Originally published at: Our portfolio managers answer your questions – InvestEngine Insights
Our team of experienced investment managers are responsible for overseeing and maintaining tens of thousands of investor portfolios. To do this, they monitor markets daily, find opportunities and ensure portfolios remain fit for purpose.
Twice a year, they present their recent performance to our clients, as well as running through some of the biggest economic factors affecting investments over the last six months. You can watch our most recent webinar here.
How do you select ETFs and how many do you include in portfolios?
There are lots of factors that go into determining both of these. In terms of the number of ETFs, I’d say there’s no set minimum or maximum – what’s more important than how many, is what they’re invested in.
We’ll only buy ETFs that compliment the overall portfolio and, when combined, create a strong, diversified portfolio. So, we’ll buy ETFs which do different things and target different areas of the market (whether that’s the equity market or the bond market).
For equities, we’ll choose ETFs which target different regions of the world or different risk factors. For bonds, we’ll choose ETFs which target different levels of duration or credit quality or inflation protection.
Of course, within that, there are lots of nuances around which specific ETFs we choose. These variables include:
- Cost
- Replication method
- Securities lending practices
- Tracking error
- Liquidity
How often do you rebalance your portfolios?
All our portfolios are monitored daily by our internal software, which we call ‘the engine’. If any of the weights in the managed portfolio ETFs exceed the tolerances that we’ve set – i.e. if any ETF gets too big or too small – then the portfolios will be automatically rebalanced back to target weights.
So, how often portfolios are rebalanced really depends on market conditions. It’s also important to bear in mind that although we monitor the performance on a daily basis, we’re a long-term investment manager. We don’t want to be buying and selling things quickly or making big changes to portfolios on a really short time horizon.
We have a quarterly investment committee meeting where we’ll sit down and discuss the portfolios. It’s not always guaranteed that we’ll make changes but we’ll always talk about performance of all the individual ETFs and the portfolios as a whole and where we can improve things. If necessary, we’ll make changes.
What makes you choose a certain exchange-traded fund (ETF) versus others following the same index?
Although the underlying index may be the same, our due diligence process involves looking at many other factors, including cost, replication method, fund size, liquidity, trading volumes, securities lending policies, tracking error, and tracking difference.
Do you think the rise of passive investing makes looking at historical mean reversions etc. less relevant or likely?
[Note: ‘Historical mean reversion’ is a financial theory that states that the price of assets will generally revert back to its historical average over time. This can be the average in terms of historical growth, or the return of the underlying industry.]
Given passive funds are still not a large enough part of the market to set prices, their impact on mean reversionary tendencies remains limited.
The vast majority of trades on stock exchanges continue to be made by active funds – ETF primary market trading accounted for under 6% of company stock trading in 2023 according to the Investment Company Institute. It’s therefore still active funds who are setting prices and dictating the timing and speed of any mean reversions.
What is a comfortable price-to-earnings ratio? Or, what is a comfortable range for P/E?
[Note: a price-to-earnings ratio is the measure of a company’s share price relative to its earnings per share. It is used, generally, to assess the value of a company’s stock, and is also used to compare its current valuation against its historical performance and the rest of the industry it’s in. A high P/E ratio could mean that a company’s stock is overvalued.]
There is no set comfortable P/E ratio I’m afraid – for individual stocks it depends on the industry (banks, for example, tend to have lower P/Es than technology companies), and on the company. Similarly for regions, it depends on the industry makeup of the country (the large technology weighting in the US is a large part of the reason why it’s so expensive).
A comparison versus other regions and the region’s own history can be helpful to understand a reasonable range of valuations, but as mentioned in the webinar, valuations can stay overvalued or undervalued for prolonged periods of time, which can cause issues for those looking to use valuations to time markets.
To further complicate matters, there are several reasons why we might be set to expect structurally higher valuations going forwards (see the half-year commentary for more detail).
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This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
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