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By Paul Justice, CFA | 07-01-2011 11:36 AM

Bringing Investment Discipline Strategies to ETFs

Russell's Rolf Agather and Mark Roberts discuss why their firm launched a series of ETFs based on six established investment strategies.

Paul Justice: Hi, there. I am Paul Justice with Morningstar, director of exchange-traded fund research. Russell has brought forth a series of investment discipline ETFs to the marketplace following strategies that have been followed now for about 30 years plus, especially in the Russell Group itself.

Today, to talk about these developments with me I have Mark Roberts, manager of products development at Russell and also Rolf Agather, who is joining us from the Russell Index Group. Thank you gentlemen.

Rolf Agather: Thank you.

Mark Roberts: Thank you.

Justice: If you wouldn't mind, talk about some of the strategy funds that you have now brought forward. So, we are looking at six different funds that are targeting investment styles that have been around for quite some time.

Agather: Yeah. So, what we've actually done is, first, we are looking into the large-cap U.S. equity space. So, we've got an aggressive growth fund, a consistent growth fund, a growth at a reasonable price, also known as GARB, an equity income fund, a low P/E fund, and a contrarian fund. So, there are really six distinct types of investment discipline indexes and ETFs that we've now launched.

Justice: Now, these are all strategies that really originated back in the '80s, and this is something with which you are very familiar. Could you talk about how you have been implementing these strategies before and what it might compare to that's available in the investment landscape?

Agather: Sure. I mean it's interesting. The concept for the investment discipline indexes has actually been around almost as long as the broad Russell indexes. So, shortly after we created the Russell 3000 and the Russell Index family in 1984, the concept of actually getting more narrow and specific indexes that represented an active manager strategy was actually in play at Russell.

What was happening at the time, though, was Russell wanted a way to actually implement those sorts of strategies very tactically. Obviously, at the time ETFs didn't exist, and for Russell, the typical format would have been a separate account or a commingled fund. So, even though we had the concept in place, we really didn't have a good vehicle that we could use to implement these sorts of strategies in the way that Russell wanted. So, when the ETFs came along that was actually the ideal vehicle for us to actually implement these strategies.

Justice: So these are more niche-focused strategies, but doing it through the ETF allows you to reach a broader audience and a varied audience. You can go not only to the institutional level, but all the way down to the advisor and the individual. Was that some of the appeal of bringing it forth in ETFs?

Roberts: They appear as niche, but really there are thousands of managers out there today that are following strategies like this, aggressive growth, right on down to contrarian or deep-value-type strategies. So, these are quite broadly accepted strategies. They have never been captured before the way Russell has captured them using our 40 years of manager research to distill rules-based indexes that can underpin an ETF.

Justice: So, mainly these are still going to be broadly diversified funds, with just one further amount of screening and something that you have historically studied its tendencies by active managers.

Roberts: That's right.

Justice: OK.

Agather: I think clearly they are more narrow than the broad market exposure you might get with the Russell 3000 or the large- and small-cap exposure, but even they are more narrow than that, I think they are still very well-diversified, broad portfolios.

Justice: Certainly, they are six well-accepted strategies that people can implement and especially introduce them to the concept of a broader portfolio.

Agather: Right.

Justice: Thank you for shedding some light on that.

Roberts: Thank you.

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