By John Lunt, Lunt Capital
Lunt Capital recently hosted its 2019 conference for institutional investors and financial professionals, an event we call “ETF Trek.” We shared ideas and listened to some of the best and brightest in the ETF ecosystem—ETF sponsors, index providers, research firms, academics, institutional investors, and financial advisors. One of my main takeaways—this is the greatest time in history to manage money, and a large reason is the growth and evolution of the ETF marketplace!
Presentations and discussions were not blind to economic, investment, and industry challenges and headwinds. However, an optimism prevailed that investors have been empowered with tools to navigate a variety of economic and market conditions in order to reach specific risk profiles and investment objectives. We were heartened by a sense of stewardship among so many of those in the ETF ecosystem. There was a true appreciation that every dollar has a story. That is, an individual or family worked hard for every dollar we collectively invest, and each person behind an ETF’s AUM deferred immediate spending to invest in and for the future.
We renewed one of our core beliefs that knowledgeable, steady, financial advisors with perspective and vision are difference-makers in the lives of those they work with. The investment laboratory of the last six months has provided a microscope to examine the emotions and behaviors that ultimately result in long-term investment success or failure. The past six months has been a “tale of two markets.” Dismal Q4 2018 equity performance has been followed by a surging market recovery in Q1 2019. Seasoned investors will add this period to their investment memories, always remembering Mark Twain’s famous observation “history doesn’t repeat itself, but it often rhymes.”
Uncertainty is a permanent characteristic of investing, and we will continue to analyze and manage through changes in yield curves, Fed policy, political regimes, and economic cycles. At ETF Trek 2019, we shared some “Big Ideas” as we look forward to the rest of 2019 and beyond. A quick summary of these Big Ideas is included below. Additional research and commentary for all our Big Ideas is available, with more forthcoming.
Big Idea #1: Factor Rotation
Discussion about factors is consuming significant oxygen across the ETF industry. Academic and industry research continues to point to the long-term value of traditional factors including high momentum, high quality, high value, and low volatility. Despite their long-term advantages, these traditional factors may experience periods of underperformance. Case in point is the recent underperformance of the Value Factor, which is causing some investors to explore changes to their factor allocations. Our research points to the advantages of using a disciplined strategy of factor rotation to dynamically move across traditional and non-traditional factors as they move in and out of favor. Factor Rotation highlights the “value” of adapting to rather than predicting a changing factor environment.
Big Idea #2: Currency Focus
In our opinion, one of the most underappreciated sources of opportunity for investment portfolios is the management of foreign currencies. One of my first areas of focus in the late ‘90’s was foreign currencies. However, it has only been in recent years that ETF tools have emerged to bring the possibility of currency-focused management to all sizes of portfolios. Currency ETFs may be used as “stand alone” investments that show lower correlations to traditional asset classes. Currency movements have a significant impact on international equity and international fixed income allocations. The ETF evolution has provided tools that allow investors to hedge or leave unhedged currency exposure across international equity and fixed income markets.
Big Idea 3: China and India Aware
One of the most important questions facing investment portfolios for the next decade is how to deal with the growing impact of China and India. Recent estimates suggest that the GDP (PPP) of both China and India could exceed that of the United States by 2030. I recently visited Shanghai on a trip to meet with a variety of investors and market participants. I also spent time in China and India during Lunt Capital’s Global Investment Trek a few years ago. My first-person view confirmed the potential impact of opportunities and challenges in China and India cannot be ignored. The size and growth of these markets suggests a deliberate, strategic allocation is warranted, but political, economic, and market risks may justify a tactical approach. At Lunt Capital, we are combining the strategic and tactical into a “strategical” allocation to China and India.
Big Idea #4: The Freedom Factor™
Our research has concluded one of the most compelling and unique investment factors in the financial markets is the Freedom Factor™. The premise of the Freedom Factor™ is over the long-term, financial markets of countries with more economic and political freedom will outperform countries with less economic and political freedom. My travels to over 30 countries, including on Lunt Capital’s Investment Trek around the world, has reinforced the investment value of economic and political freedom. Access to efficient, targeted, and low-cost country ETFs allows implementation of a risk-managed strategy focused on the Freedom Factor™.
Big Idea #5: Passive, Active, and Active-Passive
Last year, I wrote an article titled, “Building Portfolios in 2018: Passive, Active, and Active-Passive.” As I noted in the article, the original (and still very useful) market-cap weighted, low cost passive ETFs have been joined in the ETF universe by an array of truly discretionary active ETFs and by a variety of compelling, rules-based tactical or smart beta ETFs (technically passive but with active characteristics, or Active-Passive). The menu of ETF choices available to build portfolios continues to evolve in breadth and depth. The innovation occurring in the ETF marketplace is encouraging and valuable. We advocate including passive, active, and active-passive ETFs in opportunity sets and asset allocations.
Each market cycle includes risks and opportunities, and the present circumstances are no exception. The wide range and increasing volume of market opinions have the potential to create confusion, but knowledgeable and innovative people and firms within the ETF ecosystem are providing tools that make this the best time in history to manage money for investors. Every dollar in every ETF has a personal story of an investor behind it. We continue to believe that carefully constructed and properly managed ETF portfolios offer the potential for happy endings to each investor’s story.