Potter and Burdett flee ETF 'bubble'

Potter and Burdett flee ETF 'bubble'

Gary Potter and Rob Burdett, who run the multi-manager fund range at BMO Asset Management, have said they are selling out of passive investments for fear of a burgeoning bubble in some quarters.

The duo and their colleagues in the multi-manager team manage £3.3bn in eleven funds which invest in other external funds.

They revealed fears about a “bubble” in certain parts of the ETF market, specifically around products that track individual market cap weighted indices, have prompted the move.

Passive investments have been an easy option in recent years, with low volatility, rising equity markets and a bull run in bonds meaning passive investments only had to ride the wave to perform well.

But the Mr Potter and Mr Burdett feel that, now, while the economic outlook is positive, there is likely to be increased volatility as central banks tighten monetary policy, and in such a climate active funds are likely to perform better.

"We think there is far more value to be gained from buying the right fund than from trying to make a macroeconomic call between Japan and Europe for example," Mr Burdett said.

"For example we own the Old Mutual UK Dynamic Equity fund, which is not as well known as some of the other equity funds at Old Mutual, but has been one of our best performers.”

The error of trying to buy funds to fit into a particular macroeconomic view of the world is demonstrated by the Dynamic Equity fund, he said.

It has around two-thirds of its capital invested in what might be called UK domestic focused stocks,  which have been very out of favour. Yet it is second best in its sector.

Adam Laird, head of ETF Strategy for Northern Europe at Lyxor, said new products being launched on the ETF market in future will be more focused on specific outcomes, rather than be designed to simply track an index, as the market for the latter is pretty saturated.

Mr Potter and Mr Burdett added that they tend not to like owning funds that grow too large in size.

Mr Potter said: “The average holding period for a fund we own is four years. We try to own it in the early days, and hold onto it until the marketing department get hold of it and it grows to a size too big for it to be effective.”

One fund the duo have been buying more of is GVQ UK Focus fund. Mr Potter said they have ignored some short-term bad news affecting the performance of the fund because "we like the manager”.

Philip Milton, who runs Philip Milton and Co in Devon, said he has long focused client money away from funds that have grown very large.

He said: “Once funds get to a certain size, they stop being able to do what it was that made them perform well enough to grow to a significant size in the first place.”