Kranefuss: 2 Crises Face Financial Advisors

June 01, 2016

Lee Kranefuss has worn many hats in the ETF industry. His latest is as co-founder of an investment management firm building global ETF portfolios for advisors, 55 Capital Partners. According to Kranefuss, the firm aims to solve the increasingly difficult task for advisors of sifting through growing numbers of ETFs and building portfolios in an ever-challenging world. Why start a new investment management business? What sets 55 Capital apart?

Lee Kranefuss: 55 Capital grew directly out of my experience both in the U.S. and now living in London running Source ETFs. There’s a crisis that advisors around the world are facing; one that’s twofold.

First, we've gone from the point where there are a lot of ETFs to a point where there's just too many to sort through. There are thousands of ETFs, and all of them have claims from basic to the most exotic, but understanding the structure, understanding how to use them, understanding what they really do versus what the name says they do, is just befuddling people.

At the same time, there is a crisis in investing. There's a new normal, where people have yet to figure out how to deal in the advisor space. It's a world in which markets are very chaotic, where interest rates are at sustained low levels, including negative interest rates. Some 95% of sovereign debt in the world today is yielding less than the 30-year Treasury rate now. And much of it is negative.

So we have a flood of potential tools to use—too many to explore—and at the same time, the need to come up with a portfolio that has the opportunity and ability to perform without missing out in a much-more-complex investing environment. Do advisors need a new road map to portfolio construction?

Kranefuss: You can't just rely on what we were all taught for decades, that the 60/40 portfolio was where you start. With that, you were getting equity market participation. You're taking some of the downside risk away. You're giving up some of the upside as well. And you're getting yourself steady income that's better than the dividend yield on stocks. That's not true anymore.

If you own a 30-year bond, and interest rates go up 1%, that part of your portfolio is going to be 15%. And you're stuck with that unprecedentedly low interest rate till 2046. But today there's a combination of too much choice, people trying to tell you that here's a better mousetrap for this or that slice of the market.

We’re all trying to find better ways to invest. That’s the motivation. We started working very hard on this about a year ago—myself and Vinay Nair, who is a lead investor in the investment management firm.

One of things we realized is that people have been addressing this problem in the institutional market for a long time. It's not the best-kept secret, but it’s also not something that gets trumpeted much.

The idea is to expose yourself in a more global environment, and with more tools. And with ETFs, you can do this now—capture many more return drivers so you don't miss out. You also have to carefully manage the risk you take.

The idea is to provide people with a core portfolio that's far more diversified, both in terms of geography and in asset classes. But it takes a fair amount of work, and how to do it is not a secret, but it takes a really large, fixed effort to understand how to do that so you don't inadvertently own exposures and take risks that cancel each other out.


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