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    When active management makes sense | Shares for Beginners


    When to invest in active ETFs? When active management makes sense. Shares for Beginners podcast is a great place to learn about investing. eInvest is pleased to partner with Phil Muscatello and Shares for Beginners Podcast to help educate and support new and veteran investors alike to use Exchange Traded Funds (ETFs) as part of the foundations of their investment portfolio.

    Check out the latest episode “Can ETFs do more than Track and Index?” featuring our founder, Camilla Love.

    Camilla discusses when active management makes sense, why she started eInvest and how she is encouraging more younger women to start careers in finance. A founder story, a lesson in portfolio strategy and example of positive action in the finance industry.

    We have also created a ETF investment guide for Shares for Beginners Listeners. Sign up for the guide for the chance to win $500 invested in the eInvest Active ETF of your choice. T&C’s apply.

    Listen to the podcast for a dose of inspiration.

    Important Links Camilla discussed in the podcast. 

    F3 – Camilla’s other venture encouraging young women to start a career in finance
    Our exclusive guide to investing for Shares for Beginners listeners
    What are ETFs and Active ETFs?
    Why active management makes sense in fixed income
    Why active management makes sense when investing in small caps

     

    Disclaimer: Please note that these are the views of the author, Camilla Love, Managing Director, eInvest and is not financial advice.

    To find out how to invest in our active ETFs, visit here. The product disclosure statement and more can be found at www.einvest.com.au

    If you’d like to keep learning further, please feel free to follow any of our socials listed below.

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    Transcription

    We’ve seen recently, particularly the COVID crunch that happened last year, that all asset classes actually correlate together, that is just a really good indication of why you really need to have a well diversified

    well allocated portfolio. Good day and welcome back to shares for beginners, I’m Phil Muscatello, and today I’m speaking with a senior funds management professional who has twice jumped out of planes ski from high mountains driven fast cars and eaten fast food, Camilla love, Managing Director of E invest collective Mila Hi Phil, how are you, good. Camilla you founded a invest in 2017 Tell us about a invest in starting invest, how was that how was it starting your own ETF company.
    CL
    Camilla Love
    0:45
    Well actually quite daunting as starting most companies, you know, is. So my background is in funds management as you said, and I’ve actually specializes in institutional management so selling to big super funds and the like, like that.

    Philip Muscatello
    0:58
    So, institutional, that’s just for listeners who don’t know, institutional, like, like you say they’re big
    CL
    Camilla Love
    1:04
    super funds, you know, companies like ANP and Colonial First date that sort of stuff. So I would take my investment professionals, intellect and the portfolios, they put together, and I sell it out to those big institutions, it’s just interesting to find out how these kind of things work, especially people who have no idea how the industry works from the outside. That’s right, so one day my boss actually popped his head over the petition between us and said Camilla, what do you think of the ETF industry and I said well, you know, how do you read my MBA thesis, three years ago you would have worked that out, you know, he asked me to dusted off write me a business plan, and that’s what he invest is today. So he invest is an active manager, specializing in ETF, and we provide ETFs, where we believe that active management makes sense so we partner with institutional quality investment managers, and bring their portfolios through in an ETF format, about your MBA thesis,

    Philip Muscatello
    2:02
    it was about the problems with ETFs,
    CL
    Camilla Love
    2:03
    well actually what it was was actually bringing new business ideas to the current business perennial was in. And so, perennial what they do do is they bolt on boutiques they specialize with teams that are really intellectual in areas in investment management like smaller companies like fixed income, like global small and mid caps, and so they partner with those types of businesses. And then what I did was look at that landscape and say, what else is out there that we could partner with, and ETFs, Li sees and that listed space was definitely one that I could see was growing was democratizing the access of investment professionals to everyday Australians, and I really wanted to bring that quality to people’s portfolios. So that’s what investors.

