Toroso Asset Management uses exchange traded funds to build custom portfolios for its clients. As a professional asset manager, its ETF picks must meet various tests of quality and probability of reaching their objectives.
The New York-based firm has developed three strategies to help achieve its clients’ goals: wealth preservation, growth of capital and providing income.
Portfolio manager Daniel Weiskopf recently offered a look at how Toroso, which manages about $370 million, selects ETFs for clients’ portfolios. Below, in his own words, are his three top ETF picks for the months ahead and reasons for selecting them:
TrimTabs Asset Management, through its actively managed portfolio strategy called the TrimTabs All Cap U.S. Free-Cash-Flow (TTAC), seeks alpha through stock selection using a quantitative and disciplined approach to quality screens focused on cash flow and stock buybacks. The combination of balance sheet discipline, free cash flow and buybacks in the U.S. is important because skeptics might point out that buybacks in 2018 have eclipsed the $589 billion high in 2007 and overlook these stocks’ strengths in free cash flow and their balance sheets.
Logically, buybacks are most effective when implemented without leverage and through free cash flow because growth in EPS is both of higher quality and thought to be more sustainable. However, such research requires old-school due diligence of capital allocation and a deep understanding of individual businesses.
The TrimTabs portfolio managers run stocks in the Russell 3000 through their quality screen processes to look for companies with strong balance sheets and debt reduction, predictable six-month free cash flow, and whose share count is shrinking through company buybacks. They then tweak the portfolio equally weighted to manage sector risk and individual stock ownership to around 1%, or 100 names. As a result, while the aggregate technology exposure is about 26%, it is broadly allocated across about 25 companies.
The fund’s one-year and year-to-date performances are up 23.6% and 5.8%, respectively. As with any actively managed strategy, there is some subjectivity. However, at Toroso we believe that 20-plus years of experience should count for something.
Saba Closed End Fund (CEFS) is an actively managed ETF focused on the $230 billion closed-end fund market. Activism in corporate America is a well-known approach, but it is not institutionalized in the 500 closed-end fund space and arguably part of the reason why discounts are so often acceptable by the market. Saba, a $700 million institutional hedge fund firm, entered the ETF market in March 2017 and does deep research on discounts. We think Saba with its ETF could become the new “sheriff in town” in the closed-end fund space.
For years, many closed-end funds came public promising retail investors great yields off leveraged returns and advisors’ nice front-end paydays. Then, many of these funds stagnate under leverage. Don’t get me wrong — leverage can be a good thing when it is managed correctly and many closed-end funds are advantaged by permanent capital. However, in comes Saba with a carrot-and-stick approach to push for narrowing the 11.6% discount. The fund has an SEC dividend yield of about 8.5%.
We think the Saba solution at $25 million in assets is a great example of how the ETF market is an evolution spawned by a revolution. Fees in the closed-end fund space are high and so are the fees associated with these two funds, but investors should also know that in the case of SABA much of the fee is not paid directly to the firm. Two last points: while Saba is leveraged, they also have a hedge on interest rates. Nothing is free, but again, where leveraged is managed and a discount on the portfolio is at 11.6%, near a low, investors are well compensated to be patient to see some of the discount get narrowed.
At Toroso Asset Management, we are always looking for ETFs to help us hedge inflation as part of our All Weather Plus (wealth preservation) portfolio. We have primarily used physically backed commodities like SPDR Gold Shares (GLD) or GraniteShares Gold Trust (BAR). We tend to avoid futures-based commodity products due to the decay associated with rolling the futures.
One of our new ideas for oil exposure without futures is the Pickens Oil Response Index (BOON), an ETF designed for investors seeking long-term exposure to the potential rise in the price of oil. The index is constructed with equities that have a high correlation to the price of oil but not necessarily just energy companies. The end result: a basket of equities that provide exposure to the price fluctuations of oil with less volatility and can be suitable for buy-and-hold investors. The ETF was launched in early 2018 and has performed quite well, up over 5% since inception.
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