Sterling’s Eicker: Why ETF-Only Portfolios
October 25, 2012
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Murphy: Is it hard to sell the idea of a cash allocation to your clients? I mean, how difficult is it to justify charging a fee just to park their investment in cash?
Eicker: It’s really not. We only go to cash when everything else is dropping, so as long as there’s leadership someplace, it’s OK. The whole idea is to rotate into the best-performing asset class, so the only time we’re going into cash is when everything is falling in unison. Our clients think it’s worth every penny.
Murphy: In July you launched an alternative bond portfolio. Do you see fixed income as the sweet spot right now?
Eicker: Let me say that we are a risk-averse shop. I love what our fixed-income portfolios provide because I think we’re going to see rising inflation, a rising interest rate environment, and if you are just sitting on an asset class and not rotating, you are going to get killed. But on our tactical bond portfolio, there are six things you can rotate between, like TIPS, high yield, emerging-market debt, sovereign debt, aggregate bond [and cash].
So we should perform well because we can rotate into things that are doing well at any given time. We have also added a 20-year inverse Treasury component to protect against rising rates. We can only take a 20 percent position in that, so when it gets to that, we allocate 40-40 between two out of the top three asset classes and 20 percent to inverse Treasurys. If interest rates rise, this is designed to smooth out the ride for bond investors. At the end of the day, we capped that position so that we don’t expose investors to undue risk.
Murphy: You have developed an index and ETF portfolios, the first being a tactical rotation one that came to market in December 2009. What’s the next step for the firm?
Eicker: We started managing live money in December 2009. We now have $135 million of assets under management and they're growing fast. The biggest thing for us right now is building up the selling agreements and having distribution space. I think the next part we have to tackle now is getting more feet on the ground. We are looking at hiring a wholesaling firm or hiring more wholesalers within.
Murphy: Given that you have designed the indexes yourself, why not launch your own ETFs like, say, AdvisorShares?
Eicker: We have actually talked to AdvisorShares, and there is definitely interest on both sides to eventually create an ETF, but we want to build up our brand first. We have also talked to mutual fund companies, which is to say we have a strong chance of launching something in the next 12 months.
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