity in April has been a contrast to the fears and defensive activity seen in March, as investors responded to global lockdowns and market volatility. “Last month, we saw a flight to safety through precious metal ETFs or broad-based market ETFs, whereas this month, investors, rightly or wrongly, are reading into the signs of a recovery, with Australian equity and property ETFs being the main beneficiaries, both being up by almost 12% on the month,” says Ms Anagnostakos. On the flip side, oil was a particular concern in April with prices becoming depressed and the futures market even turning negative for the first time. While the type of investments sought has switched, the volume of activity generally has remained high. According to ASIC, average retail trading increased from $1.6bn pre the COVID-19 crisis to $3.3 billion at the end of April 2020[2], with many dormant accounts recommencing trading activity. Ms Anagnostakos says, “in terms of the ETF market, a usual day, pre-crisis, accounted for about 4% of total trades on the S&P/ASX 200, but during this time it has ballooned to about 10% of total trades.” Trading on conviction Ms Anagnostakos believes that this increase in activity comes down to an increasingly aware and educated retail base compared with the past. “Many investors have learnt from our most recent crisis, the GFC, such times often present a good price point to buy into the market, and have been doing so with long-term and short-term ideas in mind,” she says. According to Ms Anagnostakos, the ASX has noted an increase in shorter term trade activity on a retail front, with the cash equities market one such area which has experienced trading spikes, along with commodity and geared funds. In terms of the cash equities market, an example of investors trading based on expectations is through the US dollar, which some anticipate strengthening compared to the Australian dollar. There are a range of ways to trade for exposure to the US dollar, from cash holdings to using ETFs such as the ETFS Enhanced USD Cash ETF (ASX code: ZUSD), and many such corresponding investments may have experienced activity increases in April. Some activity in investor demographics such as retirees may be a response to the change in the status quo. That is, their dependence on fully franked dividends for an income which is under threat in the current environment. “With the big banks either deferring or cutting their dividends altogether in their most recent announcements, one of the most common discussions advisers are having with their clients is about mobilising capital within their portfolio to sustain their income streams… so these kinds of discussions we have with advisers are around the different income options that are available to them via the ASX investment products through the vast amount of fixed income ETFs, fixed income and private credit LICs, LITS available for steady income flow,” Ms Anagnostakos says. A more diverse market in crisis While the GFC and COVID-19 crises are vastly different events, the increased trading activity in this situation may also be related to the broader and more diverse investments available this time around. “You just have to look at the sheer size and the growth of the ASX product suite just to see how many different options are now available to investors. Let’s look at the market at the height of the GFC, June 2008. There were only 198 products for investors to choose from after buying individually listed companies on the ASX. As at the end of April 2020, investors have over 614 products to choose from, on top of all the individually listed companies on the ASX. So you could most definitely say that investors are spoiled for choice these days,” Ms Anagnostakos says. As an example, the Australian ETF market was barely existent during the GFC, with only 19 available in December 2007 compared to the more than 211 now available on the ASX[3]. Ms Anagnostakos notes the increase in ETF trading activity during this crisis may be in part due to their ability to offer diversification. “If you want to diversify and lower your overall portfolio risk, ETFs are a classic way to do this as they are a pure beta play. If you believe in the long-term direction of certain asset classes, strategies, sectors or geographies, and they represent good value to you in this crisis, then investors can seize the opportunity to invest in and potentially lower their overall portfolio volatility, while still achieving good long-term returns,” she says. Some slowdown in product launches Despite the increased April activity, there has been some slowdown in the issue of new products on the ASX, with only one new investment product released in April. Ms Anagnostakos suggests it is too early to determine whether the pipeline of ETFs coming to market has really slowed down but in the case of LIC or LIT investments, it has made more sense for issuers to delay given the volatility in asset prices. On the whole though, she believes this is an unusual time so a slowdown in new products wouldn’t be entirely surprising. Ms Anagnostakos says, “there’s volatility because people are working from home, which is another reason that we may not have seen any products made…. And it might be safe to say that issuers in this space will be wanting to see some stability before bringing some new products to the market.” To find out more about investing with ETFs during COVID-19 or the ETF Securities Partner Series, please contact us.

