PASSIVES PULSE

Why plain vanilla can still be tasty

Invesco’s Pierre Bellot isn’t tempted by the surge of new ETFs targeting niche markets, especially when those operating in more traditional areas continue to outpace active rivals

VICTOIRE BARBIN PERRON Reporter

The sudden rise in ETFs chasing transformative trends, such as veganism or the rise of medical marijuana, has not gone unnoticed by fund buyers. But, despite the diversity of thematic products, Invesco’s Pierre Bellot doesn’t seem impressed.

The passive part of his strategy consists mostly of in-house ETFs which, contrary to the current market trend, look decidedly ‘vanilla’. ‘When it comes to specific thematics or conviction investments, I’d rather take an active approach,’ he says. Bellot’s exposure to passives is mostly in traditional markets, such as US equities, where there is little competition from active alternatives. ‘At Invesco, our ETF equity allocation is core,’ he says. ‘These funds are an excellent way to gain exposure to equity markets at a competitive price.’

This is why two-thirds of Bellot’s overall equity exposure is now passive. For in-house US ETFs, he favours the Invesco EQQQ Nasdaq 100 Ucits ETF and the Invesco S&P 500 Ucits ETF.

When picking external funds, Bellot is drawn to the type of returns that are rarely achieved by an active strategy, such as the Xtrackers S&P 500 Ucits ETF. Over the last three years, this fund has returned 52.79%, which represents 295 basis points above the reference index, which was up 49.84%. ‘This type of return is almost impossible to find on an active strategy,’ he says.

PLAYING INFLATION Bellot favours active strategies in more niche areas but he is not afraid to deploy passive funds to capitalise on inflation, despite the sophistication implied by this type of play. The Lyxor US$ 10Y Inflation Expectations Ucits ETF is a case in point. This fund offers exposure to the prospect

28 March 2020 | citywireselector.com of rising inflation in the US, which he views as an interesting theme given the huge divergence between the official figures of expected inflation and the Consumer Price Index. The index is currently at a year high of 2.5%, while the US inflation break-even rate is set at 1.67%.

HUNGRY FOR MORE Bellot takes a traditional approach to much of his passives coverage, but he’s convinced ETFs are a great new playground, offering an attractive range of strategies and fees.

His enthusiasm for new strategies became evident in 2016-2017, when Invesco’s team reoriented its futures exposure towards ETFs. At the time, Bellot says, ETFs expanded rapidly in the European market, and his team adjusted their portfolio accordingly.

Having highlighted how they can be used as a core proposition, Bellot is upbeat on ETFs’ increasing role in portfolio construction. ‘They are a new cornerstone which enables investors to offer optimal allocations with better risk-adjusted returns.’ So far, he has prioritised equity exposure over bonds, as he believes the development of ETFs has favoured the equity proposition, but he’s keeping an open mind.

‘We simply want exposure to the highest returns. It would be excellent if the ETF offering for bonds expanded. A lot could be done in the smart beta sector,’ he says.

BELLOT’S CAREER IN A NUTSHELL Pierre Bellot has been at Invesco for over a decade. He joined the asset manager in 2009 as an analyst and later became one of the three portfolio managers based in the Paris branch. He has over 14 years’ experience in the financial industry.

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This fund aims to exceed the Solactive Flight to Safety index, which measures the performance of a wide spectrum of products offering investors protection from market turbulence. These range from a volatility-weighted basket of gold, US-listed large-cap utility stocks, and US treasuries. All asset classes are selected for their defensive exposure, and their lowcorrelation to each other.

TECH REP FUND: iShares U.S. Tech Breakthrough Multisector ETF

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SOCIALLY CONSCIOUS FUND: Direxion MSCI USA ESG - Leaders vs. Laggards ETF

ETF provider Direxion’s latest fund offers exposure to both high-scoring ESG companies as well as low-scoring ones on a 150/50 ratio. The scoring is based on an ESG rating as well as ESG trends. The fund tracks the spread between ESG leaders and ESG laggards.