Evrin Erdem, head of investments at Copia Capital Management, has grown her exchange traded fund (ETF) focused wealth management proposition to around £45 million via quantitative investment and the use of algorithms. Although she doesn't make discretionary decisions on asset allocation, she does carry out due diligence on each fund the team uses and decides whether they match up to her chosen criteria.
The list of suitable funds is made up of around 18 ETFs. Erdem then rebalances the portfolios every two months, carrying out bulk trades for new client money.
“When it comes to choosing ETFs, we have a whole document on this, looking at liquidity, costs, bid offer spread, replication method and the historic tracking error,” she said. “What I am most concerned about is the costs implied via the bid offer spread, which comes back to liquidity and the ability to buy and sell and what impact that has.”
Below are three of Erdem's favourite strategies which include minimum variance, U.S. equities and currency hedging.
1) Ossiam FTSE 100 Minimum Variance UCITS ETF (UKMV)
This £37.6 million fund has annual fees of 0.45 percent and has returned 5.3 percent over the past year. It aims to track a portfolio of less volatile stocks like HSBC, BP and Royal Dutch Shell.
Erdem chose this fund in March 2014 based on three criteria – it’s liquid, physically backed and accumulates dividends.
When it comes to preferring accumulating funds, Erdem explains: “Research shows that when dividends are reinvested then overall return of that fund is better. The more money stays in cash, the more it loses out, in theory.”
2) PowerShares EQQQ Nasdaq-100 UCITS ETF (EQQQ)
This ETF is skewed to the U.S. technology sector and has produced whopping returns of over 25 percent over 12 months. Top holdings include Microsoft, Apple, eBay and Amazon.
Erdem invested in November 2013 and has held the fund since launch, and it has grown to around £27 million under management.
“I’m very happy with the price [0.30 percent fees], it’s a very popular fund to use,” she said.
Erdem excluded the other alternatives from Amundi and Lyxor as they are swap backed, and iShares’ physical version is slightly more expensive and reinvests dividends.
3) UBS MSCI EMU hedged to GBP UCITS ETF (UC60)
This fund has returned over 17 percent over the past 12 months and costs just 0.33 percent per year. Erdem’s algorithmic model switches between funds for certain exposures depending on currency movements, and she favours currency-hedged ETFs to mitigate risk of FX fluctuations.
Other funds in the approved list are XESC for non-hedged European equity exposure, UC62 for currency hedged exposure to Japan, IGUS for Sterling-hedged exposure to the S&P 500, and the Vanguard Total Market S&P 500 UCITS ETF for non-hedged equities in the U.S.