    Philip Muscatello
    2:56
    So how long did it take you to get it started
    CL
    Camilla Love
    2:58
    a while. It took me about two years between writing the business plan and getting the first ETF launched which was Eiger, the InVEST income generator fund in 2018, and that was actually seven days before I actually have my second child so everything was going on at the same time, in my household, that is really really enjoyable. I love building businesses and creating new things

    Philip Muscatello
    3:22
    here at the podcast we’re always banging on about taking your first investing steps via passive ETFs that invest offers actively managed ETFs, what’s the difference, and why active instead of passive,
    CL
    Camilla Love
    3:35
    so passive ETFs rules based or based on an index, so they follow rules set up by people who build that index or build that product. And that’s how you invest and that’s a really great way to start. What active ETFs is tapping into the intellect of investment professionals who day in, day out, look at companies to invest in, and instead of portfolios that might have 200 or 2000 stocks depending on the index that you’re investing in, they might have 6020 stocks so really it’s about picking companies that these investment professionals believe will outperform rather than just taking a sort of a bit on what the index will do over time.

    Philip Muscatello
    4:24
    Can you give us an example I mean let’s specifically talk about one of the funds, and how this kind of picking or actively managing this ETF will help to improve investors performance.
    CL
    Camilla Love
    4:36
    Yeah, so there’s definitely areas within the market where active management really makes sense and one of those is smaller companies. So we have a small cap fund the InVEST Better Future Fund, that’s a sustainability focused fund as well so there’s two aspects of active management in this fund, but let’s just talk about small caps to start with. There’s a really big difference in the inflammation as symmetry associated with smaller companies. So, you know you’d imagine in larger companies like CBA and BHP, there’s lots and lots and lots of information out there in the public markets so

    Philip Muscatello
    5:13
    there’s a lot of analysts as well covering it exactly in disseminating this information. Yeah,
    CL
    Camilla Love
    5:18
    exactly. So, the ability for you to add value on companies such as that is limited, right, but in smaller companies, they’re less covered, there’s less liquidity in them. And so for those teams and investment professionals who really do, you know, lift the lid on these companies really study them, understand the drivers, there is really great opportunity to outperform in them. So, small companies is an area where I believe active management really makes sense, which was one of our first ETS. Yeah, that’s why,

    Philip Muscatello
    5:53
    because they’re a passive index for smaller companies.
    CL
    Camilla Love
    5:56
    There is a passive index for small companies so say for example in Australia here, the ASX small ords is the passive index for it. And we use that as the index for our fund, but, you know, our funds substantially outperformed that index. And so what we also look at is tapping into that investment intellect, for those people like we’ve got a team of nearly 20 That look at these stocks, and they also look at large caps mid caps small caps micro caps unlisted stocks so think about that in the context of picking companies that fit in this portfolio. So my view is it has the ability to pick better winners, because you can see that full context, and you assume it with

    Philip Muscatello
    6:41
    that area of the market as well that there’s going to be a lot of companies that are just not going to make it some will do well, some won’t do well, so I’ll just take along for us.
    CL
    Camilla Love
    6:49
    Absolutely and diversification is really important in that space, But there are companies that can have really great drivers and one or two things just make them pop. And being on the side of that and understanding the context of that is really important.

    Philip Muscatello
    7:04
    The analysts that you partner with, they’re talking with the companies as well and going out and seeing them and really getting their hands dirty finding out about this,
    CL
    Camilla Love
    7:13
    yeah absolutely so you know, particularly in smaller companies, they will go to stores and go and walk through the stores and speak to customers and management within the stores not only, you know, the senior executives of the business, they’ll look at competitors they’ll look at the supply chain and the customers, and you know we’ve touched a little bit about ESG environmental, social governance aspects, that’s an area where you really do need to actively manage the indices in that segment are not very good, like they’re based on companies who research other companies on the ESG aspects. And so for example if they don’t have a policy they’re marked down or they’re assumed for a policy, their carbon emissions, if they don’t provide carbon emissions they might be given a benchmark. But actually, that’s really not a good indication of what these companies output is for an ESG perspective so analysts go in, they engage with these companies, they understand them in greater detail, and therefore they’re able to get greater value for our clients. And part of that.

