Multi-Asset

Building your book with multi-asset portfolios

Kevin Gopaul, Global Head of ETFs, BMO Global Asset Management, sits down with Amit Prakash, Managing Director, Multi-Asset Solutions Team (MAST), to discuss how their teams collaborate and innovate in the current investment climate.
July 2020

Kevin Gopaul

Global Head of Exchange Traded Funds

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Amit Prakash

Managing Director Multi-Asset Solutions

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With mounting pressure to streamline their product shelves, many Advisors are embracing multi-asset portfolios that save critical hours on the investment side of their business. For a closer look at this trend, Kevin Gopaul, Global Head of ETFs, BMO Global Asset Management, sits down with Amit Prakash, Managing Director, Multi-Asset Solutions Team (MAST), to discuss how their teams collaborate and innovate in the current investment climate.

Tailwinds for multi-asset portfolios

Kevin Gopaul: Over the past decade, our Multi-Asset Solutions Team has been at the centre of two major industry trends. First, there’s the innovation of precise ETF solutions, which allow investors to get targeted exposure to the sectors and factors they need. Second, there’s been an industry-wide push for simpler product shelves. Together these drivers have fundamentally altered the investment landscape for Advisors – and the emergence of the COVID-19 virus only accelerates this transformation.

Amit Prakash: To Kevin’s first point, the growth in precise ETFs has been extremely valuable to asset allocation. If we want to trade small cap European equities, ETFs would allow us to do that in a targeted way without gaining any unwanted exposures. The same is true if we want to step into the Canadian market, the US market or specific parts of the bond curve – in each case we can express our view in a simple and effective manner. We also find that ETFs provide liquidity reflective of the underlying market, and visibility into the expected transactions cost of our portfolios.

KG: And precise exposures are only half the story. For many Advisors, simplification on the investment side represents a vital opportunity to refocus your efforts within the business. Rather than analyzing flows and data all day, you can outsource the allocation duties to a seasoned portfolio manager with similar views on investing. You can hand over trading and rebalancing and, best of all, you can focus growing the business, servicing your clients and cultivating new prospects. Put another way, efficiency is the other half of the story.

AP: That said, we know customization is still important. Our portfolios are divided into risk buckets that run from mostly fixed income to majority weighting in equities, with corresponding increases in risk and reward. We know risk tolerances can vary wildly, so we make it easy to find the right solution for your client, whether that’s a balanced fund, equity growth fund or conservative fixed income, etc.

When you buy a fund whose benchmark is the S&P/TSX composite, you know exactly what’s held within the fund. There is no ambiguity.

The ABCs of portfolio construction

AP: When it comes to building a portfolio, we’re laser-focused on solutions that allow us to play in the intersection of cost and access. As I mentioned earlier, ETFs help us keep an eye on transaction costs, though the ultimate return of the portfolio will depend on exposures they provide. All else being equal, a 60/40 portfolio split between global stocks and bonds has historically delivered 5% to 7 % returns, with a Sharpe ratio ranging from 1 to 1.4, because the asset weighting mitigates the downside and, to a certain extent, moderates the upside. In other words, once the asset allocations are set, you’ve established the long-term expected return and risk characteristics of the portfolio.

KG: The transparency of ETFs is helpful in this process, considering that when you buy a fund whose benchmark is the S&P/TSX composite, you know exactly what’s held within the fund. There is no ambiguity about whether it’s tilted towards a particular sector, size or geography. You know the 500 names, and that leads to a predictable and well understood portfolio that minimizes investment surprises. In our experience, that structure speaks very well to the end client.

AP: That’s right. And although we strongly believe in matching portfolios to risk tolerance and time horizon, it can be useful to add a tactical layer at the margin. Careful implementation of these sleeves can add value beyond your generic return, reducing slippage from standard securities and fund vehicles, and building greater flexibility into the portfolio. Just look at recent events: The unexpected shock of a global pandemic caused a historic sell-off which asset managers could not have anticipated. With the right tactical response, that volatility could have been an opportunity.

KG: It’s the perfect expression of active and passive. Amit and his team build portfolios that range from active to passive, which are in turn based on instruments ranging from plain vanilla index funds to more complex factor-based strategies. Their job is to ensure Advisors have comprehensive solutions across the risk spectrum, and our role is to supply them with a broad range of innovative tools – whether that means adding covered call layers, creating a new currency-hedged exposures, or the building a responsible investing framework to include environment, social and governance factors.

We had “shock absorbers” to minimize the downside effects. And later, when prices rebounded, we were still able to take part in the rally.

