There’s no doubt COVID-19 has been causing a roller-coaster of concern for investors. But Alex Vynokur, BetaShares chief executive officer, says the situation has also brought about a few interesting insights. Instead of pulling out of their investments, many of his clients are choosing to reposition their portfolios – with technology the main beneficiary.
Alex tells me investors have been turning to technology funds because they’re viewed as relatively defensive in these times, given their resilience as businesses and individuals ramp up their digital use. BetaShares is about to celebrate its 10-year anniversary and now manages $11.9 billion in assets. But Alex says he still learns something new every day.
“We continue to reinvent ourselves and to reimagine what the opportunities are for Australian investors and I think that’s exciting. From our perspective, it keeps us fresh and keeps us close to customers. I think the next decade is going to be a lot more exciting than the past.”
In this Q&A, Alex explains not only why ETFs are appropriate for investors during COVID-19 but in a nice example of honesty, where the weak spots exist. He also highlights some interesting behaviour among Millennial investors and why equity portfolios should have at least 50% of their investments allocated to technology. Alex also reveals a bit about how he invests.
caption: Alex vynokur, CEO, BEtashares
What is it that ETFs are providing that is leading to their strong growth, especially in the context of COVID?
Traditionally the answers would be transparency, simplicity and low cost. But I would say there are actually two other attributes, which are liquidity and the ability to play defence.
People tend to take liquidity for granted. But the truth of the matter is that when times are benign, nobody's got a liquidity problem. But when you need it most, it can disappear and we’ve seen this a number of times during market downturns. So one of the critical benefits of ETFs is their liquidity, which has been tested in so many crises in the past: it happened in the technology crash, during the GFC, through Brexit and again during the COVID crisis. During all these times, ETFs have really been the bastion of reliable liquidity across the board: it is a key feature that has held up strongly.
The second attribute is the ability to play defence. There are many investments available through the ETF structure that allow investors to play defence by profiting even when the markets are weak or volatile. For example, during this COVID period, one stand-out performer is gold, including gold miners. An ETF easily provides access to this sector, and it’s played out very nicely from a defensive perspective. Other examples include fixed-income ETFs that provide a negative correlation to equities and bear funds that can be used to hedge a portfolio.
What interesting ETF trading behaviours have you seen emerge during COVID?
What has been great to see is that the majority of investors have been staying the course and using the weakness and volatility in the market as an opportunity to add and accumulate. But what we found particularly interesting is seeing a younger demographic buying throughout the crisis – both as the market is falling and also on the way up. Many are investing either once a week or once a month and it’s been interesting to see how this demographic, which is generally Millennials, are displaying a lot more discipline than people traditionally have given them credit for.
I think this behaviour among Millennials reflects how investing habits have changed over time. In the past, the general view in Australia was that the best way to build wealth was via property ownership. But what's happened over the years and over the last decade in particular, with property becoming a lot less affordable, people are turning to equity investments, and ETFs fit the bill because they tick so many boxes. For example, there is no minimum amount you need to invest and they offer diversification.
Another interesting insight from this cohort is many prefer to invest in ethical funds as a way to align their investment dollars with their values. This is reflected in strong flows we're seeing in the BetaShares Global Sustainability Leaders ETF (ASX: ETHI). But it’s also a sensible way to generate superior returns over time because as an ethical investor, you tend to be underweight in sectors that are in structural decline – such as fossil fuels – and overweight in growth sectors such as technology and healthcare.
BetaShares has led the way in launching tech-oriented ETFs. Why are you so big on technology?
Technology is disrupting the way we live our lives, the way we consume media, the way we shop, make payments and consume entertainment and news. It affects so many aspects of our lives, from booking takeaway food to listening to music. Technology in today’s world transcends sector or industry classifications, and as such it is not at all a surprise that revenue and earnings growth of global technology leaders significantly outpaces that of the general market.
I'm a big believer that technology is already reshaping our lives in different ways and I believe it’s going to continue to play a great role.
Australians are one of the fastest adopters of technology, but at the same time, our market is very underweight in technology – so most investors have an underweight position in the sector. In other words, they are underweight in what I believe will be one of the greatest drivers of value for decades to come.
I have been on a mission personally and professionally to bring technology closer to Australian investors. While the history of Australia's wealth creation has been in resources and financials, I think the future is in technology and innovation. Therefore we are deliberately building out a suite of technology-based investment opportunities and of course, the BetaShares Nasdaq 100 ETF (ASX:NDQ) is our flagship product with almost $1 billion in funds under management. NDQ includes many well-known names such as Amazon, Google, Zoom, Facebook and many other leading global companies.
We followed this one up with the BetaShares Asia Technology Tigers ETF (ASX:ASIA), which has great-performing companies such as Tencent, Alibaba and Samsung. We introduced the Betashares Cybersecurity ETF (ASX:HACK) because it caters to a particular segment of the technology space that is very well placed to grow. The BetaShares S&P/ASX Australian Technology ETF (ASX:ATEC) is one we’re very excited about because Australia has some phenomenal technology companies with great leadership and innovation that’s relevant on the global scale. Picking winners in the ever-evolving tech space is very hard and I think that’s where these ETFs come into their own: they provide the opportunity to diversify while still getting exposure to growth.
Do you believe there's an appropriate allocation within typical equity portfolios to technology?