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India rises to the COVID-19 challenge

May 13, 2020

India is poised to be an economic superpower, benefiting from structural factors such as business reform, income growth, urbanisation, domestic consumption and demographics. Tipped to be the world’s third largest economy by 2035[1], India holds appeal from a business and investment perspective. The COVID-19 pandemic has changed the outlook in many global economies but the challenges may only be temporary for India. Kanish Chugh, co-Head of Sales at ETF Securities, spoke to Kinjal Desai, Fund Manager Overseas – Equity for Nippon India Mutual Fund, on her views about India and the COVID-19 challenge. Managing COVID-19 With a population of 1.3bn, some commentators may have expected COVID-19 to ravage India but its infection rate has so far remained low compared to its population size. The Indian government was swift to enact measures[2] including: - travel ban and quarantine measures for returning travellers - total lockdown from 24 March 2020 - financial relief package of INR 1.7tr[3] - monetary relief with interest rate cuts from the Reserve Bank of India (RBI)[4] Current modelling suggests, if the ongoing lockdown continues to be implemented effectively, by July 2020, less than 0.01% of the Indian population is likely to be infected[5]. Further stimulus may be announced to support small and medium sized enterprises, as well as harder hit industries like aviation, hotels and tourism. Challenges and opportunities in lockdown While lockdown has created challenges for the economy, Ms Desai notes certain sectors have been able to continue to function. “There are certain sectors which have functioned, I would say quite well given the circumstances, which I’m looking at FMCGs, staples, telecom, pharma, power and utilities… Over a slightly longer term, I would say that it is the consumer discretionary sectors, which is your auto, durable goods, capital goods sectors which will… perform better but they have taken a very bad hit now,” she says. Ms Desai suggests focusing on individual players in each sector which may be positioned to gain in this environment. “The companies which have a strong balance sheet are the ones which are going to gain market share… We’ve seen how telecom have been, and how banking has done better over NBFC [6],” she says. Reliance Jio Infocomm Limited (Jio) is an example of a telecommunications company which was positioned for growth before the pandemic and has apparently continued to benefit. It is the largest telecommunications operator in India with a mobile subscriber base of 370 million and 35% market share (as at December 2019)[7] . Facebook recently announced it has purchased a 9.99% share in Jio, announcing a potential collaboration with WhatsApp[8]. The broader global environment has also created opportunities for India across the pandemic period, with oil prices at extreme lows. “India is actually the third largest oil consuming economy in the world, just after China and the US, and we are dependent on imports for 80% of our oil needs… we’ve seen [oil prices] come down by almost 60%, this has presented India with an amazing opportunity to store and build reserves. Indian companies have actually procured almost 7 million tons of oil, which is 20% of our annual needs in these low prices,” says Ms Desai. Has the pandemic changed India’s outlook? India was on track to be one of the next economic super-powers prior to the COVID-19 pandemic, so investors may wonder how the pandemic has influenced its prospects. Ms Desai views the COVID-19 pandemic as an external event, with the structural factors behind India’s growth prospects still favourable. She points to India’s demographics, low private sector debt, domestic demand orientation and low reliance on foreign demand as a structural advantage over peers like China and other emerging markets. “There are various factors which have pointed towards a steady recovery in growth. First, there are clear signs that private capex has started to pick up. This was reflected in our domestic credit growth which had remained subdued for quite a few years. But now we are seeing it sustainably growing. Secondly, like I said, the RBI was actually in the midst of a rate-cut cycle in 2019. And apart from this, the central bank has also been very proactively supporting the economy with domestic liquidity this will finally lead to transmission of these policies, lowering of policy rates to real life lending rates,” Ms Desai says. She also sees an additional opportunity for India from the COVID-19 pandemic. “This COVID-19 pandemic can actually be a turning point for the global supply chain… which is currently highly concentrated in China, and India can be a huge beneficiary of this shift. Global Investors are definitely looking at India to rise up to this opportunity and take this leap ahead,” she says. The US-China trade war had seen a number of multinational companies consider moving operations to India. The combination of the COVID-19 pandemic, and resurgence of tension between US and China in a pandemic ‘blame-game’ may see many businesses take a more serious approach to rebasing their operations. Is now the time to invest in India? Global uncertainty may be putting off many investors, but for some, now could be the time to revisit their investment strategy around India. Ms Desai says, “the valuations have become very attractive since good businesses are available at decade low valuations. The current time is very uncertain, but our long-term fundamentals continue to remain intact.” The longer-term opportunities for India remain. Ms Desai points to the demographics of India, skewed younger compared to peers, which offers benefits in terms of a large working base easily able to support growth through taxes and consumption. Consumption and income growth are also factors driving India’s growth. “India is a hugely unpenetrated market compared to global average and that provides enormous opportunity. Again, an example is penetration of video goods has just begun to expand as we come close to that $2,000 per capita [income] mark. Experience from other countries suggests that discretionary consumption, your cars, white goods travel all improve exponentially once you cross the two to $3,000 per capita income mark,” Ms Desai says. She also notes that financial literacy in India has also been improving as incomes have grown, with a benefit to the financial services industry. Those considering exposure to India in their portfolio could consider an ETF like the ETFS Reliance India Nifty 50 ETF (ASX code: NDIA) which covers 50 of the largest and most liquid Indian domiciled securities. [1] https://www.austrade.gov.au/Australian/Export/Export-markets/Countries/India/Market-profile [2] https://www.thejakartapost.com/academia/2020/04/19/indias-response-to-the-covid-19-pandemic.html [3] https://home.kpmg/xx/en/home/insights/2020/04/india-government-and-institution-measures-in-response-to-covid.html [4] https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=49582 [5] https://timesofindia.indiatimes.com/india/lockdown-till-may-31-can-stall-coronavirus-pandemic-says-study/articleshow/75653149.cms [6] NBFC refers to the Non-banking financial crisis in India. You can read more in https://www.etfsecurities.com.au/idea/individual-investors/the-three-key-drivers-of-indian-performance-in-2019-5e5d8ff76d22670017b30dc8 [7] https://www.mobileworldlive.com/asia/asia-news/reliance-jio-widens-lead-as-profit-soars/ [8] https://techcrunch.com/2020/04/21/facebook-reliance-jio/