    Philip Muscatello
    8:20
    What’s the difference between a managed fund, and an activator ETF.
    CL
    Camilla Love
    8:25
    Well, really, they’re one of the same, except they are different in their access an ETF is a managed fund, but a managed fund in its entirety as most people know it is unlisted so you have to fill out an application form reads your PDS, you might have t plus two days of transactions, and then you get units in the fund, similarly to an ETF, it is a managed fund, you do need to read the PDS, except it’s the transaction so the ease of transactions, the fact that they are quoted on the exchange, the transparency that you understand what’s in the portfolio. I think it’s a really great thing. And then obviously the liquidity associated with it you can move and change your portfolio holding up and down, depending on when you feel like it.

    Philip Muscatello
    9:15
    And it’s also about your ability to buy it, as well.
    CL
    Camilla Love
    9:19
    Absolutely. So, for an ETF you buy through a broker for a managed fund generally you will buy direct through to the fund manager.

    Philip Muscatello
    9:27
    Now I’m going to I’m going to geek out here because I love,
    CL
    Camilla Love
    9:30
    I love geeking out.

    Philip Muscatello
    9:32
    I really love the talking about fixed income, that’s really boring really I mean, most people aren’t really that interested in it but let’s talk about fixed income.
    CL
    Camilla Love
    9:41
    Yeah fixed income is a great area to think about So stepping back a little bit. When companies, there’s two ways to raise capital they can do it through equities, or they can do it through debt and debt is essentially fixed income, and fixed income, the attributes of fixed income, are a coupon rate so the interest rate that you get paid as a borrower, and then also the principal so the amount of capital that gets borrowed to fixed income in ETF land has grown a lot in the last 18 months, there’s a lot more opportunity to invest in fixed income, passively, and actively so putting my actively managed hat on. I believe that fixed income should be actively managed, and the reason for that is because fixed income indices aren’t that great. So if you think about what fixed income indices are is those companies who issue, the most debt, a higher up in the index and therefore get allocated more money, and I don’t think that, as an investor, I wanted to be able to sit there and go I’m allocating my dollar hour my $100 to the company that’s issuing the most debt that’s not the way that I would think about it. The other good thing about actively managed fixed income, is you can move the duration rate, which is a really technical word of that portfolio and given that interest rates are low right now, you technically need to have a lower duration portfolio to benefit in this rate environment but there’s a really great article on the InVEST website on fixed income. So, if you don’t know much and you really want to go and learn some more about that area, head there and you can find that some more.

    Philip Muscatello
    11:28
    So in its most basic form, it’s a way of getting a little bit more money on your term deposits, not like, it’s not like a term deposit at all, but it is it’s a way of generating a bit more interest in your investments.
    CL
    Camilla Love
    11:40
    That’s right and there’s different types of fixed income in there so most people do think of term deposits and hybrids. There’s also sovereign so government bonds is corporate credit so companies loaning there’s high yield bonds. And so, particularly in this area of really low interest rates, what we’re finding is investors are actually moving up the risk spectrum trying to find extra returns from their fixed income portfolios, the fixed income to me is your insurance part of your portfolio. And that’s really critical when constructing a full portfolio of equities, fixed income and you know, a balanced portfolio what most people call a balanced portfolio so fixed incomes there to be your insurance for when equities, move the way that you’d probably don’t want it to move right fixed income the attributes is generally lower volatility, and the income yield right so that is what investors invest for in their fixed income, but particularly now when interest rates are so low, lots of people are heading towards a higher yielding credit portfolios just to eke out more interest in their portfolios, and I think that a lot of investors don’t understand what they’re getting into, because they move more like equities in higher yielding fixed income than they actually do like bonds, so if you’re looking at a fixed income portfolio that is returning 6% or more per annum, you really need to lift that hood. Look at what’s in it and understand the volatility and return profile of fixed income because fixed income is not there to be your insurance policy. It’s there for something else, and you need to understand that when putting your portfolio together.

