Natixis Investment Managers entered the ETF space nearly eight years ago. The firm currently has a lineup of five actively managed ETFs. It takes a thoughtful approach to introducing new products, considering how they meet investor needs. It also offers access to a portfolio construction team for advisors seeking advice on the portfolios they are building for clients.
VettaFi spoke recently with Natixis senior vice president and head of institutional product and ETFs, Nick Elward, about the firm’s approach to the ETF space and how it brings the expertise of its affiliates to the table with its products.
What kind of position is Natixis carving out for itself in the ETF space?
Our plan in the ETF space is to focus on active ETFs, and we have a product line of five actively managed ETFs now. Over time, as the opportunities emerge, as our portfolio management teams have the capability, and as our clients are asking for new exposures, we hope to build out that product line responsibly to comprise equity, fixed income, and certainly alternatives. Thus far, we have at least one product in each of those three big buckets.
Alternatives Increasingly Important in Portfolio Construction
Are there any trends in portfolio construction that you’ve noticed in recent years?
Historically, as you know, asset allocation portfolio construction has focused chiefly on an allocation to equity and an allocation to fixed income. For the majority of investors, that was comfortable for their lifetimes. But we have seen alternatives becoming more utilized by more investors over time. That may have started in earnest about a decade ago when we saw liquid alternatives becoming more popular — but not extremely popular.
The data I saw about ten years ago would have shown that about 3% of assets were in alternatives. And then 97% in equity and fixed income for most investors. So [it was]pretty small. Looking at it now, we’ve seen much more usage of alternatives. I definitely see that as expanding.
Within alternatives, we’ve seen the evolution from mostly real estate to managed futures and hedge fund replication. The latest evolution seems to be a lot more interest in options-oriented products, where an options manager can take down risk in the equity market with an options overlay.
Gateway & Its Options Strategies
Gateway is an affiliate of Natixis based in Cincinnati, Ohio, and has been running options-oriented products since 1977. The firm manages our Natixis Gateway Quality Income ETF (GQI), which implements an options selling strategy. They’ve historically offered a few options strategies structured as mutual funds and separately managed accounts. They use options and hold underlying equities to provide some form of equity returns. But generally speaking, they focus on limiting the downside through the options market.
Some of these options-oriented products have generated about two-thirds of the return of the S&P 500 with about half the volatility. That’s been popular. The latest evolution in this product area is options overlay products focused on generating income for investors that can act as a monthly paycheck. GQI can be used in this way.
We believe GQI is going to help a lot of investors who are interested in the monthly income or who are just being cautious around equity market risk. It can produce returns that complement traditional equity and fixed income.
Vaughan Nelson’s 50 Years of Experience
Can you tell me a little about the other affiliates sub-advising the rest of the products in the Natixis ETF lineup? Do you want to start with Vaughan Nelson?
Beyond Gateway Investment Advisers, we have eight other affiliates within the U.S. market. Vaughan Nelson is a manager based in Houston, Texas, and they’ve been an asset manager for over 50 years. Their approach has been consistent since then, primarily focusing on publicly traded equities. They take more of a value approach to investing than blue-chip or high growth. Over the years, we’ve worked with them to launch several mutual funds and SMAs.
In addition to that, Vaughan Nelson also manages two active ETFs that are more than three years old and switched from semi-transparent to fully transparent as of February 1. Those are the Natixis Vaughan Nelson Select ETF (VNSE) and the Natixis Vaughan Nelson Mid Cap ETF (VNMC).
Some ask why these ETFs made the switch to daily transparency. The reason is that portfolio managers have become comfortable providing their securities daily. The managers are satisfied that they can do their trading effectively, either in one or a few days, without having a market impact from potential front running.
VNSE is a large-cap product; the second, VNMC, is a midcap product. VNSE uses a concentrated approach, holding about 20-25 stocks. Over time, the PM team has shown that taking sizeable positions in individual securities tends to provide better portfolio results rather than spreading their stock choices over a dozen or more companies. The product has done really well, earning a five-star Morningstar rating as of 12/31/2023. Many investors utilize VNSE as part of portfolio construction, making it a core U.S. equity holding.
