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Seven uses ETFs for passive fund range

Seven Investment Management believes the introduction of its asset-allocated passive funds of funds is part of a Darwinian evolution of the multi-manager concept.

The company says the first challenge for multi-manager funds was the argument between fund of funds and manager of managers, which was followed by fettered versus unfettered portfolios.

Ucits III then led to multi-manager funds with broader multi-asset portfolios and transparent charging structures. Seven says the next challenge will be achieving the same returns through asset allocation while cutting down on charges.

It has addressed this issue by establishing four risk-graded funds that apply active allocation to a portfolio of passive investments, mainly exchange traded funds.

The asset allocation of these funds will be almost identical to the company’s existing portfolios which invest in actively managed funds but ETFs will be used because of their greater liquidity and lower costs. Other tracker funds will be used if ETFs are not available in certain sectors or asset classes.

Director Justin Urquhart Stewart says it would not have been possible to create the asset-allocated passive funds five years ago because there was not the range of assets available through ETFs that there is now.

Urquhart Stewart says: “We think the asset-allocated passive funds are a cost-effective way of putting together a portfolio of ETF investments. Private investors can put together their own portfolios but some ETFs are available only to institutions, so that private investors cannot get access.

“Most IFAs do not know a lot about ETFs because they do not pay commission and investors are not told about them.

“Cost is going to be crucial in the slowing global economy where returns are going to be lower as charges can eat into the returns. If you believe that asset allocation produces 90 per cent of the return, why do you need to pay an active manager?”

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