    Philip Muscatello
    13:31
    So what I wanted to talk about coming back to fixed income you’re talking about the risk and that there’s different risks in corporate bonds, presumably it’s because the companies that pay the highest amount of interest, and not as strong as the ones that are paying a lower amount of interest. Yeah, probably not using the right terminology here but if you can explain that a little bit better than what I’m doing.
    CL
    Camilla Love
    13:53
    That’s right. So, if you’re a company that is doing really well and you’ve laid out some money, your interest rate will be generally lower, the industry, gives you a what they call credit quality score. So, those companies are doing really well and can pay back their interest, they get an A, or more on their credit quality score, for example, those companies who are not so good at paying back their debts and aren’t doing so well, they might get something which is called a triple B or less quality score on their credit quality, and that’s an easy indicator to show you their propensity, and actually default. So when you’re looking at a portfolio of fixed income, you should ask yourself, not only about what is the returns or what is their coupon rate or their interest rate that you’re getting, but also what is the average credit quality of this portfolio so there are some listed, Li C’s and ETFs out there that have triple B or less credit quality scores as average portfolio, and some Hu, a or above. So, when putting your portfolio together, you need to think about what proportion of my fixed income allocation will go to triple A double A, or even triple B, or less. So, the propensity to default is higher, obviously, in triple bay or less companies.

    Philip Muscatello
    15:22
    Yep, so there’s a spectrum of risk here and the spectrum of defensiveness, I guess is part of your portfolio, that’s when you’re constructing your portfolio, you want to have some, maybe less risky or some a little bit more risky, but it’s generally defensive is it so it
    CL
    Camilla Love
    15:35
    is generally defensive fixed income and defensive what that means is an opposite correlation to equities, when I was talking about insurance that’s what I’m talking about. So, defensive means that when equities goes to minus 10, your fixed income portfolio will be propping up your overall portfolio and will not be volatile, like that. However, we’ve seen recently, particularly in the COVID crunch that happened last year, that all asset classes actually correlate together. So, that is just a really good indication of why you really need to have a well diversified well allocated portfolio

    Philip Muscatello
    16:17
    and it’s diversification across different asset classes, not just diversification Within equities,
    CL
    Camilla Love
    16:23
    that’s right so diversification. Within equities and fixed income together but also equities fixed income, you might look at alternative assets, you might look at property, you might look at other things as well as that,

    Philip Muscatello
    16:34
    so you’ve also got an income generating fund, but this is not fixed income,
    CL
    Camilla Love
    16:39
    no that’s right so I go the InVEST income generator fund. That is an Australian shares based ETF, and it aims to produce a 7% targeted income yield per annum. And it is investing in a group of companies that really a tilted towards those who are higher dividend paying, which is a great portfolio for those investors who are really looking to supplement their income, or might be in their retirement phase of their life, but it is volatile because it is equities based. So companies in the area, the banks are in there, some of the rates are in there because they’re really good dividend payers, and that’s what that portfolio is about So Big Blue Chip companies that pay really good dividends over time and consistent dividend payers.

    Philip Muscatello
    17:32
    So you mentioned hybrids, what’s a hybrid.
    CL
    Camilla Love
    17:35
    So hybrid is a mix between a fixed income security and equity security. So it looks like a fixed income security you loan people money, and you get income over time

    Philip Muscatello
    17:52
    and wishes them and where do they mainly they’re
    CL
    Camilla Love
    17:54
    coming from the banks, and most of your listeners will understand you know that Commonwealth Bank and NAB and as I said they will provide hybrid securities out there, but actually the globe is full of hybrids, which is great opportunity to invest globally, but most Australian investors particularly know that the big bank ones, but they too can be exchange traded, which is good but most investors actually hold them to maturity, which is a good thing for,

    Philip Muscatello
    18:21
    that’s what they’re designed for really isn’t it. Yeah,
    CL
    Camilla Love
    18:23
    exactly, exactly. But they have that equity attribute where the issuer can actually provide shares, if they decide not to pay the capital back.