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Active investing with passive funds

May 06, 2020

The debate between active and passive investing has always been contentious but has taken an interesting twist in recent times. Some investors have sought a ‘best of both worlds’ approach by using passive investments in an active way. So, what does it mean to invest in this way, and does it work? Kanish Chugh, co-Head of Sales at ETF Securities, spoke to Nazar Pochynok, Financial Adviser at Bell Partner Creations and Andrew Wielandt, Managing Partner for Dornbusch Wealth, on Active investing with passive funds. Taking an active approach Normally when investors think of passive or active, they think of very specific investment products. Passive investments are defined as those which follow rules or a methodology to automatically follow an index or benchmark with the aim to “match the market”, while active investments are discretionary, meaning they are made based on a fund manager’s research and philosophy. “The way we use active management is a little bit different. We use it from a risk management perspective of looking at how to change the dynamic asset allocation of our passive portfolios,” says Mr Pochynok. He primarily uses passive investments like ETFs in his portfolio to offer cost-effective access to particular assets and markets. Mr Pochynok says, “nothing in passive is truly passive. Everything is an active decision. For example, the underlying constituents of companies and the relative benchmarks they track from ETF to ETF really does differ. Do you choose an index that is cap-weighted or equal-weighted? Should the index have style factors incorporated, such as quality, size, momentum and volatility? All these decisions are not submissive. And they're very much active manager thinking more so in a cost-effective and simple-to-use strategy.” Is passive really passive? Passive investing has become increasingly popular in recent years as it offers liquid cost-effective exposure across the market or to specific assets, sectors or themes which may otherwise be difficult to access. Despite this, some negative connotations have still lingered, namely that passive investing offers “passive performance” and that you need to “pay for performance”, that is, pay higher fees for active management to generate returns. The historic data suggests this view is a fallacy. Mr Wielandt points to research conducted by Standard & Poor’s over 18 years. “The 29,000 data sets basically [show] that if you’re trying to be active and outperforming the market, you’ve got a 95% chance of failing. And of the 5% that succeed, if you look at them over the next five years, only 5% of the 5% will succeed,” he says. This research is supported even by recent data. “One of the SPIVA reports for last financial year, so take away COVID, also suggested that in 2019, for the financial year, almost 93% of active managers underperformed the ASX 200. And that number also persists at 83% underperformance over three years and 81% underperformance of the index over five years,” says Mr Pochynok. This isn’t to say there isn’t a place for active investments, but rather investors should be selective in using them and seek to identify those consistent performers. Passive with active overlay for clients The switch to using passive investments in an active way reflects a change in attitude for advisers as well as their clients. Mr Wielandt says, “two years ago I would have said that we were more just choosing direct equities…But certainly over the last eighteen months we've been far more using ETFs and passive ETFs and, as you're saying, sort of using ETFs in a passive tool in an active manner…There's some difficult conversations happening with clients that have got this direct equities focus, that have got that mindset. That was a 1990s mindset. 2020 today, and it's about total return. It's about broad asset allocation and terrain. You're using passive tools but in an active manner.” He notes that the Australian market is behind global counterparts in terms of how it’s using passive investments like ETFs but will get there eventually, following the path of countries like Canada with a similar environment to Australia. The choice to use passive investments in an active way will continue to be something investors and advisers grapple with across the coming years. For Mr Pochynok though, it has been a simple decision that comes back to the value proposition he offers to his clients. “Looking at it from a macro perspective, the real value that advisers bring is solving big rock problems for clients, and making their lives simple, efficient and providing them with effective solutions,” he says. From his perspective, using passive investments to allow him to focus on active risk-management and client goals is a natural fit.

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