Eight Bays is pleased to announce that we have been featured in the Australian Financial Review paper. We have included the article below so that you can have a read.
Eight Bays targets the best thematic ETFs
Tony Featherstone
Nov 12, 2021 – 5.00am
As Australian issuers launch ASX-quoted thematic exchange traded funds (ETFs), Eight Bays Investment Management has a different approach.
In partnership with Equity Trustees, Eight Bays has launched a fund-of-funds that invests in a portfolio of thematic and sector ETFs listed in the United States.
Eight Bays co-founder George Clapham says the firm is “exchange agnostic” with ETFs. “It makes more sense to invest in ETFs listed on US exchanges. The US ETF market has the most depth and liquidity. For investors, that means far greater choice of ETFs and lower fees.”
The EQT Eight Bays Global Fund is the first of its kind in Australia. The high-conviction, low-turnover fund holds five to 15 ETFs and up to 20 per cent of its portfolio in cash. The fund invests in ETF sectors or themes, such as social media and semiconductors, which have low representation in Australia.
Active management
Mr Clapham, a former active funds manager, believes thematic ETFs are useful for investors seeking portfolio exposure to high-growth trends. He argues that thematic investing requires active rather than passive (set-and-forget) management and a portfolio approach.
“Retail investors might not realise how much stock overlap there is in thematic ETFs and how this can expose portfolios to unnecessary sector or stock concentration risk. For example, Tesla is held by 244 US-listed ETFs, ranging from broad-index ETFs to crypto ETFs,” Mr Clapham said. “Through active management, we avoid stock duplication across ETFs in our portfolio.”
ETF correlation (funds moving in the same direction) is another risk, says Mr Clapham. “Some ETFs are highly correlated. Adding an ETF in a certain sector doesn’t lead to better performance and can diminish diversification benefits. Through active management, you can observe and manage these ETF correlations.”
Mr Clapham says buying thematic ETFs on US markets reduces fees. “Thematic ETFs can be very expensive compared to ETFs over broad indices. Some thematic and country ETFs have expense ratios exceeding 50 basis points. In addition, some of these funds are less liquid, often incur greater buy-sell spreads (a cost to investors) and can trade at a discount to their Net Asset Value in volatile market conditions. Investing in US-listed ETFs reduces these problems.”
Eight Bays analyses ETF valuations broadly in the same way investors analyse stocks. “We track a range of fundamental information, such as the average forward price-to-earnings ratio in an ETF. When the thematic ETF looks expensive, we sell it, and vice versa. You can’t just buy and hold thematic ETFs; they can get very expensive at times.”
The strategy is working. Since its inception in January 2020, the EQT Eight Bays Global Fund has delivered a cumulative return of 48 per cent to the end of October 2021 – or about 13 per cent above its benchmark index. However, as an actively managed fund its management fees are 1.17 per cent per year.
Mr Clapham says investors who invest only in Australian equities are missing out on some of today’s most exciting investment themes. “Investors are far better off investing in a portfolio of themes and using active management to monitor thematic ETFs. These ETFs are more complex than retail investors probably realise.”