    Philip Muscatello
    18:35
    Okay, well let’s talk about some of your other work. And if three eyes are there for three future female in finance now. It seems to me to be a great industry to work in. It’s fabulous. It’s a fabulous, but you know people are perhaps not exposed to it as, as much as some other areas of employment. So tell us about big females in finance yeah
    CL
    Camilla Love
    18:56
    so I started future females in finance, a couple of years ago, pretty much at the same time as I studied Eva’s actually, to really actively promote finance as a career, to girls, particularly those who are from, you know you 10 all the way through to the end of university because it’s an industry that I’ve been in for nearly 20 years and I love it, but there is a gender gap in this industry, particularly in the analyst side of the industry so managing the money. And I really want to nudge some really fabulous talent which is some great talent out there in the female community that coming through to choose finances a career and I mean, you’d well know that finance has a sort of a reputation issue. The Wolf of Wall Street doesn’t help that, I will say, but it’s a really great career to have, I mean my days are never the same. I’m surrounded by highly intelligent intellectual people, I’m meeting clients, I’m talking about money, and I really love that. And I had not have a guy who I deem is my International Man of Mystery in my life who was actually my godfather. I wouldn’t know what finance was a nor what I’ve been nudged into the career. My mom was a teacher. My dad was a chemical engineer I should never have been in finance. So

    Philip Muscatello
    20:25
    what happened, what was the story with the godfather.
    CL
    Camilla Love
    20:27
    So, he spent most of my formative growing up years in Tokyo and New York, in the 80s and early 90s which could you imagine how fabulous that would be if you were in finance. Anyway, so he would come back to Sydney in summer, much to fanfare of my parents and, you know, his friends and family and all that stuff and I’d go around to their place for barbecues and he’d be telling everybody all these fabulous stories of the places you’ve been to and the people he met and you know the deals that he had done. And no one actually knew what he did. Everyone just knew that he had a great time doing it and so from afar, I was like, I don’t know what you do but whatever it is I’m doing that. And later on I actually realized he worked at Citi Group in New York in Tokyo,

    Philip Muscatello
    21:15
    so this is investment banking,
    CL
    Camilla Love
    21:17
    Yes, banking and so I knew that that’s what I wanted to do as a career at that point in time. So that’s how I got in, but lots

    Philip Muscatello
    21:25
    of people don’t expose to that. Yeah, they don’t
    CL
    Camilla Love
    21:28
    have that access.

    Philip Muscatello
    21:29
    Yeah. What I’m finding so interesting about doing the podcast is learning about what companies actually do and you’re actually seeing where all the wheels are turning in how the whole world, and the economies
    CL
    Camilla Love
    21:39
    operate exactly and if you are a student at University, you think that finance is investment banking or accounting, right, but it is an enormous, enormous industry, with so many different segments, and you might only think of the big four banks plus Macquarie Bank and maybe UBS and all that sort of stuff, as your employer, but actually there’s some great small businesses doing fabulous things with really highly intellectual and they are world leading, but because there’s all these perceptions out there of what finances. People aren’t lifting the hood searching for different careers within finance, let alone choosing finance themselves so that’s why I started

    Philip Muscatello
    22:22
    f3, and you’ve got some fabulous females in the company as well and then we’ve had Emily on the podcast absolutely
    CL
    Camilla Love
    22:28
    Emily is a great,

    Philip Muscatello
    22:31
    great mind.
    CL
    Camilla Love
    22:32
    She’s great. And she’s really passionate about what she does, and I want to see that in the next generation. So, I mean, Phil, you know I have a little baby girl who’s two and a half, and I want to be able to stand here and 20 years time and say, Look, join my industry because it is fabulous and look at the impact that I have made in this last 20 years in changing the gender disparity.

