Ben Seager-Scott, head of multi-asset funds for Tilney Group, says there are lots of different ways to build multi-asset portfolios incorporating passives/ETFs and related funds.
But he adds: "Much of it depends on the investment strategy or preferred style of the investor. One way to think of it is as a bit of a spectrum between fully active and fully passive.
"Even those investors who heavily favour fully active funds may end up using passive for exposures where active management generally doesn’t make sense, for example for physical gold exposure or simple gilt/US Treasury exposure."
Then again, there are some fully passive portfolios, at the far end of the passive spectrum, which he says come in several varieties; some using simple, static allocations, some using tactical asset allocation and some using more sophisticated passive/ETF options, such as factor ETFs.
He explains: "Investors in these types of portfolios may have a focus on minimising costs, or perhaps they simply don’t want to be exposed to the dispersion of returns you get with active funds and simply opt not to play that game.
"I hope that gives you some idea of a few different passive portfolio set-ups that spring to mind, I’m sure there are others."
Style tilt
Cowen's second reason, providing core beta to a benchmark component, essentially means allowing for some style tilt while navigating and managing risk.
He says: "For example we can combine a corporate bond tracker to give core rates and investment-grade credit exposure and combine it with a tactical macro bond manager.
"We can then size the respective positions to deliver the degree of benchmark risk we are comfortable with, and vary this as the backdrop becomes more or less suitable to active management."
And the growth of more flexible and tailored ETFs, or smart beta funds that do not track a traditional market-cap-weighted index such as the FTSE 100 or the S&P 500 means managers can create more bespoke portfolios of passive funds for clients that can help create that tactical tilt.
Such flexibility can also help provide an environmental, social and governance overlay, for example, as more cleverly structured ETFs are brought to market that avoid simple 'deselection' strategies but actively include companies with strong ESG credentials that are accredited independently by ratings agencies such as Sustainalytics.
Core-satellite approach
Again a borrowing from the institutional world, where the core-satellite approach was taken by many pension funds at the turn of the new millennium.
This essentially allows a large, centralised holding of a passive fund or series of passive funds, with the flexibility to add different asset classes into the mix around the edges.
