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Finding Flexibility With Multi-Asset-Income ETFs

Andrew Gogerty

Andrew Gogerty: Good morning. This is Andrew Gogerty from Morningstar's ETF Invest Conference, and we're talking today about the trend in multi-asset-income strategies coming to market. Joining me this morning is Rob Williams, principal at the Sage Advisory Group.

Rob, thank you for joining me today.

Rob Williams: Thanks for having me today, Andy.

Gogerty: So, multi-asset-income strategies are starting to come to market; we're seeing them in a variety of wrappers. Sage has a historic institutional fixed-income background, yet for this strategy, you chose to use ETFs as the vehicle to express that. What kind of factored into that decision?

Williams: Yeah, correct. We do both. We do ETF strategies and individual bond strategies. Where ETFs make a lot of sense, we found, is outside the core bond market, more illiquid, difficult-to-reach sectors where you want to be a little more tactical, like high yield in emerging markets. Take that a step further into multiasset income, not only are you going outside the core bond market, but you're going outside the bond market period, into REITs, perhaps MLPs, dividend equity.

So, you want to be more flexible and tactical, and we find with the ETF product, you can maintain the integrity over an SMA account, make it scalable to lower dollar amounts. And as a manager, we love it because we have global access to all bond markets, noncore bond markets, as well as equity markets that are hard to reach and we're able to be tactical and be in and out of those segments whenever we deem fit, according to our outlook.

Gogerty: It seems like part of that scalability is kind of the cost-effectiveness of using the ETF to get an exposure as opposed to try and replicate all those individual securities to get the same asset class.

Williams: Precisely. Yeah. We find even though we run similar strategies in our regular business using individual securities, we even find for a high-yield-trade examples, if we see relative value to want to get in and out of high-yield, it's way more efficient for us, and liquid, to do one trade in one ETF and get that position on or off rather than unwinding our whole 50 or 100 positions or tweaking that in the regular portfolio. So, it brings a lot of efficiencies to bear.

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Gogerty: Let's talk about the trend that we're seeing these strategies come to market from ETF strategist firms such as yourselves, but you're also seeing different iterations come from the ETF providers, where they're wrapping ETFs and they're using some type of either algorithm or valuation metric to kind of rotate assets. What asset classes does your strategy focus on?

Williams: You know, we keep it pretty basic in the sense that, at heart, we’re a core fixed-income manager. So, I think by definition someone who is going after income is somewhat conservative. So, we're going to keep a large flavor of this in the fixed-income markets and even in the core fixed-income markets. Even though that's not where the yield is, you still want to have the volatility characteristics of a fixed-income portfolio. So, we will really be 80% to 100% in the fixed-income markets, including core and noncore. So, you are getting yield in emerging markets as high yield.

Then we'll have the flexibility to say anywhere from zero up to 30% outside the bond market completely and to reach dividend equities, and we'll do that. We'll also take traditional positions in equities, but we'll just use the ETFs that are tilted more heavily towards the dividend side. So, if we like mid-caps, for example, rather than buying the market cap, we’ll buy the dividend-weighted to make sure we're adding income but maintaining all of our best asset-allocation decisions as we go.

Gogerty: But it seems like at the end of the day, you’re not going to get into large weights and esoteric things like mortgage REITs, or 50% of the portfolio into MLPs, or non-U.S. REITs dominating the allocation.

Williams: Right. To us, you need to have constraints on to it, right? So like I said, we benchmark our multiasset, and other people do it differently. Like I said, we want to keep it a little more conservative. We benchmark at 80% fixed/20% equity, and have that flexibility to go up 30% equity or outside the fixed-income markets. And then even within the fixed-income, we can be 100% fixed income, but we will not be more than 40% in noncore. And what I mean by noncore is inside the Barclays Aggregate Treasury agency MBS investment-grade credit. So we even limit the high yield in the emerging market and the really high-volatile things that can end up dominating performance if you use it in too-big slugs.

Gogerty: Other than understanding what potential characteristics the portfolio can have, what do you think are some of the key takeaways that an advisor should make sure they understand? Because income for an advisor is never going to go away as a topic of conversation with their client. When they're looking at these strategies and the different iterations, what do you think some of the keys are that they should make sure they understand before they put a client into one strategy or the other?

Williams: Sure. I'll go back saying the overall risk posture of it. They might want income, but they could still be a conservative investor. So, I see other multi-asset-income products that will--everyone likes to reach for yield, but you have to worry about the correlation risk of what you're putting in that and what are the constraints. That's why we've built those constraints into our portfolio, because if I'm ranking index opportunities and market and that's really my methodology, I may have REITs, I may have high-dividend equities, I may have high yield. Those are all correlated. If we have a big turnaround--risk assets turn around--then portfolios all go in the same direction.

So, I would say, I would look for guys who have expertise in fixed income because you are going to need a good amount of fixed income in there. Someone that is tactical, but has risk constraints and it makes sense. This portfolio is not going to look great because of the income, but all turn in one direction when things go poorly.

Gogerty: Yeah, your NAV is getting destroyed, but you're getting this big income.

Williams: Exactly. Income could be wiped away very quickly with equity-market risk and outside of fixed-income volatility.

Gogerty: Great. Well, thank you for your time today and your perspective.

Williams: My pleasure.

Gogerty: This has been Andrew Gogerty at the Morningstar ETF Invest Conference with Rob Williams from Sage Advisory. For more information on ETF managed portfolios, check out, the ETF Managed Portfolio Center. Thank you.