Midcaps Offer Unique Opportunities
VNMC has a four-star rating from Morningstar as of 12/31/2023 and has performed much better than many competitors. We have some work to do to let investors know about the good work we are doing with that product and how it can really help them regarding asset allocation. A lot of investors like the midcap space because it seems to offer the best of both worlds. They contend that, in some cases, large companies have had their day to grow, and their growth has slowed.
Small caps can be even faster growers, but along with the faster growth of small caps, you will often have higher volatility. Therefore, many investors find that mid-cap space is a sweet spot. It could also appeal to asset allocators looking for something to complement a large-cap product.
What about Loomis Sayles? I know they also manage two of the ETFs in your lineup.
Loomis Sayles is a very well-diversified and very large asset manager. They have a comprehensive product line of fixed income and equity. One of our ETFs that launched about seven months ago is the Natixis Loomis Sayles Focused Growth ETF (LSGR). Its manager, Aziz Hamzaogullari, is running about $70 billion in investments. That’s more than some really well-known asset managers have in total assets.
We’re pleased to bring him from the institutional side of the market and the mutual fund market to the ETF market. He has a quality growth approach with a long-term time horizon and approaches the market like a private equity investor would, where the time horizon might be out for five or more years.
Loomis Sayles’ Short Duration ETF, an Allocation for All Seasons
Loomis also has a well-regarded fixed income business and manages the Natixis Loomis Sayles Short Duration Income ETF (LSST), which is about seven years old. It has a four-star rating from Morningstar as of 12/31/2023. The managers are running $100 billion globally, mostly for institutional investors.
It’s been a tougher time to sell short-duration recently. [The category] was number one for outflows last year among mutual funds and ETFs. However, from a portfolio construction or asset allocation perspective, most investors agree they must allocate to short duration in portfolios. Many investors have money market exposure in portfolios, complemented by short duration. The thinking is that with short-duration exposure, one can acquire better yield than is typical of a money market fund. And it provides some diversification, with the duration being out to about two years on average, whereas the money market is less than 270 days by rule. So investors are getting a little more duration exposure, and it’s good diversification exposure.
Risk Comfort & Time Horizon Are Key to Portfolio Construction
What should advisors consider when they are building their portfolios?
As financial advisors are building portfolios, of course, the starting point is evaluating the end investor. This process includes assessing their comfort level with risk generally, and their time horizon, in particular. These are the guiding principles of asset allocation. Once this initial scoping is completed, it will be clear the required allocations can vary greatly. For example, a financial advisor might have a 30-year-old investor who you would think would be allocated more aggressively, but maybe that person’s psychology is such that they’re very conservative, and it would not be a good thing if their portfolio volatility were high. You could have a 30-year-old investor who’s a technology millionaire without taking a lot of risk. But maybe they demand it and want to be highly invested in risk assets.
It all starts with the end investor and with what’s right for that person. The adviser takes that and then contemplates what’s available in the market and thinks about liquidity needs for that investor. These are some of the important initial considerations.
Diversification Into Sub Asset Classes — Don’t ‘Go It Alone’
And then there’s the general dynamics of diversification for investors. That’s typically a combination of looking at how different ETFs, mutual funds, or other investment vehicles (of varying sub-asset classes) are correlated to each other and thinking about how the portfolio, when constructed, looks about the expected return for the expected volatility. Then, in a scientific way, the best financial advisors can build a portfolio that offers true diversification and meaningful potential returns. We’re happy we’ve worked with many financial advisors that do just that.
We have a portfolio construction team of over 20 CFA-type individuals who meet with financial advisors and discuss the client situation they’re working on. The team provides insight into how they might build that model for the investor. The advisor and portfolio construction team work together to finalize the risk/return profile for that model. It’s a great partnership — we do nearly 1,000 discussions with financial advisors yearly. And, of course, these services are free.
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