Thursday, February 15, 2018
This blog series highlights ETFs that have recently gone public and reflect
those strategies currently most in demand by investors. While ETFs are not
eligible for ETFG Risk Ratings until traded for 3 months and ETFG Reward
Ratings for 12 months, our goal is to highlight the most cutting-edge
investment strategies that have recently embraced the ETF structure – we hope
you enjoy this special series of posts!
You may not be able to
judge a book by its cover, but anyone who follows the ETP industry as closely
as we do, knows that when it comes to ETPs, that is exactly what you are
supposed to do.
There is a set formula to
naming a fund; first, you add the benchmark, then throw in the investment style
or what was being excluded from the fund, maybe a pinch of something trendy and
voila, you no longer have to even read the one-pager!
Silly as that may sound, with 276 new
products launched in 2017, it’s more important than ever to find a way to
standout from the crowd.
believe in going the extra mile which is why for our first “New-to-Market
” post of 2018, we decided
to focus on a fund with the most abbreviated name in the most overlooked sector
to hit our desk in a long time, the ClearShares OCIO ETF
) to see if you really can judge a book by its cover.
specifically multi-asset funds, probably seem a strange place to start another
year of New-to-Market posts given our focus on finding new and innovative
strategies, something most investors would consider to be sorely lacking in a space
they think is dominated by passive 60/40 funds charging pennies in fees.
Allocation funds have long been a backwater
of the ETP universe for any number of reasons, but chief among them is the
combination of performance and cost that has left many of their intended users
looking for alternatives.
intended as low-cost core holdings, most allocation funds are built as fund-of-funds
products, layering in an additional level of fees that often leaves the
allocation ETP at a disadvantage to their less-expensive mutual fund peers in
the fee-sensitive market.
Throw in that the retail Financial Advisor has long been conditioned to either using in-house
products or those offering trailing fees and the inability of multi-asset funds
to find an audience begins to come into focus.
Still, the sector has seen
a steady stream of new funds come to market in the last few years, many of them
actively managed, although the clear trend has been away from offering core
allocation funds in favor of more specialized products.
The focus has been on unique strategies that
help smaller sponsors stand out in a space where potential buyers will either
stay with the largest funds or those offered by their custodian.
Most are either focused on producing income,
managing risk or are more tactically minded for those brave souls not willing
to go 120% in equities.
Add in the fact we’re
nine years into a strong bull market that has investors chasing returns, not
planning for 20 years out, and now would seem to be an odd time to bring a new fund
to this space.
, which as you can guess stands for “outsourced chief
investment officer,” the first fund offering from Clearshares, a subsidiary of Clearbrook
What do they bring to
A long history both as a
money manager and consultant who in recent years has seen a steady increase in
demand for their outsourced CIO services as more institutional investors
realize that the key to long-term performance is more about recognizing what
you don’t know and how to plan around that.
While trying to grasp the size of the OCIO
market is difficult, Clearbrook has found a working
formula as the company is currently advising over $28 billion in assets while OCIO
itself has already taken in $100 million to make it
one of the larger funds with a broad mandate in the multi-asset space in less
than a year of trading.
That level of commitment
would serve as a major vote of confidence for a new fund in any category, but
for a fund like OCIO
, it could prove to be the key to survival in a very
Like many of the
funds in the allocation space, OCIO
is an actively managed product which for most ETP
investors is a big enough challenge to embrace, but the fact that fund doesn’t
have a well-defined benchmark and you can see why we might think of OCIO
In fact, OCIO is missing most of the attributes investors think of as
common in new funds; no formulaic investment strategy, no limited universe to
draw investments from and no preset dates for rebalancing.
What a brave new world indeed.
Instead Clearshares had a
simple goal when they decided to bring this product to market; to marry the
asset allocation expertise and independence of the outsourced Chief Investment Officer
with the price and efficiency of the ETP and without each acquiring the worst
traits of the other.
How that translates
into a working product begins with the benchmark where instead of comparing
their performance to a specific index, the focus is on outperforming the naïve
60/40 portfolio, here using MSCI ACWI and the Barclays U.S. Agg for the equity
and fixed income positions.
As you would
expect with active management, there are no preset rebalancing dates or formula, instead the fund has a broad mandate that allows it hold onto
strong performers although no one fund can be more than 5% of the fund.
