ETFs are the next stage of “evolution” at Excel

Excel is the first Canadian fund manager to leverage the expertise and proprietary mathematical models of Alken Asset Management of London, U.K. The firm’s subsidiary, Cabestan Quant Research Ltd., uses sophisticated quantitative models to make asset allocation decisions and manage risk.

The two ETFs invest in up to 18 global asset classes that will be dynamically rebalanced to meet the defined risk and return targets, with a goal of limiting downside.

“You don’t get rich when markets are going up, you get rich by cutting losses when markets are falling,” said Francois d’Hautefeuille, head of quantitative investments at Cabestan, during the presentation. “The No. 1 rule is don’t lose money. You need risk management.”

The goal is to “eliminate noise” from the portfolios using asset-class management to provide better diversification than could be found by investing in any one asset class, d’Hautefeuille said. Rather than attempt to add value with individual stock picking, the ETFs’ managers will increase and decrease weightings in various asset classes and are willing to go to zero in any asset class if conditions warrant.

Although the ETFs are managed using quantitative models, there is also a human element. For example, the ETFs may use real-return bonds instead of traditional bonds for fixed-income exposures if fund managers believe inflation is on the rise.

The various asset classes covered by the funds include U.S. equities, European equities, emerging equities, real asset equities and various kinds of bonds, including government, high-yield, emerging, and convertibles. The ETFs may also invest in specific regions, sectors and currencies. Each position is capped at 10% to meet risk diversification constrains. Exposure is achieved by investing in globally listed ETFs as well as individual securities.

The ETFs are rebalanced weekly to meet asset-allocation targets, but additional adjustments can be made if extreme market movements create imbalances or opportunities, d’Hautefeuille said. Drawdown controls include reallocation to safe assets when the risk premium increases.

Excel Global Balanced Asset Allocation ETF’s investment objective is to seek a targeted annul return of 2.5 percentage points over the Bank of Canada (BoC) overnight lending rate during a rolling two- to three-year period, before fees. The ETF targets volatility in a range of 4% to 6% for the same period.

Excel Global Growth Asset Allocation ETF has a targeted return in excess of five percentage points over the BoC overnight lending rate for a rolling three- to five-year period before fees while targeting volatility in a range of 8% to 9%.

“With our emerging-markets mutual funds, the best way to add alpha is through individual stock-picking, and it pays have a manager on the ground looking at stocks,” said Asdhir. “In global markets, which are more efficient, adding alpha is more effectively achieved through asset-allocation decisions. Our ETFs offer a cost-effective way to invest across a variety of global asset classes.”

Excel’s two new ETFs offer not only multi-factor global asset allocation with potential exposure to more than 17,000 individual global securities, but also target absolute returns as well as limited drawdowns in falling markets.

“It’s a combination of man and machine,” Asdhir said. “The managers will be analyzing thousands of data points and combining that information with the human touch.”

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