“In terms of how ETFs are likely to evolve, I think a lot of that will depend on what comes out in the industry. I do see a greater role for simple factor ETFs, as people get comfortable with them. I’m a little bit wary of multi-factor ETFs.
Jobs in ETFs: As a chemistry graduate with an M.Sc. in Cheminformatics and a Ph.D. in Biochemistry, how did you get into investment management?
Ben Seager-Scott: It was by accident but it follows a twisted logic. I’ve always been driven by knowledge, I really like knowing things and the reason I did chemistry helps to understand why I ended up in investment management.
At school it really wound me up when teachers talked about atoms and electrons explaining the basics and then saying it’s more complicated than this but you don’t need to know. I needed to know all the bits that they were not telling me – that need to know, getting that little bit extra, led me all the way to a Ph.D., to the cutting edge of admittedly a tiny field.
While I was doing my Ph.D., it became clear to me that I couldn’t see myself standing at a bench for the rest of my life. It’s not like on TV where you have a eureka moment every day. 90% of your time is spent playing with things that aren’t working, trying to get them to work.
Biotechnology research interested me so I started off in industry doing biotech industry research at a very basic level. That was in 2007 and when the global financial crisis hit no one had any need for biotechnology analysts anymore but the wealth management industry has a lot of work during crises and recessions. When you have a correction in the markets that’s often when investors seek professional advice – during the tough times.
There was more need on the generalist analyst side so I then became a generalist investment analyst – a generalist analyst is about everywhere and everything. Even though I didn’t know it at the time, that really met my desire to understand how the world works, understand what’s going on, all reflected through the lens of investment analysis and investment strategy.
JiE: Earlier this year you were promoted to the newly-created role of head of multi-asset funds at Tilney to oversee a £7bn range of funds. Tell us about your career path.
BS-S: I joined as an analyst covering active funds and seeing active fund managers but I wanted more exposure and the next stage to me was about strategy, getting exposure to the bigger picture, macro-economics, asset allocation, the much broader strategy picture. I was fortunate because Tilney has been through huge changes since I joined, expanding very significantly, both in terms of acquiring companies and launching services. Around the time that I felt I wanted a slightly broader remit we’d gone through a merger bringing in a lot more assets, a lot more staff and gaining a much bigger geographical footprint which gave me the opportunity to transition to a strategy role, developing and deploying investment strategy.
I spent a couple of years doing that while we grew as an organisation evolving into various departments and different sub teams when I thought it would make sense, particularly when it comes to the fund-of-funds, to bring all of the different elements of portfolio management, fund research and some of the operational elements into a single stream and avoid ending up in silos.
So at the start of this year, I went from being a strategist at one of the several teams to overseeing this new structure, focusing as a single team to deliver a best in class fund-of-funds.
JiE: Tell us about the core values that have served you throughout your career, taking you to where you are today.
BS-S: Being focused on client needs and recognising what people are investing in your funds for. The vast majority of my personal invested assets are in these funds, so that helps me not only tell clients I’m investing alongside them, but it really helps focus on what I want to achieve. I am aligned with my client, making sure I’m focusing on getting good outcomes.
I think particularly for new clients or clients that are wary of investing overall, it’s a benefit to know I’m invested alongside them, that a lot of my colleagues are invested, so we are aligned, and we are on their side, not on the investment banking side.
The way I deploy the investment strategy won’t surprise you given my background. It’s about being evidence based and having high conviction, making sure there’s a clear basis for making moves and when I do move, it’s with high conviction, meaning that I tend to make changes infrequently, but when I do, they are meaningful in size. A lot of it is about evidence, looking at the detail, but not just looking at the headline, looking at the second and third derivative of that decision, really getting under the bonnet and making sure I fully understand the rationale before I move.
JiE: How about elements of culture at Tilney that attracted you to the firm and keep you there?
BS-S: It’s an ambitious firm. When I joined, the business was relatively small with about £4Bn AUM, now through acquisition and consolidation AUM is over £24Bn. The proposed merger with Smith & Williamson would take us towards £45Bn. That ambition is also seen in the different services that have been launched over the last eight years, the execution service, managed portfolio services, etc.
Even at scale, I like the fact that we have a relatively small business ethos in terms of being able to take on fresh ideas. Good ideas get supported here giving you the ability to have an influence and get things done.
JiE: Any significant challenges along the way, anything that stands out that you learnt most from?
BS-S: The challenges are probably the flipside of that ambition as some of the adaptations can be a little challenging. Most people, and I’m no different, are a little resistant to change as you get used to doing things a certain way. It’s healthy to challenge yourself and every time we go through a merger we strive to take the best of both worlds.
JiE: We are seeing increased competition in the European ETF market, the recent entry by Goldman Sachs just another example. More competition, broader choice is better for fund selectors and ultimately the end investor. In an increasingly diverse market, what criteria do you use to select an ETF?
