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2 global equity ETFs for your portfolio

Emma Rapaport  |  21 Apr 2022Text size  Decrease  Increase  |  
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Actively managed exchange-traded funds stormed to the fore in 2021 as investment firms sought to bring their strategies to a wider range of investors via the exchange.

These funds are managed by a team of portfolio managers with the aim of outperforming the market. They don’t track an index, but rather reflect the portfolio of an active stock or bond picker.

Because active ETFs are listed on the exchange, investors can buy and sell them as they would a normal share.

The year saw more than 15 new products launched across the ASX and competing exchange Cboe, more than passive and strategic beta ETFs combined, with funds from Hyperion, Perpetual, Janus Henderson, and Coolabah (to name a few).

Several listed investment companies also relisted as active ETFs, including Monash and Magellan, due to investor pressure to reduce long-term discounts to their NAVs.

MORE ON THIS TOPIC: Investing basics: Active ETFs explained

In this article, we delve into two actively managed global equity ETFs under Morningstar analyst coverage – Hyperion Global Growth Companies ETF HYGG and Platinum Asia ETF PAXX - to understand why they’ve been awarded top marks. Analysts expect highly rated funds to outperform over a full market cycle.

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Hyperion Global Growth Companies ETF HYGG

From management team Mark Arnold and Jason Orthman, Hyperion Global Growth Companies ETF HYGG invests in a concentrated portfolio of high-growth global stocks. The fund was added to Morningstar’s fund coverage earlier this month with a Bronze rating.

Analysts applauded the team’s “diligent research” and “strong selection” saying that it should “deliver positive returns over the long-term”. However, they note that the fund’s “strong growth-style bias” means it will likely see short-term bouts of underperformance during cyclical or value-led rotations. The first quarter of this year is a key example with the fund ranked among the worst performers under Morningstar coverage returning -14%.  

“Investors should prepare for higher-than-average volatility,” analyst Michael Malseed says.

Here are some highlights from Malseed’s analysis. Read the full note here.

Portfolio: Hyperion takes a 10-year view on company earnings and valuation, selecting high-quality stocks with the potential to grow into large total addressable markets. This "time arbitrage" is one of the key competitive advantages Hyperion has over a market often fixated on quarterly results.

Portfolio construction is largely systematic. A model portfolio weights each security primarily based on its forecast 10-year internal rate of return, and single names are capped at 13% of the portfolio. The result is a highly concentrated portfolio of 15-30 names, and turnover tends to be 30%-40% annually.

Technology and consumer discretionary names have long been well-represented, and alongside communication-services stocks, they accounted for more than 80% of assets as at 31 Dec 2021. Major holdings include Tesla, Square and Amazon while more recent additions include Spotify and Airbnb. The portfolio has a go-anywhere mandate, but it has averaged over 85% in US-domiciled names over the past three years, and it has minimal emerging-markets exposure

People: Mark Arnold and Jason Orthman lead Hyperion's quality-oriented culture. They're tenured and have proved themselves over a long period. A third portfolio manager position is periodically rotated among the senior team, occupied by Liam Polkinhorne as at the end of 2021. The analyst team is well-resourced, having expanded over the years to support the firm’s growth. Workload across both domestic and global equities has been a watchpoint, but we have become more comfortable in the team’s ability to manage this.

Performance: This strategy has an excellent track record since its June 2014 launch. Since then through December 2021, this vehicle's 22.7% annualized gain sailed over the MSCI World Index's 14.3%. These eye-popping relative returns largely come from a run of standout years over 2015, 2017, 2018, and 2020 when it landed in the category's top decile.

Given the strategy's highly concentrated approach, stock picks drive performance here over the long term, but the positive rerating of growth companies in a low-yield environment has been an undeniable tailwind. Tesla was a standout performer in 2020, contributing more than 20%, equal to the next three winners combined (Square, Amazon, and PayPal Holdings).

Platinum Asia ETF PAXX

Silver-rated Platinum Asia ETF PAXX aims to identify companies across Asia with earnings and cash flow growth prospects unappreciated by the market.

Morningstar analyst Ross MacMillan says this fund has “extremely knowledge portfolio managers” in Andrew Clifford and Cameron Robertson, a “well-established investment process”, and a “well-considered management fee” of 1.10%.

He notes the departure of previous portfolio manager Joseph Lai in late 2020 and volatile conditions in China during the past 12 months have posed some of the toughest challenges this strategy has faced since its inception. However, they have confidence in the key foundations of the strategy.

Here are some highlights from MacMillan’s analysis. Read the full note here.

Portfolio: Platinum's portfolios are frequently quite different from their benchmarks. As at 31 Dec 2021, China was by far the largest country exposure as a result of significant opportunities identified by Platinum’s investment team over numerous years. As well as owning US-listed ADRs, the manager also gets exposure through Hong Kong and is also willing to invest directly in China A-shares, including state-owned enterprises (something that is unusual among Platinum's peers). Indian stocks also feature prominently in the strategy and have been an overweighting since mid-2013. These overweightings are offset by long-standing underweightings in Taiwan and South Korea.

Diversity exists at the sector level, but we believe technology will potentially dominate going forward. The strategy’s style is predominantly a mix of value and growth stocks. Top holdings include Taiwan Semiconductor Manufacturing Co Ltd, Samsung Electronics Co Ltd and Vietnam Enterprise Ord.

People: The strategy now has two co-portfolio managers - Andrew Clifford (manages the majority of funds under management), Cameron Robertson (around 25%). Two senior analysts manage a small sleeve of funds for the strategy. Clifford has a long history of successfully managing this type of strategy. He has accumulated vast knowledge of stock investing in China, having undertaken on-the-ground assessment since the early 1990. Cameron Robertson has been with Platinum since 2010, analysing resources, industrials, technology, and communication stocks. We believe this knowledge and experience, particularly of the tech sector, will serve him well in the role of co-portfolio manager here.

Performance: Platinum Asia has had an impressive but volatile long-term track record under multiple portfolio managers, outperforming the Morningstar Category benchmark and peer average over the trailing three-, five-, and 10-year periods to 31 Dec 2021.

The year 2016 was a struggle, but this reversed in 2017 as China exposure paid off handsomely. Global volatility and substantial falls in Chinese stock exposure hurt again in 2018. But the portfolio manager took advantage of price drops by purchasing stocks to ensure the portfolio benefited from the rebound in 2019. The strategy significantly outperformed its peers in 2020, with tech and Chinese consumer discretionary names being the largest contributors. However, the fund’s 2021 performance was lacklustre; being overweight in China, the strategy paid the price, with numerous Chinese stocks falling sharply.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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