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Active management yields big results for First Asset Global Financial Sector ETF
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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Wednesday, November 01, 2017


It may be described as an exchange traded fund (ETF), but CI Investments Inc.’s First Asset Global Financial Sector ETF (TSX: FSF) is not your typical ETF. It posted a whopping 42.9% one-year return through September 2017. Along with its sister fund, First Asset European Bank ETF (TSX: FHB) with a 49.6% return, it topped the financial services equity fund category for the year. Put that down to portfolio manager John Hadwen’s intensely active management style.

Indeed, despite the generic-sounding moniker, this fund bears almost no resemblance to the traditional passively-managed ETFs. Hadwen, who is Vice President, Portfolio Management of CI’s subsidiary, Signature Global Asset Management, explains: “The [MSCI ACWI Financials Index (Unhedged)] benchmark has 440 names of financial companies globally, but we take only the best 25 or 30 names. We ignore about 100 names, and we keep up on another 300, so that’s a pretty big opportunity set.

“The portfolio is very actively managed,” Hadwen adds. “We’re doing close to 300 meetings a year with analysts and company management, and we will allocate capital away from bad ideas towards better risks. We’ve been doing well for quite a while; we’re well ahead of the benchmark.”

As for what types of companies Hadwen favors, he divides them into three basic categories: “capital compounders”; “restructuring stories”; and “value traps”. The latter he describes as companies that show promise but never do live up to that promise. “In a lot of cases, at 60% of book value, they’re overvalued. We might step in for a trade, but we generally avoid them. We still have some, such as Barclays Bank, but that’s because they’re too cheap to sell.”

Ironically, while Hadwen holds up Canadian banks as a model, he has no Canadian banks in the portfolio. “Banks tend to be better at compounding capital, and what we’re trying to do is find Canadian bank models in other markets, but they’re tough to find,” he says. “In Europe it’s very competitive, for example, and half the banks might be non-profits. But while banks tend to have higher returns, the banks here have been underperformers over the past year. We’re not really in Canada – it’s maybe 6%-7% of assets – because we haven’t found any good companies. We’re also worried about household leverage.”

As for that whopping one-year return, Hadwen admits it wasn’t quite as expected: “Over the past year the stars lined up, with banks being the only sector to benefit from higher interest rates. But [those high returns] didn’t come from our two favorites, Wells Fargo & Co. and Synchrony Financial (both U.S. based). It’s not always the best ideas that work out well over a short period. But when you’re dealing with a single sector and there are a lot of opportunities in the universe, you can generally get good returns.”

Top holdings as of Sept. 29 included Wells Fargo & Co. (NYSE: WFC), Synchrony Financial (NYSE: SYF), Discover Financial Services (NYSE: DFS), Banco Bpm Spa (IM: BAMI), Nordea Bank AB (STO: NDA).

Looking back, Hadwen notes that global financials were at a low point at the start of 2016. “The U.S. financial system bottomed out in February 2016, due to regulatory pressures and low interest rates. Then in June 2016, Brexit pushed rates even lower. Now, global economic data are improving, there’s been a movement upward in rates, and that’s good for banks because it can improve their margins. They’ve started moving upward from what were depressed expectations. U.S. mortgage insurers are up 30%, and Indian banks are up 31%.

And where do further opportunities lie?

“Brexit really stressed the financial system, but it’s more normalized now in the U.S., although earnings are still depressed in Europe, so there’s a better upside there,” Hadwen says. “In Europe, Italian banks got really cheap at about 38% of tangible book value, and we think they’re good for 60%.

“There will be more opportunities in the U.S. too, if the promised tax cuts materialize,” Hadwen adds. “Wells Fargo is the only [U.S. financial company] that hasn’t normalized, so it’s still 10%-15% cheaper, and we own warrants good until next October, rather than stocks. At $33 it’s in line with tangible book value, so there’s a ton of upside if the tax cuts come.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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