Wed, 13 Jun 2012
Astor Asset Management's Rob Stein describes how his firm is managing their fixed-income strategy amid a proliferation of ETF products, drama in the eurozone, and the potential for interest rate normalization.
Andrew Gogerty: The expanding ETF fixed-income landscape and the impact on ETF managed accounts.
Hi, I'm Andy Gogerty, ETF Managed Portfolio Strategist with Morningstar. Joining me today is Rob Stein, managing director and portfolio manager from Astor Asset Management.
Rob, thanks for joining.
Rob Stein: Thank you, Andy.
Gogerty: Let's start big picture, because there have been some changes on the fixed-income ETF landscape this year--basically product development. A lot of new ETFs in recent years, especially this year.
As a manager of an ETF fixed-income portfolio, how is all this new product development changing, if at all, the way that you're looking at management of that strategy?
Stein: Sure. It's been particularly good for us. We use an active approach, and we are more than just buying the name-brand index product, like we did with our long/short portfolios. So it gives us the ability to utilize what our core competency is, fundamental analysis of economic trends and interest rate trends, and then create a portfolio that's not only along the duration curve but the risk curve as well, and to balance it out with some products that perform like fixed income but don't necessarily have the exact-same attributes.
Gogerty: You'd mentioned your long/short strategy, and let's be frank, most people know Astor from their successful long/short strategy. Active Income came out in 2011. What type of advisor, or what type of client demand, is that product appropriate for? Who are you targeting with this strategy?
Stein: So to be clear, we were using some of the fundamental analysis that we now have in our Active Income strategy in our Long/Short balanced strategy. It had a slice of allocation to fixed income in the Long/Short balance product. So we were able to utilize those rules and philosophies and fundamental analysis for a stand-alone product, particularly when the breadth of products became greater.
But we grew this out of out of demand. We try not to build things on spec, but when advisors are saying to us, "Gee, we like what you did to the equity side of my allocations. You created a product that helped with standard deviation, drawdown, and risk--a product that over the longer term actually improved returns while reducing that risk. Anything exist like that on the fixed-income side, because I'm very concerned that as rates normalize, I don't want to be the one to first say they are going up, but as they normalize, there might be some stress on pure fixed-income portfolios.
And what we found is there was an appetite for a fixed-income product that sat alongside their core fixed-income strategies that did the same thing that Long/Short balanced did: Reduce risk, reduce standard deviation, reduce correlation, and increase return. And that's what you get with the Active Income product.
Gogerty: You touched on it a little bit, but going back, obviously, managing a portfolio of ETFs, there is a lot of technical quantitative factors. It sounds like you were leveraging some of them from Long/Short into this portfolio. What are maybe some of the differences, or what are some of the other things you've done a little bit differently now that it's a stand-alone as opposed to a sleeve of a broader equity and fixed-income portfolio?
Stein: So the components of an equity-based ETF, when the ETF is the wrapper, are going to perform very similar to what the underlying securities are. But when you wrap an ETF around other non-equity assets, like fixed income, there's a different personality that exists. I happen to think that the ETF wrapper around the fixed income makes it more efficient. It looks and trades like a stock, and you don’t have to worry about some of the challenges of managing a fixed-income portfolio.
Gogerty: Price discovery.
Stein: Price discovery, and if you need to borrow and shorting and so on and so forth. So for us, the drilling down into the components of the ETF requires more data, more information than the typical manager might even subscribe to with his other service providers. So, we think that we are uniquely positioned to evaluate a fixed-income ETF, and that was important when we were picking between the plethora of ETF securities.
Gogerty: You had mentioned the normalization of rates--let's not say "rising," let's say "normalization."
What are some of the macro--because obviously macro is a big input when you're managing an ETF portfolio--what are some of your other key areas of focus right now, other than this potential normalization of rates, and how is that flowing through to your positioning?
Stein: So, let's touch on the normalization of rates, because it's fun and cute but there's a reason. So, stocks go up for different reasons, but you don't care because up is good. Rates go up for different reasons, too, but you do care. If interest rates are going up because the economy is growing, that's good. You can perhaps take more risk.
If interest rates are going up, like we see in Spain, because credit quality or risk is going up, that's not so good, and you would have a different portfolio composition. So, when looking at fundamental analysis, it's more important in the fixed-income arena to know the why, as opposed to the equity arena, where up is good. So we focus on those fundamental reasons that drive interest rates.
Gogerty: Do you see, potentially, what is going on overseas, the uncertainty--do you see that having a prolonged effect on the fixed-income market in the U.S.? Do you see it decoupling? We can watch the sentiment overseas and the impact on the markets here the next day or the day before. Do you see that staying coupled in the near-term?
Stein: So, Andy, that's where we might differ from other economists or portfolio managers. I do believe that the drama in Europe, which is substantial and significant, will have its appropriate impact on the U.S. fixed-income and economic environment. I think that what you see is an environment where it's 60 degrees, it went to 62, and everybody thought it was 80 and sunny. Then it went from 62 to 59, and everybody thought it was freezing.
And the impact of the drama in Europe, which is driving our fixed-income markets quite a bit for a variety of reasons, as well as without the derivative products, less supply of fixed-income assets, will decouple. And you will see a market that will perform based on what Europe's issues are creating from an economic standpoint, not from a contagion or risk standpoint.
Clearly a headwind, clearly going to do something to our growth and our GDP forecasts, and that should be factored into the price of the various securities, but I do not think that it's a situation that exists there that's soon to exist here.
Gogerty: Well, thank you for your insight today. I definitely appreciate it.
Stein: Thank you, Andy.
Gogerty: This has been Andy Gogerty with Morningstar, talking with Rob Stein from Astor Asset Management.
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