While institutional investors have yet to undergo the cultural shift towards widespread ETF adoption, Katy Thorneycroft, CIO for international multi-asset solutions at JP Morgan Asset Management, said the wrapper comprises a growing role within certain institutional portfolios.
Thorneycroft, whose team covers approximately $50bn of non-US mandates, noted her firm’s clients view ETFs as “a very helpful vehicle” owing to intraday pricing and trading.
“While it is still a relatively small part of what we do, we are increasingly finding clients have a preference for ETFs, depending on the types of clients they are and what they are looking for,” Thorneycroft said.
She added where ETFs play a role, this has tended to be as a vehicle for providing exposure to existing strategies such as JPMAM’s ‘research enhanced index’ systematic active approach for smaller mandates looking to minimise tracking error.
“We would typically use ETFs more strategically for those kinds of clients,” she said. “We have got an increasing number of clients that would like advised model portfolios and ETFs are a useful tool as the end client can easily trade the advice when we are using ETFs as part of it.”
Small caps primed for comeback
Turning to asset allocation, Thorneycroft noted her team retains an overweight to the S&P 500 and sectors including energy, but expects an acceleration and broadening out of earnings beyond ‘magnificent seven’ names.
“The next step for us is to look at ways to access the rest of the US equity market, for instance looking at equal-weight indices or small caps,” she said.
“We are neutral small caps for now, but we have seen smaller companies run hard as we have started to get expectations that we are eventually getting closer to Federal Reserve rate cuts.”
She cautioned investors to evaluate whether a potential small cap revaluation is just the effect of rate cuts being priced in, or whether this part of the market can deliver consistent earnings.
“We need to be mindful that as we see rate cuts, whether this takes off enough of that financial pressures for some of those loss-makers who are perhaps more highly leveraged and whether there might be a follow-through in earnings growth to take that revaluation story a little further,” she said.
Beyond the US Treasury yield curve
Within fixed income, Thorneycroft’s team has not confined itself to this year’s playbook path of restoring US Treasury duration exposure to near benchmark levels, instead also spying opportunities within the credit space.
“As an asset class, high yield, for instance, works very well in terms of the carry,” she said.
“We have to be upfront about the fact we will not get much spread tightening, but absent a difficult growth environment, you can pick up that carry nicely and get attractive all-in yields for credit assets at the moment.”
Within sovereign bonds, she added her firm is "neutral duration overall".
“We like markets such as UK gilts and we are underweight markets such as Japanese government bonds, as we know the Bank of Japan is going to continue wanting to normalise interest rates.”
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full edition, click here.
