[This article was first published in our quarterly magazine for financial planners, ETF Report UK. To read the full issue in PDF format click here]
What do you get when you marry a wealth of iShares experience with entrepreneurial drive? An independent discretionary fund management business built on ETFs.
Having spearheaded BlackRock's iShares' investment research initiative in Europe, Allan Lane decided the time had come to break away and set up shop building an independent exchange traded fund investment business.
But what propels an established executive, who spent four years at iShares and prior to that was part of the Barclays Global Investors team, to up roots and leave?
Perhaps a vision that ETFs were the future and investors from all walks of life would eventually be led to them.
Lane consequently founded Twenty20 Investments alongside Irene Bauer, the firm's chief investment officer, and Mike Kleyn, principal consultant—both ex-BlackRock. Their aim was simple: to launch an independent discretionary fund management firm using ETFs to build portfolios for wealth managers, financial planners and institutional investors.
It is just one of a handful of firms offering this service, and since inception, has grown to assets under management of $37 (£23) million (which includes funds the firm advises on, such as Beauregard Capital).
What has the firm done that has made it successful? In part, being 100 percent ETF focused is what breaks the mould and helps differentiate the firm from its peers.
"Even now a lot of the investment management community in the UK and Europe, are in denial of what lies ahead. In the U.S. ETF take-up is split 50 percent retail and 50 percent institutional. In the UK and Europe it is 10 percent retail and 90 percent institutional.
"One way or another, new money will arrive, albeit via a younger demographic or from an ever -growing audience who will switch out of their active products due to poor performance accompanied by high fees. It is not if this will happen, but when this will happen," Lane says.
One of the firm's first moves on launching was to trademark its portfolio brand name: the iBasket. This is, in short, a basket full of ETFs. The firm's Balanced Real Return iBasket has a one-year track record with returns of 9.4 percent.
It has also recently launched a Country Rotation iBasket with Societe Generale and runs Bespoke iBaskets for investors who know what they want.
The approach that Twenty20 takes to investing is systematic and research driven, not the star manager approach. It also runs an open architecture policy, which means that it is not tied to a single provider, meaning that the firm can use a range of different ETFs.
"Chasing returns is understandable, but often leads to disappointment. The macro economy, and the inevitable investment cycles that come with it are a hallmark of the way the world really works.
"It means that investors should remember the idiosyncratic factors such as wars, political inference in the markets and the not so invisible hand of regulation, and is why we should accept why investing will be forever unpredictable. In the end though, this is where skill is required and results in that rare quantity called alpha," Lane noted. The firm considers itself to take an actively managed approach to passive ETF portfolios. The portfolios are graded into different risk categories, which include cautious, balanced, growth and adventurous.
"There are 5,400 ETFs globally, but choosing from that many is difficult. We perform our own cluster analysis, which breaks the ETFs into groups and we then whittle this down to 200 ETFs, putting these into subcategories based on a scoring system and risk. Once the portfolios are up and running, they are then rebalanced monthly.
"In terms of cost, we do like lower TERs, but at the core, everyone is competing on price, and credibility in the asset class is something we deem more important," said Lane. "We are then left with a list of ETFs from which we can build portfolios based on the investor's theme."
The Challenging Road To Success
Despite the firm's success to date, it has not all been smooth sailing.
Breaking into the IFA space is a challenge in itself explains Lane. "We are still not on as many platforms as we should be, but it will come. The IFA space is a cautious one and it is tough to break into, but this is starting to change since RDR."
Currently, Twenty20's iBaskets are available on Praemium and via management accounts. There are also plans to launch them on Transact and Ascentric in the near future. The firm can also be found on iShares' Connect programme, which is essentially where iShares lists its preferred suppliers of products.
However, getting the right technology and systems to access platforms is an undertaking and Lane admits that today's world is a big data business, and as a firm, they need to ensure that they invest enough in the technology to keep up. This, of course, costs money and requires the firm to ensure that a virtuous circle is kept in motion.
He says that to achieve scale they need to make a difference. "We have to partner with other firms to gain the level of distribution that ensures Twenty20 is heard in the marketplace. For that reason, finding a distribution partner for our ETF based Country Rotation strategy is the way to go."
Twenty20 now has a team of five people and employs the mantra 'mass innovation and not mass production', which lends itself to addressing the needs of clients and not just that of the business.
Lane advises anyone looking to ETFs for the first time to find someone who is already a user of ETFs and ask them for their opinion and help. "They'll find it isn't such a scary thing to do after all."
"We will continue to place a lot of emphasis on empowering financial advisers with our white label offering, as in many cases they hold the key to our success. As for me, until that retail-institutional split reaches 35 percent – 65 percent, I don't think I can feel my job has been done," Lane noted.