Navigating through the COVID-19 crisis

AP: One innovation we implemented well ahead of the coronavirus pandemic was the addition of a factor lens in all our portfolios. Specifically, we began expressing our equities view through BMO Low Volatility ETFs, which allowed us to moderate risks in the portfolio AND remain invested in stocks. That way when the market plunged in March and April, we had “shock absorbers” to minimize the downside effects. And later, when prices rebounded, we were still able to participate in the rally.

KG: Our team was fortunate to have a wide breadth of solutions on hand. When there was a flight to quality, we could provide some of the best quality solutions in the marketplace. Then as central banks around the world cut interest rates, our covered call strategies did quite well filling the demand for yield. And now with renewed interest in precious metals, especially gold, we can point to our expertise managing commodities as proof positive of our capabilities across the full market cycle.

AP: When the crisis first began, we looked to Kevin’s team for support on the credit side of the equation. If you remember, prior to the U.S. Federal Reserve and Bank of Canada actions, portions of the fixed income markets were getting clogged up as investors became uncertain about the market outlook. The contagion spread from high yield to corporate credit, and eventually certain areas of the bond market stopped functioning altogether. Central banks eventually stepped in as a “bidder of last resort” – but in the interim we innovatively used the BMO Aggregate Bond Index ETF (Ticker: ZAG) to access more liquid parts of the Canadian bond market.           

KG: That expertise is why the Bank of Canada chose us to manage the Provincial Bond Purchase Program (PBPP). As Amit mentioned, the central bank is providing liquidity to areas of the market that have been impacted by the coronavirus, and we happen to be one of the few managers on Bay Street with a dedicated provincial bond mandate. We’ll be supporting provincial government funding markets as lawmakers implement emergency measures to respond to the COVID-19 situation.   

The real benefit of having an internal multi-asset team is that we get to test our strategies before putting them out to the street.

Double-sided partnership benefits

KG: Amit and I worked together at a global investment firm in Toronto nearly two decades ago. In some ways, that shared experience led to common ground on portfolio construction and risk management. When I joined BMO Global Asset Management in 2009, it made perfect sense to recruit him for building our new business in Hong Kong, and later our multi-asset solutions team in Toronto. The shared history provides us with closer, stronger linkages than you’ll find at other investment houses.

AP: I agree – and our relationship has also allowed us to create a positive feedback loop between our teams. From the multi-asset side, it’s helpful to have support when implementing ETFs in our portfolios. I already mentioned how ZAG helped us navigate a liquidity freeze at the start of the coronavirus panic. That’s just one example. And in return, we deliver feedback to Kevin’s team, helping them better understand the challenges we’re facing, refine existing strategies and build new tools.    

KG: Unlike ETF providers who cater almost exclusively in-house, the majority of our business is external. The real benefit of an internal multi-asset team is that we get to test our strategies before putting them out to the street. We can be fairly confident that if they need something, the industry will need it as well. For example, if we hear them ask for small cap, we can be relatively sure there’s demand elsewhere. It’s a feedback loop that helps with engineering our solutions.

AP: Take ESG as another example. Responsible investing has become a macro trend in the marketplace, and we noticed there’s an inherent sector bias in equities that fall into the category. The governance factor in particular leads to companies that are, potentially, better equipped to manage crises. With that knowledge in hand, Kevin’s team has introduced perhaps a broad suite of ESG ETFs in Canada, spanning multiple asset classes so we can pick and choose the pieces we need to execute our investment strategy.

 KG: Our approach wasn’t really channel specific, but most of the demand we’ve had in the past two years has come from Investment Advisors who see the writing on the wall. They’re asking us about these solutions, and their clients are asking them. Plus we’re on the verge of an immense wealth transfer from Baby Boomers to younger clients who are more inclined toward ESG solutions. So there are incentives for everyone to have a conversation about growing in a more responsible way.

 

 

For more insights from Kevin Gopaul, Global Head of ETFs, BMO Global Asset Management, read The Next “Leap of Faith” for ETFs, and visit BMOETFs.com. To learn more about the Multi-Asset Solutions Team, read the June 2020 Monthly Commentary.

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Disclosures

This communication is intended for informational purposes only and is not, and should not be construed as, investment, legal or tax advice to any individual. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Past performance does not guarantee future results.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

The BMO ETFs or securities referred to herein are not sponsored, endorsed or promoted by MSCI Inc. (“MSCI”), and MSCI bears no liability with respect to any such BMO ETFs or securities or any index on which such BMO ETFs or securities are based. The prospectus of the BMO ETFs contains a more detailed description of the limited relationship MSCI has with BMO Asset Management Inc. and any related BMO ETFs.

Commissions, management fees and expenses (if any) all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated. For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the prospectus.  BMO ETFs and ETF series trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

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