globally diversified stock portfolio in a single fund. The fund is managed by portfolio manager, Paul Hrabal, who is the President and Chief Investment Officer of U.S. One.
The fund has slowly been able to increase its asset base from about $2 million upon launch to close to $7 million, where it stands today. ONEF should attract investors looking to achieve long-term passive exposure to global equities as it provides exposure to about 5,000 global stocks. The manager achieves its exposure by investing in other exchange-traded funds and hence is fund-of-funds. It provides this exposure for a cost of 0.51%, which is the total expense ratio, including the fee for underlying ETFs.
As a firm, the company has targeted smaller investors who are looking for the kind of professional portfolio management that high net worth clients receive from dedicated advisors. In a recent interview with ActiveETFs | InFocus, Hrabal explained that the main target investor group for ONEF is, “Individual, small investors with less than a $100,000 investable assets that either have limited or no financial advice”. U.S. One has indicated plans to launch a similar all-in-one type bond ETF and also a balanced ETF, thereby covering a broader range of products.
ONEF looks for long-term capital appreciation by investing in ETFs that track indices comprised of large, mid and small-cap companies in the US, Europe, Asia and other markets. The portfolio manager holds the ETFs for long periods in order to minimize portfolio turnover.
The fund is actively-managed only to the extent that there is a pre-determined target mix for the portfolio based on an asset allocation strategy which is reviewed or changed just once a year. With regards to changes to that asset mix, Hrabal explained, “We’re not going to be shifting any one segment – there’s 5 segments in total – we wouldn’t shift any one segment over 5% from one year to the next.”
The fund is benchmarked against the S&P500, even though the fund provides exposure to global equities. The portfolio managers generally expect performance of the fund to fall in between the S&P500 and the MSCI World Index.
At the time of writing, ONEF’s held 5 different underlying ETFs, with the largest being the Vanguard Large-Cap ETF (NYSE:VV) which made up 48% of the portfolio. The other 4 holdings were the Vanguard Europe Pacific ETF (NYSE:VEA) – 21%, Vanguard Small Cap ETF (NYSE:VB) – 20%, Vanguard Emerging Markets ETF (NYSE:VWO) – 6% and the iShares MSCI EAFE Small Cap Index (NYSE:SCZ) – 5%.
The emphasis is clearly on achieving broad exposure and wide-ranging exposure to equities. As a result of the allocations, three quarters of the fund is in large/mid-caps while 25% of it is in small-caps. This focus is the result of prior research as Hrabal explains, “We follow what the numbers point to which is over decades small-cap outperforms large-cap by about 200 basis points”. The United States forms the largest geographic allocation at 68%, with 17% in Europe, 13% in Asia and 2% in other regions. “We wanted to try to bring to the small individual investor’s attention that broadening outside the US, with some global diversification in both developed and emerging markets, can boost fund returns and reduce risk over the long run and outperform any one single market”, elaborated Hrabal. Hrabal’s lean towards the large US allocation results from a bullish long-term view on the US economy. Another reason he mentions for that allocation is that the fund is targeted towards US investors who are earning and retiring in US dollars – hence it makes more sense for the fund’s returns to be tied more to US companies.
When asked whether this portfolio composition would change much in the face of changing economic conditions, Hrabal first pointed out that ONEF is not a sector rotational or tactical type fund. “You’re not going to see us shift from two-thirds US to one-third US in a year. You’re not going to see us make those fundamental moves. But over time, if we see certain markets outperforming and if we believe that those will continue to in the future, we are going to make subtle changes in shifting the portfolio over time”, said Hrabal.
ONEF’s performance has been varied depending on time periods. Since inception in May 2010 till end October, the fund had returned 5.36% compared to a 5.39% for the S&P500, marking a slight underperformance. However, in the 3 months up till September, ONEF returned 9.07% while the S&P500 returned 7.97% – thereby outperforming the fund comfortably. That outperformance is also seen in the 1 month time frame as well.
That provides some indication that right after launch, the fund underperformed in the opening months, before picking up performance subsequently. However, given that the fund’s composition only changes annually, both the underperformance and subsequent outperformance are simply due to the dynamics of the initial target allocation.
ONEF has generally traded at a slight premium to NAV over the last two quarters. The price of the ETF shares deviated from NAV more in the first quarter, Q2 2010, often exceeding 20 basis points in premium. However, that deviation has been brought down in Q3 2010, with deviations generally being restricted to less than 10 basis points. In general, ONEF has been quite effective in keeping the deviation of the ETF market price from NAV down to a minimum, especially relative to other Active ETF peers.
Written By Shishir Nigam from ActiveETFs | InFocus Disclosure: No positions in above-mentioned names.
Shishir Nigam is the founder of ActiveETFs | InFocus (http://www.etfshub.com/), which provides extensive coverage and analysis of actively-managed ETFs in US and Canada, including debates on major industry trends, insights on the latest product launches from issuers in the Active ETF space as well as in-depth interviews with industry executives and thought leaders.
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