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Market Headwinds Require Patience, ETF Strategists Say

ETF managed portfolio skippers are choosy about where they park assets. 

Andrew Gogerty, 03/01/2013

Investors will need patience and precision to be successful in a frothy global market, a handful of ETF managed portfolios strategists warned at a recent conference.

The strategists, who represent an industry that grew its assets 60% in 2012 to $63 billion, told an audience at IndexUniverse’s Inside ETFs Conference that opportunities definitely remain for patient investors willing to ferret out global exposures. But strategists will need to address broad market headwinds with greater precision.

Two strategists--Rob Stein, managing partner of Chicago-based Astor Asset Management, and John Forlines III, chairman and CIO of JAForlines Global—said they’re watching macroeconomic signals and market cycles to surface opportunities beyond broad-based indexes. Forlines noted that global economic growth is out there, but in an unbalanced way. Emerging-markets economies are growing faster, and his JAForlines Global Tactical Allocation strategy shows little exposure to both developed-markets equity and government bonds. The firm also finds nondollar emerging-markets debt a potential prospect going forward. Forlines also noted that global equity correlations are starting to break up, and specific countries, such as Japan, could do well in 2013.

Similarly, Mike Vogelzang, lead manager of the Boston Advisors Broad Allocation Strategy, noted that gaps are widening among returns between individual countries (Brazil and Poland, for example). Vogelzang is also looking to factor-based exposures, such as low-volatility equities, for less-aggressive equity exposure in the portfolio. Vogelzang also questioned whether monetary policy was effectively taking short-term uncertainty out of the market at all costs. The portfolio also showed exposures to volatility-linked exchange-traded funds in the fourth quarter of 2012.

James Breech, president and CEO of Toronto-headquartered Cougar Global Investments, bridged the gap between broad markets and individual countries. He noted his firm has begun modeling global equity regions, especially broad emerging markets, with great granularity, echoing Forlines’ observation that global correlations appear to be on the decline.

The strategists’ views are a good reminder that portfolios can differ widely in their degree of global flexibility. ETF strategists may identify new pockets of opportunity, so decision makers and their clients must be familiar with the degree of potential portfolio changes. Advisors can actively engage their platforms--and the strategist directly--to set the proper performance expectations. This activism will increase the likelihood that the end client has an acceptable financial outcome.

To aid advisors and decision makers in their research, in the coming weeks Morningstar will post a multipart series on best practices for selecting an ETF managed portfolio. Stay tuned. 

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Andrew Gogerty is the ETF managed portfolio strategist at Morningstar.

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