PM: Don’t switch to active because of rising rates

Investment strategist says decision to buy actively managed ETF should come down to other factors

PM: Don’t switch to active because of rising rates

Don’t buy an active manager in the fixed-income space just because of a rising interest rate environment, a leading portfolio manager warned.

Alfred Lee, director and investment strategist at BMO Global Asset Management – Canada, spoke to Wealth Professional at the Radius ETF Conference in Vancouver this week.

And he said that passive instruments continue to do well, citing a Morningstar statistic that they have beaten out 69% of competition in 2017, when rates where increasing.

Lee insisted that if you wanted to buy an active manager, do so because you like their investment style and what you are getting exposure to.

He said: “Some people are comfortable building their own portfolios with individual bonds with passive ETFs and some people may want to use active as a one-stop solution.

“But some of the things we have been seeing is, don’t just buy an active manager because interest rates are going up.”

Lee said active managers are a good route if they have a core-plus strategy with Canadian bonds, for example, but also possessing the ability to go into high yield or preferred shares beyond Canada. This also comes with a warning, however.

He said: “The truth of the matter is in a rising-rate environment last year when a lot of active managers and advisors went to shield themselves from duration, they basically parked themselves on the short end of the curve, which was actually the most vulnerable place to be and where central bank activity impacted. A lot of people got it wrong, professional active managers as well.”

Lee said that passive ETFs, rather than being in competition with active management, are being used as a substitute for individual bonds. He added that this is because ETFs are scalable and because you don’t have any inventory problems.

He said: “Another trend we are seeing in fixed-income ETFs is active management, so a lot of advisors and the feedback we’ve been receiving is they like to spend a lot more time in equities or they want to focus on the relationship-building side of the business.

“People tend not to focus on fixed income that much in terms of building their portfolio; they want to just outsource that to a professional money manager. So, with active ETFs now in the fixed-income space, it provides a way for advisors to get low-cost exposure to those active strategies.”


Related stories: 
BMO GAM launches Women in Leadership Fund ETF Series
Smart-beta ETFs: bar has been raised for active managers