Multi ETF portfolios: The dog that didn’t bark!

May 7th, 2013 | By | Category: Alternatives / Multi-Asset

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By David Stevenson

My old Uncle Fred was nothing if not brutally honest – every week I’d pop along to see him in his wonderfully clean care home and tell him my latest idea that would change the world. He’d snort loudly and derisively, draw deeply on the 28th fag of the day and then warn me that just because you think it’s a good idea and say so loud enough regularly, doesn’t mean anyone will actually do anything about it!

Multi ETF portfolios: The dog that didn’t bark! By David Stevenson

David Stevenson, columnist at ETF Strategy.

Uncle Fred’s brutal pessimism still lingers in my mind as I survey the vaulting ambitions of the ETF industry. Index tracking firms have done a phenomenal amount to change the investment world in the last decade but there’s one crucial ambition in which it has sadly failed – to effect a low cost retail revolution through multi ETF portfolios.

Alright, I know this particular ambition isn’t exactly world changing when compared to curing world hunger, for instance, but if – and it’s a big if – someone could really build a platform that put together lots of different cheap, simple ETFs into one easy to use structure or portfolio….well surely that would make a huge difference, wouldn’t it?

Take a quick risk profile test, bone up on the importance of diversification, click on a few tools, and hey presto…there’s my portfolio which can be implemented in a matter of seconds online, at low cost.

If we could really make this vision a mass market product overnight investors in multi manager funds for instance could switch to a new, better product that would save them at least 1% per annum. Add up those 1% per annums for the next 20 years, sprinkle a little compounding and suddenly those pension projections don’t look quite so awful after all.

Now before any smart alecs say “ah but David there are indeed lots of good platforms out there that are doing just this”, let us consider a brutal reality. Vanguard for instance is doing a fabulous job of selling its life strategy index unit trusts into the retail space, with outfits like Alliance Trust Savings for instance selling more of these great low cost solutions than hot cakes. Equally TCF is doing a sterling job, as is 7IM, which is also making steady progress in the wealth space. But these are unit trusts selling through fund platforms.

What I’d like is a simple to understand (and use) online share solution, involving lots of different underlying ETFs in one overall ETF portfolio. Alternatively I’d quite like a simple ETF tool that will let me plug in some assumptions, tick a few boxes and then deliver a monthly savings solution based on a bunch of low cost ETFs. You could call it plug-and-play ETF investing for the ordinary man.

Pioneering brand Nutmeg, of course, is attempting to initiate this massive revolution (as is Wake Up My Wealth) but I have a sense that it’s facing a bit of an uphill struggle. I know a few founder investors who love the platform but are holding back from pushing large sums of money on to the site because they “want to see if it actually gets any scale”, which is I guess all rather self defeating in its short-termism.

SCM has also pushed its multi ETF fund on the Deutsche Bank’s db-X platform which is another great idea which I sense is ever so slightly struggling to set the world alight and grab large amounts of AUM. Over in the world of online tools, JustETF out of Germany has devised a great portfolio tool that could represent a big move forward but it needs to find a way of really making investors notice that it’s out there and is up to the boring task of putting together a portfolio as easy as a few clicks of a mouse.

The key link between the relative lack of success for all these pioneers in the ETF space is that no-one has really deployed scale to change the situation. Put brutally, until a few large brands decide to push a multi ETF solution – with accompanying tools – on to the mass retail market, all the innovators will struggle.

Vanguard, for instance, could switch its focus on winning business through IFAs and go mass market retail with a bunch of low cost multi asset class ETFs…but it hasn’t done this to date largely because it wants to focus on winning IFAs’ trust. Alternatively, if Hargreaves Lansdown for instance wanted to break all its own rules and push an ETF platform with a passive version of its excellent Top 150 funds platform….well, that would be a huge move forward but we all know the saying about snowballs and hell.

The most obvious major player probably has to be iShares which could very easily import its already very successful multi asset class ETFs from the US and really shake up the market….but it hasn’t bothered yet, choosing to focus its attention on building the brand instead.

Why do I think these big players are needed? A major player needs to use its scale to push a multi ETF solution for three simple reasons:

  1. Most ordinary investors don’t want individual funds but a portfolio solution – they are rightly terrified of market timing and losing money on picking some duff investment idea
  2. They also want to trust a brand with their money i.e. they are very conservative in marketing terms
  3. They’re also lazy in platform terms and can’t be faffed to switch platforms and run up loads of expenses in the process. They want their trusted brand to do all the hard work for them…and then complain about it all when it goes wrong.

Odd balls like me might believe that cost really, really matters and should come top of the list of investment challenges but the brutal truth is that Uncle Fred was right. Private investors listen to the story but they don’t actually do anything about it. Issues around convenience, brand, scale and ease of use trump absolutely everything.

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