Tyler Mordy explains how these investment vehicles opened up a universe of options for asset managers and retail investors
Each month at WP, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on ETFs.
When Forstrong Global was founded in 2001, the firm’s approach to global investing was a lot more labour-intensive to execute. The firm custodied their assets at UBS, the only institution through which the firm could trade international securities at the time. From their headquarters in Toronto, a young Tyler Mordy would trade via UBS and a spreadsheet rolodex of contacts across the globe. Now Mordy is the CEO and CIO of Forstrong Global, and transactions in foreign securities have become a whole lot simpler thanks in large part to the emergence of ETFs.
Mordy explained how exchange traded funds have allowed global managers like Forstrong to offer more specific and targeted exposures to global markets at far lower costs. He outlined why the tools are now so popular and how managers and advisors can work to assess quality amid a vast universe of global ETFs.
“Wilfred Hahn, who founded the firm, always said that as ETFs evolved, he could build a better portfolio with $250,000 today than he could with $25 million in a pension plan back in the 1990s,” Mordy says. “It’s a cliché, but ETFs really have democratized global asset allocation. The irony is that we now have more ETFs than individual securities on the TSX and US stock exchanges. And I would argue that the more ETFs there are, the more important active asset allocation becomes.”
How Forstrong uses ETFs
As ETFs evolved from pure beta plays into the sophisticated set of products now available, Mordy says their value for global investors has grown all the more. The further an investor looks away from developed markets, he says, the more valuable an ETF becomes. The institutional infrastructure and trading efficiency offered by an ETF can be far more advantageous for a Canadian investor than buying those securities directly. Mordy gives the example of a global bond strategy, noting the huge transaction costs as well as issues of custody, settlement, market access, liquidity, currency, and tax that are all wrapped up within the ETF and managed with scale through the MER.
Because even globally-listed ETFs are constantly underpinned by market makers, Mordy notes that trading hours become less of an obstacle. While bid-ask spreads can widen when the underlying market is closed, ETFs can give Canadian-based managers a way to access foreign strategies without having to keep foreign hours. Those market makers, can provide liquidity beyond what is visible in the ETF’s daily trading volume, allowing managers to execute institutional-sized trades efficiently.
Because of those advantages, Forstrong’s own ETFs which trade on the TSX, are largely comprised of foreign-listed ETFs. Across the three strategies they offer, global income, global balanced, and global growth, the firm can find extremely specific underlying strategies in ETF format to add a desired exposure. Mordy gives the example of copper miners, which he can get through an ETF for lower cost and with better diversification than going for single securities. Those targeted ETFs, Mordy says, reflect how markets are becoming increasingly ‘micro-efficient’ — very good at pricing individual securities, industries and sectors. Forstrong’s opportunity is therefore less about finding mispriced individual stocks and more about deciding which of those markets investors should own. ETFs allow the firm to aggregate those micro-efficient exposures into an actively allocated global portfolio.
Finding the right ETFs for a global strategy
The trouble with the ease of access that ETFs provide is that it creates a universe of seemingly impossible choice. It’s hard enough to parse through the 1,000-odd Canadian equity ETFs listed on the TSX, let alone deciding how to assemble a global bond portfolio from globally-listed ETFs. Mordy says that his firm has created a set of seven criteria to assess the suitability of an ETF. By applying those criteria as screens for the total investable universe, Mordy says he and his team can quickly sort through the vast majority of the global investable universe to arrive at the funds that serve their goals.
That process, however, needs to be constantly maintained and readjusted to stay in line with the movement of global financial markets and new innovations in ETF offerings. Competition between ETF issuers, Mordy says, can drive prices down while new ideas get tested on the market. Sometimes those new ETFs fail, and Mordy says he has to keep abreast of ETF closures just as he watches for ETF launches.
For all the sophistication that an asset manager like Forstrong can now find on global ETF markets, he notes that there can still be a perception challenge when ETF strategies are explained to investors and even some advisors. The initial rise of these vehicles as a tool for low-cost passive index investing makes some investors wary about an ETF strategy. The response, Mordy says, is to explain clearly and rationally how ETFs have opened up the global universe.
“You go back to first principles. Most of the advisors that we work with are very good at selecting securities in North America. But they typically don’t have the same depth of expertise globally. So that’s where we come in,” Mordy says. “You can certainly build that skill set yourself and decide whether you want to own copper miners, Japanese banks or emerging-market bonds. But global markets are our specialization. ETFs simply give us a very efficient way to package that expertise alongside an advisor’s existing portfolio.”
