Brandon Clark Discusses Value Strategies & More at Exchange

Nicholas Wodeshick: Given how macro conditions and markets are pushing many advisors and investors to reconsider their portfolio allocations, what is your firm choosing to focus on right now?

Brandon Clark: From a portfolio positioning standpoint, we tend to focus more on the macro long term. For us, we’re trying to get people to not be as worried about the near term, given the fact that rates, at least historically, are at a point where I’m not sure you’re necessarily going to bottom tick the price or top tick the rate. Fixed income ETFs have attractive yields and diversifying power for portfolios now, so maybe now is just the time to go in. You’re never going to find the most opportune moment to do so. That being said, we have a lot of money market assets along with fixed income and equities, so we have solutions for clients depending on what asset class they need.

We’re more focused on tuning out the noise. As an active manager, that’s part of the value of allocating to our products. As an investor, it is better to tune out the noise on a daily basis. So, let us manage some of these day-to-day issues, navigate those markets, and just think bigger picture about your strategic asset allocation framework. That’s what we’ve been talking about with clients. Yeah, you’re going to have a lot of noise, but that’s noise in the near-term. Most of your asset allocation process for clients is going to be more focused on the long-term. So, let us manage through the noise for you.

Wodeshick: On the topic of your investment library, the Federated Hermes U.S. Strategic Dividend ETF (FDV A-) is performing particularly well. Why do you think this fund’s strategy is proving to be so effective at the moment?*

Clark: The Strategic Value franchise is over 30 years old, even though the ETF is obviously only a couple years old. The strategy is this: We’re looking to buy high quality companies that are really growing dividends and have a stable dividend payment. The dynamic of the environment we’re in right now is those portfolios tend to be a bit defensive in nature. And so, what we’ve seen here year-to-date has been a risk-off market.

We’ve seen what the S&P has done, year to date. This portfolio really does shine in these high-volatility pullback periods. The beta on it tends to hover between .6 and .7, so it’s a low-beta portfolio with defensive, dividend-paying companies. That portfolio is not going to hang with the S&P when it’s up 20%. It’s likely going to trail the S&P in that instance, but it’s a really good portfolio for this environment right now, where you’re trying to get defensive in equities.

For our other franchises, you know, we’ve got a couple different products that could fit. We’re building out investment solutions so we can offer products for the markets investors want to be in. But the dividend portfolio is definitely doing well right now because of its defensive nature.

Wodeshick: Federated Hermes is home to a number of actively managed ETFs. What aspect of active management do you think is proving to be most appealing to advisors and investors? 

Clark: I think one of the big drivers is just pure availability of product now. So, if you look at active mutual fund assets, there’s almost $14 trillion of active mutual fund assets. Active ETF assets are just under $1 trillion. We’re not quite a trillion, yet, but we keep bouncing close to it. You’ve got this huge pool of legacy mutual fund active assets from managers like ourselves, take FDV, that franchise that has been around for 30 years.

We launched these MDT products — four- and five-star funds that have 10-year track records. They’ve just not been available as ETFs. So, I think one of the big appeals and drivers for active is just pure product availability. More products are coming out and getting the ETF wrapper benefits, which include tax efficiency.

Also in this period of volatility and uncertainty, clients are looking to hire managers who have the expertise to help navigate them through these environments. For instance, I think of our Total Return Bond Fund. If you’re allocating to a core fixed income portfolio, our portfolio managers are not just buying the Agg. They are trying to navigate around some of these uncertainties and find value, vetting investments and considering sectors: “Do we need to be longer duration? Do I need to shorten up duration?” So, right now, given the market’s level of volatility and uncertainty, you’re seeing clients allocating to active ETFs to  outsource investment expertise.

Wodeshick: What do you think investors should be aware of before making the call to pivot more towards active ETFs? 

Clark: When you’re doing your due diligence on ETFs as a whole, there’s kind of a punch list. One, most of the strategies we have today are not necessarily the same, but often based on legacy mutual funds. Okay, so how has that mutual fund performed historically? Have they generated consistent alpha? What’s that track record look like? It’s not perfect, but you can certainly use this history to correlate.

The other thing I would say is some of it’s just about fit: “Does this fund fit into my portfolio the way I want it to fit?” Because it’s often easier with benchmarks. However, when you have active managers who are making these decisions, you need to consider whether they are making decisions that are what you want.

Clark: Specifically, around active ETFs, I would also probably look at that manager and understand their capabilities to run ETFs. For instance, how long have they been running ETFs? Do they have the institutional knowledge to run ETFs? Because ETFs are a little bit different than mutual funds, in terms of how you use and leverage those tax efficiency levers that we have at our disposal. It takes some know-how to understand how to make that work. For example, if you have an active ETF manager who’s launched ETFs and are paying cap gains on an ETF, I’d ask them why is the ETF paying out a gain?

And if the manager has an explanation as to why it’s happening, or if it’s part of the asset class, whatever the answer is, if it makes sense, and it’s just part of the investment process, that’s fine. They’re not able to do anything about it. But if it’s an asset manager who’s paying out a capital gain, who’s not really got an answer, I’d question if the manager actually understands how to use the ETF levers.  For context, last year, about 5% of active ETFs paid out a capital gain. At the end of the day, if you’re buying it for tax efficiency, you want to make sure that they’re doing it for you. 

Wodeshick: There’s also been a lot of discussion about moving assets from mutual funds into active ETFs. What do you see as the key advantages active ETFs can offer over mutual funds, or vice versa? 

Clark: They’re both a little different — they both have a use case; I think that use case depends on what the investor is looking to accomplish. If you’re coming in every two weeks — think money out of your paycheck — it’s much easier to do that with a mutual fund. That particular use is what mutual funds excel at — it’s what they’re there for. Whereas with an ETF, you have to put orders in. There’s not an automatic investment feature, so that would be one thing to consider. However, I think, when you start looking at the ETF versus mutual fund debate, you have to ask if features such as tax efficiency are important to you. 

For example, if you’re in a tax deferred account, tax-efficiency isn’t necessarily a big deal. I think there’s some level of ETFs being the 2.0 factor. For example, the ability to just look at my portfolio and see the value in real time. I think some of those features are where people look at ETFs. It’s the next generation of investors. Investors can pull up their phone, look at the fund’s value, and decide whether they need to act on that. Now we have active ETFs where it has been predominately index ETFs for the last 10 years.

Everything’s kind of coming together for the ETF industry. So, I don’t know if there’s a one size fits all, when it comes to the strategy or the vehicle. You need to decide what’s important for where this money’s going and what features are going to suit it. Which features can I best use, and which ones might detract from what I’m trying to do.

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