This is where I’m going to potentially get a little bit controversial. I'm certainly conscious of the fact that each investor needs to take their own personal circumstances into account but I'll say this: the reason why investors allocate a proportion of their portfolio to equities is to get exposure to growth. It’s as simple as that. You allocate to fixed income for the defensive element or for more predictable cash flow, but you allocate to equities for growth.
If I look at the Australian investor base, the vast majority of their equities allocations are in what has been traditionally regarded as the blue chips: effectively the big banks, some miners and maybe Telstra and Woolworths. At this point in time, I believe this type of portfolio isn’t providing opportunities for genuine, long term structural growth.
If you want growth, up to half of your equities portfolio should be invested in growth opportunities, and this means technology, where opportunities can be found in a combination of global technology leaders. I also think a growth portfolio can include investments in other sectors, such as healthcare.
Many fund managers might say, "What about the price you're paying for these companies? They're on 30, 40, 50 times earnings.” How would you reconcile the valuation argument?
First, I’d stress I’m only talking about half of someone’s equities allocation being dedicated to technology; I’m not saying half of their overall portfolio should be. Technology is an interesting and divisive sector. On the one hand, you've got high valuations, on the other hand, you've got very high growth. Second, if you look at the Nasdaq companies, they have benefited from a significant amount of growth pre-COVID but many pundits have been calling out a bubble in the Nasdaq off the back of the stretched valuations.
Interestingly enough, when the volatility hit the market and people started focusing on the downside, which exposure has become the safe-haven trade? The Nasdaq 100. One reason why this is the case is that the cash buffer the Nasdaq 100 stocks are displaying today is significantly superior to what you see in the global MCSI World or S&P 500.
Obviously, I don't know what the path over the short term is going to be. But I do know companies that grow revenue and profits and convert this growth into extra profit, are going to be much better placed to grow their dividend stream and total shareholder returns for investors than those companies with high payout ratios who maintain share-price strength through buybacks. This is something which, in the US market, in particular, has been a bit of a feature over the last few years.
In Australia, there is still the mentality that investing in blue chips is the way to build wealth. But how are we going to provide for our retirement if a large portion of our portfolio is invested in companies with little growth? We have to start embracing technology and innovation now, not only as consumers but also as investors.
The benefits of investing in ETFs are well known, but what would you say is one of the pitfalls?
ETFs are a tool that enables investors to achieve their investment objectives. But I would say the most important missing ingredient from ETFs is the ability to formulate an asset allocation strategy that is appropriate to an individual investor. Eighty per cent of your returns are driven by your asset allocation. So, buying the lowest-cost Australian equity ETF and having 100% of your assets in that ETF as say, a 65-year-old pre-retiree is not a good idea. Just as it’s not a good idea to have 100% of your equity allocation in the best-performing active equities manager when you're at that stage of life.
The most important point is getting the asset allocation right. We as a business spend a lot of our time and energy educating people around the appropriate asset allocation and how it’s not about adopting a set-and-forget approach. This is because, say for a young person who's graduated from university and is into their first job, the asset allocation can be a lot more pro-growth – in fact, our view would be that the vast majority should be in growth. As that person moves through their various life stages, their needs will change and so should their asset allocation.
Therefore, the greatest criticism and the greatest limitation of an ETF is that it does not answer the question of what your asset allocation should be as an individual. Because of this, people should continue using the services of a broker or financial adviser, and if they're a self-directed investor, they should make sure they educate themselves.
Can you tell us a bit about how you invest?
My portfolio resembles a barbell: on the one hand, it’s allocated very heavily towards low cost, simple, transparent products – and it won’t be surprising to learn that includes mostly ETFs, as I definitely practise what I preach. At the other end are asset classes where I believe active management has real value, such as private debt, private equity, and bespoke investment exposures, as well as some high-conviction active equities managers that genuinely attempt to generate alpha as opposed to hugging the index.
My portfolio is very liquid and very diversified. Liquidity is critical and I think it's one of the least appreciated assets that each of us has an investor. We need it to keep our powder dry and to take advantage of opportunities when they come.
ETFs are one of the fastest growing investment vehicles in the Australian market. For a full range of products available to investors, please visit BetaShares website.
Nice contribution from Alex. Despite a fair bit of poo pooing by active investment industry stalwarts, index ETF's performed wonderfully during the fullness of the March meltdown and recovery on the back of deep liquidity. A key attribute in volatile markets as per your emphasis. Spot on! When it comes the increasing number of boutique ETFs however, buyers should be-ware that while they offer tactical portfolio allocation opportunities, risk / reward profiles are amplified as you take increasingly narrow bets on parts of the market. No less so in tech than anywhere else. Growth is not a 'get out of jail free' card. Price paid, exposure to market cycles and duration of investment still counts A LOT. Bear Market funds are like lottery tickets- you might win, but more likely you won't, over any period. To be used as a hedge only against your longs. Compared to so many poorer performing alternatives however (special mention to the local LIT / LIC industry) large (liquid), low cost, broad based ETF's remain a great portfolio foundation. I am a fan.
Both Betashares and Etf Securities have quality technology ETFs. I like FANG due to Tesla exposure offset by technology constituents with capital-light business models. Betashares could add Tesla in future products to attract more millennials.