Fixed Income is hard, and it’s not getting any easier. Many investors have been looking for alternative approaches, and one that’s recently celebrated a significant milestone is the Columbia Diversified Fixed Income Allocation ETF (DIAL ), with three solid years of performance in the can.
ETF Database CIO and Director of Research Dave Nadig recently spoke with Marc Zeitoun, CFA, Head of Strategic Beta and COO North American Distribution for Columbia Threadneedle Investments, about the fund, fixed income investing, and more.
“One thing that makes us unique,” Zeitoun points out, “is that our active PMs are also the managers of our passive solutions.” Columbia Threadneedle believes that whoever manages the money and develops the index methodology is just as important as any other due diligence question anyone may have on a mutual fund or an SMA.
Zeitoun expressed a bit of disbelief that more ETF investors don’t ask this question.
“We believe that there are so many unintended consequences of people buying a benchmark, mainly taken from a lack of familiarity with the rules, leading them to judge a book by its cover,” Zeitoun said.
Going for More Than the Score
Ultimately, what should matter is investors getting the exposure they want — and need — as opposed to having an attractive-looking score on any particular portfolio metric. For Zeitoun, on his side of things, Columbia Threadneedle looks at all angles of a portfolio, rather than just duration or credit risk or sector exposure.
As Zeitoun explains, “Investors have needs on a continuum, the client is going up and down. Whatever they want, it’s not up to me to tell them what is right. It’s up to me to deliver options based on their preferences. However, the industry makes a constant mistake of homogenizing people’s preferences.”
Keeping that in mind helps advisors manage client expectations. For Zeitoun, the Columbia Threadneedle approach is to start with the benchmark and use the active/alpha-seeking strategies and the tax/pure beta to bridge the gap. Ideally, there will never be an underperformance-of-expectaiton, but that sort of commitment could lead to problems.
To make for a better play, Zeitoun details how Columbia Threadneedle enlisted their active PMs to build a rules-based process based on their experience on the actively managed, alpha-seeking side of the business. Developing that further has proven to be successful, and has formed the model around how DIAL has been built.
As far as the importance of these strategies and funds have to fixed income when it comes to seeing ETFs as more than a passive affair, one needs to keep in mind creations and redemptions in fixed income ETFs. The average investor may feel lost on some of this, but advisors having more knowledge on how these rules were developed could lead them down a more confident path based on some of their favorite brands, where they recognize expertise.
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