The rigour and research behind Macquarie's active ETFs

22 Nov 2023
 

Go behind the scenes for an insider view of Macquarie’s active ETF strategies and market analysis.

Active ETFs are still a relatively small proportion of the increasingly popular exchange traded fund (ETF) investment market – but their growth has accelerated in the last few years. In the five years to 2022, the number of asset managers with active ETFs quadrupled globally.¹  

Investors are attracted to active ETFs by the combination of low-effort access to diversified investments, with the potential for market outperformance. But that means they need to pay close attention to the underlying investment strategy, as active ETFs offered in the market have different risk profiles and complexity, that will ultimately determine their risk and return outcomes.

An active ETF strategy should be based on a rigorous and repeatable process that aligns with the overall investment objectives of the active ETF. Which means it needs to be backed by robust research and expertise, so fund managers can make sound decisions about which underlying securities to hold, how to manage risks appropriately, and actively manage positions within the active ETF based on valuations, allocations and/or macroeconomic views.

This approach can help them mitigate the impact of market downturns, and proactively take advantage of opportunities when markets move. 

“Unlike with a passive ETF, an active fund manager can respond to market shifts,” explains Blair Hannon, Macquarie ETF Investment Strategist. “For example, they might tilt towards a more defensive portfolio if their analysis and deep research indicates the market may be entering a recessionary period.”

A conviction-based approach

With significant experience managing funds and institutional investments, Macquarie has honed a distinctive approach that seeks to generate long-term value and positive investment outcomes. And now, with Macquarie ETFs, more investors can access those strategies.  

There is a reason that institutions trust Macquarie to manage money: its asset management teams are known for making sensible, thoughtful decisions, with a patient and long-term approach. 

“Our Portfolio Managers don’t just react to trends,” notes Luis Sarmiento, Senior Investment Specialist within the Macquarie Professional Series. “They might look at particular themes – such as the energy transition – but it’s not about identifying ideas that may or may not play out tomorrow. It’s a long-term approach.” For example, through its Professional Series, Macquarie has partnered with Edinburgh-based portfolio management firm Walter Scott since 2005 because their philosophies align. 

“We know there is more than one way to invest in global equities, but we are very selective when choosing the managers we partner with,” explains Sarmiento. “Walter Scott has a consistent, time-tested, long-term approach. The firm has trained multiple generations – some of the junior analysts we met when first partnering with Walter Scott 18 years ago are leading the firm today.”

Expertise at scale

Walter Scott manages $A122 billion² across eight strategies, predominantly for institutional investors. The Walter Scott Global Equity Fund, which is now available as an active ETF through Macquarie, is managed by a team of 20 investors. In comparison to a star stock picker approach, there must be unanimous support of every member of the team to agree to buy a stock – but it only takes one dissenter to sell.

This collective consensus approach is strengthened by the fact that the team are not specialists in any single sector or market. They can bring connected perspectives, understanding the ripple effects of certain market trends on other industries or regions.  

“Ultimately, Walter Scott believes wealth is created by companies growing their earnings,” says Sarmiento. “They’re not looking for winners in the next six months. They’re looking for companies benefiting from tailwinds with long-term potential.”

Macquarie’s Fixed Income team of over 130 investment professionals managing over $A300billion AUM around the world, also provides global connectivity at scale. The team is responsible for two Macquarie ETFs: Macquarie Income Opportunities Active ETF (Managed Fund) and Macquarie Dynamic Bond Active ETF (Managed Fund).  

The fixed income portfolio managers discuss market changes and portfolio positioning on a daily basis, and the entire team of 130 meets weekly to focus on market conditions. Three times a year, they host a Strategic Forum to understand broader market trends, bringing together Macquarie’s Fixed Income teams from Australia and New Zealand, Europe, and the US. Along with providing timely market intelligence these meetings are also forums to assess whether developments in markets challenge the prevailing strategic views. Because that is what active managers do, they are constantly reviewing the impact of changes in markets to client portfolios. 

