So just the ETF is transitioned as a single security. It reduces cost. It reduces implementation short fall. And it’s those sorts of uses of ETF that have driven the turnover. Marian Azer: They’re particularly good when you’re looking for a specific asset class, say
US small cap or emerging markets, and you’re trying to replicate a benchmark. It’s difficult to get futures to replicate those sort of benchmarks.
Adam Seccombe: There are obviously a number of ETFs on benchmarks similar to futures, and where that’s the case a manager should look at the ETFs as well as, rather than instead of, futures because there will be subtle differences between the pricing of a future and an ETF. We run S&P500 money and we own ETFs and futures because if we want to buy, we obviously want to buy whichever is cheaper, and if we want to sell we want to sell whichever is more expensive. Michael Bailey: For the institutions that are here, have ETFs proved useful as a transition tool?
Troy Rieck: We want every tool at our disposal we can get. I’ll pick up the point on the derivative pricing. In the current world where everyone’s short of cash, people have forced sales of equities because they can’t sell their fixed interest portfolios, and we’re tending to find that derivatives are trading expensive to fair value. So if you’ve got money to put to work, you prefer not to buy the derivatives, all else being equal. Jim Karelas: But if you want to take money off the table, you’ve got the choice because you sell the derivative at a premium.
Troy Rieck: But you can turn that around. There’s still ways you can use those ETFs. We’ve actually done a couple of structures recently where we’ve got a swap on the ETF which has been considerably cheaper than either an index portfolio or a plain vanilla derivative. By being able to put risk capital out there, you can facilitate other business and the counterparties are happy to share some of the rewards that come with that. So you use every tool at your disposal in times like these. But the rebalancing one is one I find very interesting.
Funds, I don’t think, have any idea how much additional risk they leave on the table when they don’t take care and maintenance of their portfolios seriously. People often talk about, ‘I haven’t rebalanced in the last three months and equities have gone down a lot and that’s really great’, but let’s hope you get the timing right when you want to get back in, because you’ve not got your biggest exposure at the worst possible time if markets rally.