Leading asset manager Hyperion talks ETFs, stock picks and the global markets outlook
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ETFs (exchange traded funds) provide a flexible and modern approach for investors to get access to portfolios run by professional asset managers, Hyperion says.
One of Australia’s leading asset management firms, the investment group last week flagged the launch of an active ETF for its Hyperion Global Growth Companies Fund (ASX:HYGG).
With HYGG now trading on the ASX, Stockhead caught up with Hyperion’s chief investment officer (CIO) Mark Arnold and deputy CIO Jason Orthman for a chat about ETFs as well as the broader market.
Hyperion’s global fund is one of three it operates, alongside a dedicated small cap fund and its Australian Growth Companies Fund, which typically ranks high in Morningstar’s quarterly rankings.
The funds are open to new investors and require a minimum investment of $20,000. But Arnold explained that an active ETF is effectively the same investment strategy, with a more flexible approach.
“The rationale for doing it is it’s a more modern way for investors to access the fund,” he said.
“Some advisors and clients are more reluctant to go with the unlisted format because it’s a longer process.”
The unlisted and listed units are fungible, which means investors can buy in the unlisted format and sell in listed format (or vice versa).
Since the fund launched on Monday March 22, Orthman said volumes have been steady with a good balance of advisory firms and retail customers.
“For traditional broking firms advising their clients, it gives them an option to get simple offshore exposure, rather than purchasing, say, an incumbent blue-chip stock,” he said.
“And pleasingly there’s also been a number of retail investors that are unadvised and going direct. So it’s a nice spread for starters and those are the channels we want to open up.”
Lastly, the pair said that another advantage of listed ETFs is that they provide a more sophisticated live-pricing mechanism.
“Right now, if you have an unlisted product you get pricing every 24 hours and you only get a price once. Whereas on the exchange you get that price every second,” Orthman said.
The live-traded value of the ETF also reflects changes in global futures markets.
“If you buy (the ETF) in afternoon trade for example, and the NASDAQ is expected to move higher then that will be reflected in the price. As far as we’re aware, that’s the most sophisticated way of doing that,” he said.
Turning to Hyperion’s investment approach, Orthman and Arnold also provided insights on how they build the global growth portfolio.
It currently comprises around 25 stocks. Aussie companies have made appearances in the fund, but a selection pool spanning global developed markets makes it a “really competitive process to get selected”, Orthman said.
“What we want are modern businesses that have structural tailwinds, and they tend to be market leaders that can defend their position.”
Looking globally, Orthman said a good example of that is NASDAQ listed fintech Square Inc, run by Twitter co-founder Jack Dorsey.
“Part of their business is an app called Cash App, which allows peer to peer transfers and there’s nearly 40m monthly users,” he said.
“That’s something that could potentially disrupt traditional banking where Gen Z consumers don’t have the same level of loyalty. So it fits the criteria of a modern business with a disruptive product that’s relevant to the next generation.”
On the ASX, Orthman flagged infection prevention company Nanosonics (ASX:NAN).
“They’ve got a strong management team and a product that’s difficult to replicate because it’s got patents out as far as 2029,” he said.
“So to us it’s a business that has a modern way of doing things. They’re setting a new standard of care in hospitals with clear market leadership globally, and a strategy to defend its future earnings streams against competitors.”
Along with the company view, Arnold also provided some top-down analysis on how Hyperion views the economic backdrop in the wake of the COVID-19 shock.
Rising yields since February have prompted a shift out of tech/growth into cyclicals/value stocks, which Arnold described as a “pretty healthy rotation” that “de-risks the market”.
And he said the Hyperion ETF growth fund is now positioned to benefit from structural tailwinds over the long-term in what he said will be a low growth, low inflation environment.
While inflation expectations have been rising, there are “too many structural reasons why inflation is unlikely to increase dramatically over the longer term”, Arnold said.
“There’s a lot of tech disruption and innovation going on, and that’s still flowing through to better products at lower prices, which is deflationary by nature,” he said.
And on the demand side “we think aggregate demand is going to be fairly subdued once we get through the cyclical recovery, due to ageing populations and higher debt levels”.
As a result, the investment team is currently factoring a yield on benchmark US 10-year bonds of 2.5 per cent into its longer-term models (US 10-years are currently at around 1.7pc).
Broadly speaking, Hyperion is “pretty comfortable with the outlook”, Arnold said.
“We focus on a longer term horizon, so we’re not trying to predict moves over the next 12 months. We’re looking out over 10 years and setting stock weights based on that time frame for companies that meet our criteria.”