Using proprietary models, the team identifies high conviction opportunities and this disciplined process is enhanced by the experience within the team, including Brett Lewthwaite, Chief Investment Officer and Head of Fixed Income with over 25 years’ experience in financial services. They have seen fixed income through unprecedented market volatility, and numerous market cycles and disruptions. 

Weighing up active management fees for potential alpha 

Globally, some asset managers have come under scrutiny for failing to deliver above benchmark returns while charging high fees. Sarmiento observed that “active management fees need to be measured against the benefits that they bring.

“With Walter Scott, their focus on managing downside risk is a key advantage,” says Sarmiento. “It’s a concentrated portfolio that aims to give investors a smoother ride through the market cycle than equities generally. That’s a key benefit of their active management in global equities.”

In general, having experienced teams analysing your investments every single day does inevitably incur a premium in the form of management fees.

“As we’re not just there to give you the benchmark returns, there is a slightly higher cost to access that level of investment expertise and research,” explains Hannon. 

That’s why he sees passive (index) funds as continuing to have a place in investment portfolios, with active ETFs acting as a complementary force to provide potential downside protection and/or upside advantage.

Active ETF portfolio weightings are at the fund manager’s discretion, so they can overcome some of the inherent market biases or inefficiencies of index funds. Examples of active management in the fixed income funds include avoiding lower yielding or highly indebted issuers, which in times of stress can exacerbate potential issues. 

Hannon believes the offer of active ETFs is a powerful opportunity for investors and advisers.  

“With active ETFs, what you’re really investing in is the strategy,” he says. “Now it’s easy for investors to buy into true institutional-grade strategies and expertise.” 

Investing in active ETFs means you have teams of analysts and experts identifying the investing opportunities, making buy and sell decisions, and managing the fund on a daily basis. It’s a combination of human intelligence and sophisticated analytics and modelling tools. And that’s what makes active ETF investing more appealing to growing numbers of investors.

¹ Morningstar data, March 11 2023.
² Source: Walter Scott as at 30 June 2023.

Risks

All investments carry risk. Different investments carry different levels of risk, depending on the investment strategy and the underlying investments. Generally, the higher the potential return of an investment, the greater the risk (including the potential for loss and unit price variability over the short or long term). Find more information on the risks of investing in an ETF in the Product Disclosure Statement for the ETF. This and the Target Market Determination for the ETF should always be considered before deciding to invest in any ETF. 

The Macquarie Walter Scott Global Equity Active ETF (Managed Fund) is a separate class of units in the Walter Scott Global Equity Fund (ARSN 112 828 136), the Macquarie Income Opportunities Active ETF (Managed Fund) is a separate class of units in the Macquarie Income Opportunities Fund (ARSN 102 261 834) and the Macquarie Dynamic Bond Active ETF (Managed Fund) is a separate class of units in the Macquarie Dynamic Bond Fund (ARSN 101 815 141).  A separate class of units is not a separate managed investment scheme. 

The Macquarie Walter Scott Global Equity Active ETF (Managed Fund) is designed for consumers who are seeking capital growth and income distribution; are intending to use the Fund as a core component, minor allocation or satellite allocation within a portfolio; have a minimum investment timeframe of seven years; have a high or very high risk/return profile for that portion of their investment portfolio, and require the ability to have access to capital within one week of request.

The Target Market Determination (TMD), available at macquarie.com/mam/tmd, includes a description of the class of consumers for whom the Fund is likely to be consistent with their objectives, financial situation and needs.

Future results are impossible to predict. This document contains opinions, conclusions, estimates and other forward-looking statements which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such forward-looking statements.  

Past performance information shown herein, is not a reliable indicator of future performance. 

No representation or warranty, express or implied, is made as to the suitability, accuracy, currency or completeness of the information, opinions and conclusions contained in this document. In preparing this document, reliance has been placed, without independent verification, on the accuracy and completeness of information available from external sources. To the maximum extent permitted by law, no member of the Macquarie Group nor its directors, employees or agents accept any liability for any loss arising from the use of this document, its contents or otherwise arising in connection with it.