BS-S: It comes down to a very detailed due diligence process, both of the index and the ETF structure itself. We spend a couple of days with providers really getting under their skin to learn how their ETFs operate. We couple that with rigorous desk research.
The index itself can be straightforward or very detailed. Something like a large-cap UK equity index is relatively straightforward but for a more detailed smart beta process, that requires a lot more work on the index side. When I look at the index, particularly for smart beta, I have 4 indicators that I look for. I will make sure that there is a clear economic rationale, that it is supported by academic literature, that the factor and evidence persist out of sample and I have reason to believe that it will persist into the future.
With regards the ETF itself, we get into how it operates, whether there is physical or synthetic replication, details of number of counterparties, a particularly hot topic for me is securities lending in physically replicating ETFs so we look a lot at that as well.
We look carefully at the costs, independently assessing costs. We look at both internal/external costs associated with an ETF, not just reported OCF or TER. We will look at 12 months tracking difference as our gauge for the internal costs and then look at external trading environment, trading on exchange.
Ultimately I want to answer – Do I understand it? Does it do what I want? Is it giving me what I want in a cost effective manner?
JiE: Tell us a bit more about your use of ETFs. What ETFs do you use? Do they make up a significant percentage of your portfolio? And how you see your use of ETFs evolving?
BS-S: It varies very significantly across client portfolios. Historically we’ve used quite a lot of active funds because we can find managers that add value after fees, but against that we also have some purely passive fund ranges as well.
It depends on the approach, but for a typical client portfolio, quite often we will use them where we can’t find a good active manager or areas where it’s difficult for an active manager to add value – government bonds for example. We also use them for our tactical trading, so if you want to get in and out of a market I think an ETF makes a lot more sense because it gives you market exposure. It can be targeted, so you can target particular countries or, in fixed income, particular parts of the duration curve. So that’s something that we’ve used them for as well.
It really depends on the circumstances. In the passive only portfolios obviously they’ll be heavily used, in the mainstream portfolios they tend to be used less significantly but in those areas where I think they can add cost effective value.
In terms of how ETFs are likely to evolve, I think a lot of that will depend on what comes out in the industry. I do see a greater role for simple factor ETFs, as people get comfortable with them. I’m a little bit wary of multi-factor ETFs. Certainly single-factor ETFs and targeted use as we start to see more of these launching, particularly now that a lot of groups are getting quite actively involved in fixed income I can see those being used more as well. Again, that depends on some of the product developments.
JiE: You were a very early adopter of ETFs in the UK. What do you see as the greatest challenge on the horizon for ETFs?
BS-S: In the UK I can see 3 hurdles. First, and it’s a boring one but it’s very real, is related to platforms and intermediaries. Most investors, particularly in the UK, will invest through some sort of platform, and many platforms still don’t have particularly effective ETF investments – they either just don’t include them at all or they don’t trade close to real time.
It’s a problem for IFAs and other intermediaries that use platforms. If it’s not straightforward to use an ETF effectively then they are just going to go for a more traditional fund or perhaps use an index tracking fund.
There has been some improvement in recent years with a lot of platforms starting to trade ETFs but if you are running a model portfolio, you’ll simply go with funds that are available on all of the platforms. Until the vast majority or all platforms have good ETF trading it makes it difficult for large scale adoption because otherwise many outsource providers will just go with what they can deploy across the most platforms.
Second, one of the elements that worries me is making sure clients fully understand these products and how they may perform in a crisis. Obviously ETFs trade through the secondary market so market access is good, but as investment professionals we are used to trading through an exchange. We understand that at times of an extreme market crisis and stress and dislocation, some ETFs may trade quite erratically. We saw before they get hit by circuit breakers, they don’t trade in line perhaps with NAV, certainly reported NAV, resulting in headlines that these things are trading dangerously. My concern is that the next time there is stress in the market, ETFs could get tarred unfairly as being unreliable.
Clients need to understand in advance, be aware this is what can happen. There is some client education needed so ETFs don’t get a bad reputation. Clients need to understand that there is a very important difference between an ETF trading in extremely liquid equities, like UK large-cap compared to an ETF trading in Chinese small-caps that hits a bump and starts to miss the form. We need to avoid the reputational contagion effect when they say one ETF has blown up, ergo all ETFs are inherently unstable.
Third, I also think there is still a big challenge from active managers. I know that active management is under pressure, but I think there are still a lot of good managers and in the UK in particular I still think to a large extent the fund business is about well known names, active managers who can add value and I think there’s going to be quite a resistance to that as well.
JiE: Are there things that ETF industry needs to do differently or do more of to be more relevant to fund selectors and investors?
BS-S: I think attitudes are changing, but they are changing slowly. It’s just important to keep banging the drum. I think the industry is getting there.
JiE: You will be speaking at the upcoming Inside ETFs Europe conference. Tell us about your session on ‘Active ETFs in the Spotlight: Is This the Future for Investing?’
