[This article appears in our November 2019 issue of ETFR.]
Northern Trust Asset Management's FlexShares brand offers a variety of smart beta ETFs as well as some nontraditional asset ETFs. All are designed as building blocks for overall portfolios. The firm has been judicious when it comes to launches. Currently the firm offers a lineup of 29 ETFs, the largest of which is the $5.3 billion FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR).
Darek Wojnar joined the firm in early 2018 as head of funds and managed accounts, and was previously head of ETFs at Hartford Funds. ETFR recently discussed with him what drives the FlexShares business.
You’ve got a lineup of 29 funds. What does Northern Trust Asset Management consider its core fund groups?
We recognize that most advisors typically have their own way to think about funds generally. As an industry, we think in asset classes—equities, fixed income, maybe real assets, maybe some alternatives. From our perspective at FlexShares, we certainly recognize that that’s the industry approach, and that’s reflective of assets that investors generally can invest in. But we also recognize that, for most individuals who are investors, who work with advisors, they really talk about various objectives that are more related to outcomes.
We have these components now that can be used as either additional to an existing multi-asset portfolio that an advisor built for their client, or they could be used as building blocks to construct an outcome-oriented, multi-asset portfolio for clients.
Who do you consider to be your target audience for your products?
We consider our main audience to be professionals who help their end clients construct portfolios that match their objectives and tolerance with all the typical risk or tax considerations that they have.
While we recognize that, at times, it’s possible we may be found by the individual investors directly, our focus has always been on intermediaries and advisors. And that includes registered investment advisor firms, as well as those that may be working for independent broker-dealers, some banks and trusts, and advisors or portfolio managers, as we call them, that may be working for our affiliate, Northern Trust Wealth Management.
You offer several smart beta ETFs. What would you say is the role of smart beta in the FlexShares lineup?
From our perspective, the foundational strengths of Northern Trust Asset Management are its pillars, including the quantitative strategies. And we’re very strong in that, as well as in multi-asset solutions and liquidity solutions.
We’re well known for core indexing capabilities. And those capabilities are essential for us, because we leverage them in portfolio constructions every day.
We use strategies that are systematic in nature that translate themselves to being delivered in transparent index strategies.
Some of your largest funds are equity ETFs that cover nontraditional slices of the market, like natural resources, infrastructure and real estate (the FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR), the FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA) and the FlexShares Global Quality Real Estate Index Fund (GQRE)). What role do those play in the lineup?
We think about those three particular funds as, effectively, real assets. And we think that all of them together have an important role they can play in investors’ portfolios, because they provide a certain amount of diversification. Even though they’re equities, their correlation with broad U.S. equities is certainly not 1. They enhance a portfolio from a diversification perspective in a meaningful way, sometimes better than just by simply investing in international equity.
These can also contribute to income generation, and they still are equities, and therefore they have the capital appreciation opportunity. Some of them, by the nature of those assets—particularly when you think about infrastructure or upstream natural resources—are often considered a little bit more defensive.
FlexShares recently launched ETFs that offer exposure to the quality and low volatility factors. What makes those two factors go together?
We have a history of leveraging the same factors in institutional portfolios, for a fairly long time.
And what we find is that, particularly within market cycles that are so unpredictable, there are a lot of situations where investors want to remain invested in equities but are relatively nervous. So those defensive characteristics are important.For example, in looking back over the long term, you’ll find that companies that have strong valuation characteristics would be either on top or on the bottom performance wise. Pairing low volatility with the quality factor smooths this out.
To be a value investor, you sometimes need to have guts to be able to stay invested that way a long time. Quality is really in that camp, too. But the longer view you take, the better the characteristics. The same is true of low volatility. And the quality factor is a good tool to mitigate the future volatility as well.
We’re in an unprecedented period regarding fixed income. How do you think Northern Trust’s fixed income lineup addresses the kinds of problems investors are seeing in the fixed income space right now?
All fixed income investors know that probably one of the best predictors of returns from fixed income is the long-term yields.
We recognize that many investors still want to rely on fixed income assets for their income generation. They still want to have those defensive characteristics and risk management characteristics that come from having fixed income that generates the yield and return. We have a lineup that, to a degree, addresses this. But we also recognize that fixed income can be thought of in a different fashion.
One specific example, which I think is pretty unique to us, is the FlexShares High Yield Value-Scored Bond Index Fund (HYGV). We really think about high yield as more equivalent to lower-risk equities than the highest-risk fixed income. High yield bonds definitely are more volatile than what most investors who want to own return streams from Treasuries or highly rated corporate debt are willing to withstand.
The traditional funds that are focusing on high yield bonds often emphasize the higher credit aspect of high yield, which means that they give up some of the yield component. We have decided, through our empirical work, to focus on the higher yield portion of the high yield. If you look across the credit spectrum, it skews toward the lower end. We think it’s a very additive, very incremental product that’s also very unique in its positioning.
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