Next in the hot seat in ETF Stream’s Expert Investors series, where we interview fund buyers about their ETF usage on a fortnightly basis, is Barnaby Barker, investment analyst at SCM Direct.

Barker joined SCM Direct in January 2016 where he plays a role in managing the firm’s portfolios which consist entirely of ETFs.

How much of your portfolio is made-up of ETFs/index funds?

All our portfolios are entirely constructed using ETFs, with the majority of portfolios, typically invested in 12-25 ETFs.

As discretionary active managers we constantly review our portfolios and when making a strategic or tactical asset allocation change, we implement the changes utilising ETFs in order to benefit from their highly diversified, cost effective, and transparent characteristics.   

When did you start investing in ETFs?

SCM Direct was established as a pure ETF investment manager in 2009. The growth of ETFs and a desire to launch a disruptive wealth management business post the Global Financial Crisis in 2008, created the perfect environment to pursue an active investment strategy fulfilled with ETFs. 

When SCM Direct started, ETFs tended to just be used by managers on a buy and hold basis. SCM Direct’s hybrid approach offered retail investors a modern active management strategy utilising highly diversified, low-cost, fully transparent ETFs which had previously been the preserve of institutional investors.

Which asset classes do you tend to invest in through ETFs?

Currently, we are only invested in equity and fixed income. We have held property, commodities, and private equity previously and are not limited in our flexibility since ETFs cover almost every major asset category.

Which areas would you avoid?

The only areas we completely avoid are leveraged and short ETFs, as we view these as complex financial instruments that tend to be higher risk and therefore deem them unsuitable for inclusion in our clients’ portfolios.   

We also have a preference for physical ETFs as opposed to synthetic ETFs.

What is your methodology for selecting ETFs?

Once the team identifies the market we want to have exposure to, we conduct a robust ETF filtering and selection process based on valuation metrics including price/earnings ratio, price/book value ratio, price/cash flow ratio, dividend yield, price/earnings growth, earnings growth together with the individual ETF’s cost metrics including transaction costs and spreads, fund size and liquidity, tracking difference, performance after costs, replication strategy and underlying concentration of holdings.

Do you have an ETF provider preference?

SCM Direct is totally agnostic and has no bias towards any ETF provider.

We constantly review the market and new ETFs product launches to ensure we are fully up to date with all product innovations and take advantage of any price competition.

What ETF products would you like to see more of? 

There is limited choice when it comes to ESG fixed income products. According to Bloomberg, there are only 9 ESG corporate bond ETFs in sterling available and only 1 UK ESG equity ETF priced in sterling.

We would like to see product innovation across a range of products, including alternative share classes offering currency hedging, factor tilted ESG strategies, such as a US value ESG ETF – for example, one that uses an index that does not hold all the giant tech stocks.

Are there any areas ETF providers could improve?

Data:

It would be useful to have more quantitative data on the underlying holdings, such as the earnings growth, P/E ratio and the price/cash flow ratio.

There can be discrepancies between many of the data providers for such metrics and not all ETF providers produce these numbers for comparison. 

Fees:

As advocates of 100% fee transparency, we would suggest ETF providers best practise of fees should include funds transaction charges displayed clearly and easily accessible, as well as downloadable across all funds; not buried deep within their websites.

Expert investors is a series brought to you by ETF Stream where on a fortnightly basis we interview the key individuals from across the fund selection and research space about the ETF ecosystem.

Fund selection plays a crucial role in portfolio construction. Once the asset allocation decision has been made, these individuals need to decide how they want to be exposed, be it through a mutual fund, investment trust or ETF.

Over the years, ETFs have become an increasingly important part of any investor’s toolkit. This series will show how the key players across the fund selection space use ETFs in their portfolios while asking what more can be done by the ETF providers to help with this increasing adoption.

To read the previous edition of Expert Investors with Peter Sleep, senior investment manager at 7IM, click here.