Paul Amery, editor of IndexUniverse.eu, recently conducted a telephone interview with Charles Morris, head of absolute return strategy at HSBC global asset management. Morris and his colleagues are active users of ETFs in their portfolios.

IU.eu: Charles, please describe your fund operation.

Morris: We manage money for sovereign wealth funds, retail investors, private clients and charities, all on an absolute return basis, with US$2.2 billion under management. Our portfolios are multi-asset, with around a third invested into alternatives (predominantly hedge funds) and two thirds in bonds, equities, commodities and credit.

IU.eu: What proportion of that is invested in ETFs?

Morris: Our current ETF exposure is 10% in inflation-linked bonds (in US government TIPS, French OATs or UK index-linked gilts, depending on the underlying currency class of the investor). We have an additional 10% in gold bullion via ETF Securities Physical Gold (PHAU) and 5% in agricultural commodities via the ETF Securities Agriculture DJ-UBSCI ETC (AIGA), which we bought a couple of weeks ago.

IU.eu: Do you use European-listed ETFs only?

Morris: No, we have an international client base so we use them from listings around the world.

IU.eu: What’s been the historical range of your ETF exposure?

Morris: On average it’s been slightly lower than it is currently, at around 15%, but we’ve had up to 30% invested at times. Historically we’ve had a lot of equity exposure via ETFs – for example, we’ve owned India, Brazil, the FTSE 100, S&P 500, and the Nasdaq using exchange-traded funds – though we don’t have any right now.

IU.eu: If you decide, say, to invest in US equities via an ETF, what decision-making process do you go through to determine which one to buy?

Morris: We have internal procedures which mean that, first of all, we have to approve the provider. Not all issuers are on our approved list and of the 2000-plus ETFs on offer worldwide I’d say that we only deal with around a third of the providers. Then we look at things like UCITS compliance (for European clients), tax-friendliness and intra-day liquidity. Fees are a secondary issue.

IU.eu:  Do you have any views on whether a certain type of ETF structure is preferable – for example, physically replicated or swap-based?

Morris: As long as the fund is run according to the UCITS rules, the fact that a fund may have some derivatives exposure (for example, in a swap-based ETF) doesn’t concern us, provided the counterparty has been approved by our due diligence process.  We’ve owned both types of fund in the past, although currently we only have iShares and ETF Securities trackers in the portfolio.

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