    Philip Muscatello
    22:56
    Has it been changing. I think the industry is a lot more grown up these days than it has been in the past,
    CL
    Camilla Love
    23:02
    I think, I think it is, but there’s a lot of ways to go. So I think the GFC so the global financial crisis did not a great thing for graduate recruitment getting that next generation in. And that then set up a whole, you know Following years of a massive gap. I think now everyone’s looking at, you know, companies are looking at, you know, hiring practices and retaining great female talent and all that sort of stuff. It’s now actually getting that female talent, up into the top echelon so you know you can’t be what you can’t see. And let’s get more females in that space so from my perspective, f3 is about using that pipeline getting that next generation in, it is up to the companies within our industry to actually take that gauntlet and move, you know, senior executives up through the ranks, and, you know, making it a great place to work for females,

    Philip Muscatello
    24:00
    where can people find out more information about f3,
    CL
    Camilla Love
    24:03
    so you can go to my website, which is a three.com.au, or you can google f3. There’s lots of different stuff you can do there but if you’re a student at University, you can go and register for work experience. So, what we do do is provide an online work experience platform where girls in groups, research, analyze and solve a real business problem with my clients. And, you know, I’ve just had a couple of groups go through, and it’s just amazing, you know, they didn’t even know what fixed income or ETFs were two projects that they did. And by the end of it they were fully versed on both segments of the market, which I think is fabulous,

    Philip Muscatello
    24:44
    what did they analyze what was the company that they analyzed.
    CL
    Camilla Love
    24:47
    Well, so, one group looked at the ETF market, and they looked at one of my clients product set, and said, which products do you recommend and why into the ETF market. And the second group actually looked at Factory investing in fixed income, and looked at the competitive set out there and sort of really digested, where the company was really good at, and where the company could be improved because look at what my competitors are doing this is how they’re getting more money they looked at fees they looked at lots of different stuff but can you imagine how daunting it is presenting if you’re the group of five girls, presenting back to the business, your findings, they’re the ones who are working in the business the audience’s there. They’ve got all the knowledge and you’re presenting your findings but it’s you know it’s a great way of getting the next generation to look through your product provisions, and look through your company and say hey well in my generation’s eyes, these are areas where you can improve and I think that’s fabulous.

    Philip Muscatello
    25:50
    So for someone who’s listening to this podcast and they’ve come into investing for the first time, male or female. Yeah, what advice would you give someone who’s taking their first steps
    CL
    Camilla Love
    26:00
    to investing, yes, I think is just to start, really, and I think ETFs are a really great way to start, because, you know, they give you the diversification, they are cheaper in fees, and they are liquid, so you know you can invest $500 or less depending on your broker brokerage platform into your first ETF, and you can use that as an opportunity to educate yourself about ETFs, the markets, things that will provide volatility within the markets things that will provide company growth and educate yourself about it and then go from there. But I think a lot of people are very much like, oh I need to have, you know, hundreds of 1000s of dollars to invest, but actually, you really don’t. So get amongst it.

    Philip Muscatello
    26:48
    Just start just start, okay we’re gonna start right. Thank you very much Camilla, it’s been a real pleasure speaking with you thanks Phil thanks for having me, shares for beginners is for information and educational purposes only. It is a financial advice and you shouldn’t buy so many investments based on what you’ve heard here. Any opinion or country is the view of the speaker and the question is for beginners, this podcast doesn’t replace professional advice regarding your personal financial needs circumstances or current situation. Thanks to Christopher Sulis for music production with that special Greg delicious flavor. Remember, music always flows, even when the money.

     

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