Instead of rebalancing the fund by calendar which
can lead to less-than-ideal developments like selling stocks to buy bonds in a
bull market, OCIO
has a certain latitude to let those winners keep
Equities can make up anywhere
from 40%-70% of the fund while bonds can be up to 50%, while alternatives,
including REITs and MLPs, can be up to 20%.
To turn the old adage on
its head, “While that may all sound good in theory, how does it work in
Our new-to-market posts
typically feature funds long on promise but short on track records and OCIO
is no exception, although we think comparing OCIO
with a more traditional core allocation fund, here
the iShares Core Growth Allocation ETF (AOR), can offer valuable insights for going
AOR is the epitome of a passive
core fund which makes it the perfect contrast to OCIO
Not only does
it follow a formulaic strategy, but it also has set rebalancing dates and
relies on a handful of broad-based iShares products with no ability to use more
So how have they matched
up so far?
Starting with its historical
was launched in late June of last year, giving it
slightly better than a six-month history but during the period there were
several significant developments in financial markets including rising Treasury
yields and a weakening dollar which could help an actively managed fund
outshine its passive peers. OCIO
managed to deliver with an 11% return from inception
to the end of January, compared to a 10% return for its blended benchmark thanks
in no small part to the funds ability to keep equity exposure close to 70%
while the bond portfolio had slightly less duration than AGG.
That might seem anemic to some but compared
to the iShares Core Growth Allocation ETF (AOR) which while charging a slightly
lower fee (.25% compared to OCIO’s .67%) delivered a 10% return with the
roughly same equity exposure and you start to get a very different perspective
A tiebreaker would obviously
come down to who did better with less risk, something vitally important to all
long-term investors, but we would offer that it might be important to consider
whether an active or passive strategy is more likely to have excess risk going
It’s impossible to determine
these things ex ante, but given the recent rise in bond yields while equities
have become so choppy would suggest that the ability to tactically shift
between not just sectors but between markets and investment products could
offer a better risk-adjusted return going forward.
Only time will tell, but the launch of OCIO
could signify that much needed change is finally
coming to a long-overlooked space.
Thank you for reading ETF
opinions and estimates constitute our judgment as of the date of this material
and are subject to change without notice.
ETF Global LLC (“ETFG”) and its affiliates and any third-party
providers, as well as their directors, officers, shareholders, employees or
agents (collectively ETFG Parties) do not guarantee the accuracy, completeness,
adequacy or timeliness of any information, including ratings and rankings and
are not responsible for errors and omissions or for the results obtained from
the use of such information and ETFG Parties shall have no liability for any
errors, omissions, or interruptions therein, regardless of the cause, or for
the results obtained from the use of such information. ETFG PARTIES DISCLAIM
ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY
WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE. In no event shall ETFG Parties
be liable to any party for any direct, indirect, incidental, exemplary, compensatory,
punitive, special or consequential damages, costs, expenses, legal fees, or
losses (including, without limitation, lost income or lost profits and
opportunity costs) in connection with any use of the information contained in
this document even if advised of the possibility of such damages.
ratings and rankings are statements of opinion as of the date they are
expressed and not statements of fact or recommendations to purchase, hold, or
sell any securities or to make any investment decisions. ETFG ratings and
rankings should not be relied on when making any investment or other business
decision. ETFG’s opinions and analyses
do not address the suitability of any security.
ETFG does not act as a fiduciary or an investment advisor. While ETFG has obtained information from
sources they believe to be reliable, ETFG does not perform an audit or
undertake any duty of due diligence or independent verification of any
information it receives.
material is not intended as an offer or solicitation for the purchase or sale
of any security or other financial instrument. Securities, financial
instruments or strategies mentioned herein may not be suitable for all
investors. Any opinions expressed herein
are given in good faith, are subject to change without notice, and are only
correct as of the stated date of their issue.
Prices, values, or income from any securities or investments mentioned
in this report may fall against the interests of the investor and the investor
may get back less than the amount invested.
Where an investment is described as being likely to yield income, please
note that the amount of income that the investor will receive from such an
investment may fluctuate. Where an
investment or security is denominated in a different currency to the investor's
currency of reference, changes in rates of exchange may have an adverse effect
on the value, price or income of or from that investment to the investor.