The Most Sophisticated Factor Products May Be Exactly What You Need Right Now. An interview with with Chuck Martin, portfolio manager for AGFIQ and co-founder of FFCM.

The Most Sophisticated Factor Products May Be Exactly What You Need Right Now

The ETFs offered by AGFiQ have always been some of the most sophisticated products on the market. Even the names—the AGFiQ US Market Neutral Anti-Beta Fund (BTAL)—can be intimidating. But with market volatility returning, and investors looking for ways to maintain exposure to the market, these products may be exactly what many investors need.

Inside ETFs Chairman Matt Hougan caught up with Chuck Martin, portfolio manager for AGFIQ and co-founder of FFCM, to talk about his portfolio of ETFs and why they’re a perfect fit for today’s markets.

Matt Hougan, chairman, Inside ETFs (Hougan): One of your most interesting ETFs is your AGFiQ Hedged Dividend Income Fund (DIVA) ETF. A lot of investors today are searching for yield but are worried that dividend stocks are overvalued. Are they?

Chuck Martin (Martin): It’s hard to say all dividend stocks are overvalued. You want to make sure companies that are paying dividends are going to be able to sustain and grow those over time.

With the recent tax cuts, companies are going to have a lot more ability to sustain or grow dividends as their effective tax rates come down. With that said, what we’ve seen in recent years is investors moving out of fixed-income investments and into pure equity investments as they look for higher yields, and that has pushed up valuations in some cases.

Investors have been asking us, is there any way to do something in between? Rather than going all the way from fixed income to equities, is there a way to isolate the dividend stream so that valuations don’t come into play?

That’s why we created our AGFiQ Hedged Dividend Income Fund (DIVA). It really tries to hedge out the sector and market risk, and leave behind the dividend stream for the investor. We’re trying to give the investor a way to access the yield they are seeking without taking a lot of extra risk.

Hougan: The way DIVA does that is by going 100% long stable, growing dividend companies and 50% short stocks with unstable dividends. Given rising interest rates, is this a good environment for that approach?

Martin: The stocks on the long side should benefit from economic growth and should be able to sustain their dividends. While you might have some interest rate risk in the fund’s utilities exposure, you also have significant exposure to sectors like financials, that will do well in a rising rate environment.

We also have significant exposure to MLPs, which have enjoyed the recent rise in the price of oil. So I definitely think it’s a good environment for the income-producing equities in the portfolio.

Hougan: Talk to me more broadly about your product suite and how it fits into the evolution of factor and smart beta ETFs.

Martin: It’s funny you ask, because when you think of the evolution of something, usually it goes from less complex to more complex. In factors, it’s actually the opposite.

When we launched our funds—which we like to suggest have pure factor exposure, because we’re placing bets on the positive side of the factor and shorting the negative side of the factor—we were essentially the first or second player in the factor space. But ours are some of the more complex factor products out there because we’ve approached things from an academic perspective with the goal of providing a truly uncorrelated set of returns to investors. We believe these strategies provide access to institutional caliber strategies within an ETF vehicle.

Hougan: It seems like your products have been almost ripped from the academic literature on factor returns; it’s really factor investing at its purest. Is that a fair analysis?

Martin: Yes. When Bill DeRoche and I started this company, the desire was to take academic research and put it into an easily accessible product like an ETF.

Hougan: How do these funds fit into an advisor’s portfolio?

Martin: The hedged dividend fund we mentioned earlier is simple: it’s a fixed-income alternative.

But let’s take something different, like our AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL). We know the name is a mouthful, but the product is really designed to be a potential hedge against the equity market. It invests in a basket of low-beta (beta is a measure of a stock's volatility relative to the overall market) stocks and shorts a basket of high-beta stocks; that’s why it’s called anti-beta. When market volatility rises, those high-beta names tend to get really punished by the market, while the low-beta names hang in there, so you get a positive spread return.

As an investor, if you own a strategy like the S&P 500, and you couple that with BTAL, you end up a portfolio that has the potential ability to protect on the downside: When the market is down, BTAL has the potential to be up. However, when the market is up, BTAL has the potential to go down but has shown to mitigate some of this downward pressure historically It’s an asymmetric return. It’s a great way to create a solid risk-and-return profile for an overall portfolio.

For instance, if you pair a 25% position in BTAL with a 75% position in S&P 500, you end up with something that acts a lot like a 60/40 stock/bond portfolio. So if you’re worried about both rate risk in your fixed-income portfolio and high valuations in your equity exposure, you could substitute some of your fixed-income allocation with BTAL to maintain the overall risk/return profile you want while potentially side-stepping those risks.

One of the things we’re doing now is creating and launching ETF managed portfolio strategies like this that use some of our funds. We know a lot of advisors aren’t sure about how to incorporate our products, so we’ve created strategies that use our funds alongside some long-only factor products from iShares and State Street in seeking to create attractive absolute-return strategies. It lets you access the uncorrelated return streams that our products can provide. Investors can find out more about them on our website.

Hougan: If there’s one sentence people should think of when they think of your firm, what should it be?

Martin: The markets don’t always go up. We’re there to help you be prepared.

Before investing you should carefully consider the Fund’s investment objective, risks, charges, and expenses. This and other information is in the prospectus which can be obtained by visiting www.AGFiQ.com. Please read the prospectuses carefully before you invest.

Risks: There is no guarantee that the strategy will achieve its objective. Investing involves risk, including possible loss of principal. There is risk that during a “bull” market, when most equity securities and long only strategies are increasing in value, the strategy’s short positions will likely cause the portfolio to underperform the overall U.S. equity market and such strategies. These securities may be more volatile than a broad cross section of securities, and momentum may be an indicator that a security’s price is peaking. The value of an investment in the strategy may fall, sometimes sharply, and you could lose money by investing in the strategy. The strategy may utilize derivatives and as a result, the strategy could lose more than the amount it invests. When utilizing short selling the amount the strategy could lose on a short sale is potentially unlimited because there is no limit on the price a shorted security might attain. For further risk information, please read the prospectus.

Shares are not individually redeemable and can be redeemed only in Creation Units. The market price of shares can be at, below or above the NAV. Brokerage commissions will reduce returns. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00PM Eastern time (when NAV is normally determined), and do not represent the returns you would receive if you traded shares at other times. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense subsidies and waivers in effect during certain periods. Absent these waivers, results would have been less favorable.

The owners of Shares may purchase or redeem Shares from the Fund in Creation Units only, and the purchase and sale price of individual Shares trading on an Exchange may be below, at, or above the most recently calculated NAV for such shares. AGFiQ Asset Management (AGFiQ) is a collaboration of investment professionals from Highstreet Asset Management Inc. (HAMI), a Canadian registered portfolio manager, and of FFCM, LLC (FFCM), a U.S. registered adviser. This collaboration makes up the quantitative investment team.

Distributor: Foreside Fund Services, LLC