BS-S: I think one of the headlines for the session is ‘deploying ETFs in an active format’ as a way that active managers, and by active managers here I mean human managers, can access this growing part of the market. My focus on the buy side is to ask why would fund managers want to do this, what are the benefits, what are the challenges.
I’m also interested in is defining what we mean by active – everyone knows it’s about alpha, it’s about humans picking stocks. As we have very plain vanilla passive and ETFs just tracking plain vanilla indices – now you have smart beta and factors, tilted indices. As we see ever more sophisticated algorithms and quant processes, I’m interested in discussing if we may move to a point where we go beyond active and passive as we know it. Perhaps we have passive as being index based and then we start talking about human active and quant-active. Discussing how that’s likely to evolve is something that I look forward to teasing out from the panel.
JiE: Does the daily drama of reality TV or Twitter politics make the role of the macroeconomist any easier (you get to see everything play out almost as if you were in the room), or does it make it more difficult (there are unpredictable twists and turns, not just daily, but hourly) or is it noise and you just get on with decision making based on the fundamentals?
BS-S: A couple of years ago, Tweets often caused a very significant market reaction but markets adapt and now they are used to it. Now the market looks through it and reacts a lot more sanguinely than it did previously.
You do need to be conscious about how the market is likely to perceive it and whether or not the Tweet is going to constitute a sustained shift in market dynamics, so I’m sensitive to that, but 99 times out of 100 it’s unlikely to have a sustained material effect on the fundamental, so I wash it away.
I talk about the fundamentals with clients but they do tend to raise what’s happening on Twitter. To make it clear that we are on the ball with what’s happening in the real world the very last slide in all of my presentations is essentially a hot topics cheat sheet that gives a one liner on topical points so that our clients understand that we took notice and reviewed.
JiE: How you stay happy, positive and mentally fit for work? Any secrets you can share?
BS-S: I’m massively into mindfulness – finding space just to think about where you are here and now, locking out the noise. It’s really useful just as a reset.
Exercise and a change of scenery is also important. I get out for a lunchtime run along the Thames or around St. James’ Park as often as I can. Just getting outside and changing the scenery, doing a bit of exercise does wonders for my mental fitness. Even if I can’t go for a run, getting a walk down the river really helps with mental fitness and wellbeing.
JiE: What about work life balance? What is it for you and how do you achieve it?
BS-S: I’m probably still working on it. There are two aspects that make it difficult for me, Firstly, having emails that can find you at all times anywhere. I’m terrible because I have an alert set up on my phone to allow certain people or subject lines to come through automatically (people say it’s a bad thing).
Secondly, my job involves understanding global developments happening all the time – something that I truly enjoy. I can switch on the TV at home in the evening, see what’s happening in the world and consider how an event is likely to affect the market, how it’s going to be perceived – it makes work all permeating.
I’m mindful of health and the importance of switching off and I’m still working on it. Only stressing about things you can influence is important so I do my best in that sense.
JiE: You are also on the advisory board for City Hive, co founded by Bev Shah and Mandy Kirby where the goal is ‘to create a balanced, inclusive and positive culture’ for the investment and asset management industry. Can you tell us a little bit about this?
BS-S: City Hive is brilliant, Bev and Mandy are absolutely amazing people, ground breaking in what they are doing.
We all recognize the challenges in this area for the investment industry. I try to avoid highlighting the negative, focusing instead on positive engagement and helping positive change, moving towards cognitive diversity – different views and different backgrounds across committees, firms and the industry. It comes back to some of my core principles of making sure all of your decisions are well rounded – to get a well rounded view you need different experiences and different thought processes around the table, inclusion and balanced cultures at businesses.
It’s absolutely essential to address biases and I’m particularly keen to address unconscious biases, a factor that can hinder the industry’s desire to evolve and improve. As soon as you point it out you can fix it.
City Hive is at the heart of this, I’m delighted to be involved and we’re going to see a lot more from Bev and Mandy.
JiE: Do you have a Rugby World Cup prediction?
BS-S: It depends on whether you want me to comment with my heart or my head.
JiE: Definitely your head, that’s what you’re best with but give me both.
BS-S: I’ll need to give you three answers then. My head says that when the Kiwis beat Tonga 92-7 in early September, they have to be clicking, ready and favourites. My heart is with Harlequins and England. Secretly though I’ve always loved Scotland – they’ve always been my number two team. They have a lot of potential and go to Japan as the underdogs. If they meet in the semis and Scotland win, I wouldn’t be devastated.
JiE: Brexit – impossible to predict which way it will go?
BS-S: It’s nigh on impossible to predict. Just look at how much the balance of probabilities have swung in the last 12 months from a no deal Brexit being very unlikely, to that being a very feasible outcome as we stand now.
What I can say is that the extreme of a disorderly no-Brexit is what’s holding back a lot of business, but businesses don’t actually need the other extreme of revoking article 50/staying in the EU to resume investing. People are underestimating the ability of businesses to muddle through in the middle ground. I think any sort of muddle through arrangement could actually be a positive for the economy.