Thurleigh: taking a broad view of the ETF market

Luca Serino, partner and portfolio manager at Thurleigh speaks to Clare Dickinson about using ETFs for core asset allocation

How do you use ETFs in your clients’ portfolios?
We have always been big users of ETFs because we think costs are incredibly important and the statistics show how incredibly hard it is for active managers to outperform their benchmarks; ETFs are the best way of getting broad market exposure in the cheapest way possible. We use ETFs more as core beta but we trade our ETFs quite a bit when we want to make tactical changes. Our biggest positions are in iShares MSCI World GBP hedged and iShares MSCI Emerging Markets.

How do you choose which ETFs to buy?
We started off with iShares ETFs because, back when the company was set up in 2003, they were pretty much the only people around. They have been primarily focused on cash-based ETFs as opposed to swap-based ETFs and we want to be simple and transparent.

We generally have always gone for the broad market ETFs, rather than sector specific ones. We are very focused on asset allocation because we think that’s what makes the biggest difference. If you can get the cash, bond, equity, commodity split right that makes 90% of the difference versus that 10% which comes from choosing Astra Zeneca over Glaxo Smith Kline, for example.

Most of our clients pay UK tax so we need to find ETFs that have reporting status so that the returns get taxed at capital gains rate at 28%, versus income tax which is 40-50% for most of our clients.

Do you use ETFs from any other providers?
We have been shopping around a lot recently. iShares has always been good at offsetting the costs of their ETFs by lending them out to people like hedge funds which want to short them; that brings down their total expense ratio quite a lot, almost to zero in some case. Having said this the market has developed and there are a lot more good providers to choose from than in the past.

Earlier this year we decided to allocate into Germany because the euro was weak but Germany’s exports were booming. We couldn’t find any cash-based ETFs on the Dax that had reporting status for tax purposes. We ended up buying one of the Deutsche Bank ones which were swap-based.

We have bought Lyxor ETFs in small sizes, usually for tax purposes. If you have a position in an ETF with large capital gains you can sell it and buy an almost identical ETF and then buy back the original ETF to realise your taxable gain or loss, which reduces your tax bill.