etfLIVE’s ‘seasoned investor’, Louis Gargour, explains his views on ETFs

Louis Gargour

The relationship between hedge funds and ETFs is a complicated back story for our Proposer of the motion in May’s etfLIVE’s “Big Debate”.

Gargour, ably supported by Helen Thomas from BlondeMoney, proposes the motion that this house believes ETFs will ultimately increase instability in the capital markets.

“My views on ETFs are that they have a place in portfolio construction and are a building block of modern portfolios enabling a range of different exposures which are quite useful,” Gargour says. For him, the conversation is more about the relative merits of active over passive management.

“My background spans 35 years of professional experience in financial markets” Gargour says. “I have been a short and long active investor since 1985 and I have basically seen the maturation and evolution of the equity, fixed income, and emerging markets, this has involved the creation of a variety of derivatives, indices, and most importantly ETFs,

“I have been involved in trading indices and trading ETFs throughout my career, finding them quite useful, specifically because of the manner in which they are constructed.”

Gargour launched LNG Capital in 2007, as a European focused fixed income actively managed fund management company, which employs a sector and thematic top down approach combined with deep underlying research on individual securities. The fund targets low volatility returns of 10-15 per cent per annum, has a 15-year track record and assets of USD250 million.

“ETFs give you the ability to be long and short so an active manager can and should use ETFs,” Gargour says. “They also benefit from high levels of “liquidity” however typically are retail investors, as such one of the characteristics we monitor is the liquidity in the ETFs, vis-à-vis the underlying investments.

“The conversation is not about ETFs versus not ETFs – it will be more around active management against passive investment. Should you be looking at ETFs as an instrument in a well-constructed portfolio?

“One of the problems I have is that they have only seen one-way traffic since they were created and while they have grown, we have seen no seismic shifts in investors’ sentiments which would lead to ETFs assets falling. There has been no shock that would stop them trading.

“But if supply exceeds demand in a dislocated market for a period of time, due to their construction ETFs will have to suspend trading as they will offer more liquidity than the underlying constituents or markets, and that is a reality which is not yet being taken into account.”

Gargour is concerned that if everyone starts to sell their ETFs, the ETFs themselves will have to sell underlying securities into a market that will not absorb them, therefore it’s likely that there is a suspension or halt of the pricing of ETFs. “And without prices, ETFs cannot provide liquidity. It’s all about behavioural science and fear and greed and there could be a run on ETFs, like a run on the bank. And if they suspend ETFs it could have a cataclysmic effect on markets – I may sound like a ‘harbinger of doom’, however , all we have seen is buying of these reasonably new financial instruments, and if there is a mismatch between the underlying and ETF, that could be a recipe for disaster,” Gargour concludes.

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