Changebridge Capital dials up active management offering in ETF landscape
The latest new ETF providers are bringing a ‘quantamental’ approach to ETF investment as Ross Klein (above right), Chief Investment Officer and Vincent Lorusso (above left), Portfolio Manager at Changebridge Capital describe their technical data-driven approach to stock selection, combined with fundamental analysis.
The pair has launched CBLS and CBSE. The Changebridge Capital Long/Short Equity ETF (CBLS) features a concentrated portfolio of long and short positions, with the aim of each position in the portfolio generating risk-adjusted alpha.
The firm writes that by taking long positions in companies the managers believe will rise in price, while taking short positions in companies whose stock the managers believe will fall in value, the strategy seeks to achieve long-term capital appreciation while minimising volatility. CBLS has a small and mid-cap focus and integrates an ESG mindset into the investment process.
The Changebridge Capital Sustainable Equity ETF (CBSE) utilises a long-only approach in its concentrated portfolio. Its all-cap focus aims to select securities misunderstood or overlooked by the market to generate risk-adjusted alpha. CBSE is designed with a sustainability mandate, and as such assesses the environmental, social, and governance attributes of all securities considered for inclusion in the portfolio.
Klein explains that the pair have come from the actively managed mutual fund world. “We founded Changebridge Capital earlier this year and Vince and I had an opportunity to ask ourselves ‘what is the ideal portfolio in the ideal structure – what would it look like?’”
Klein says that when the pair landed on the ETF structure, they found the opportunity very compelling for shareholders. “We have had experience in lots of different structures but the SEC’s 6c-11 rule has opened more active managers to the ETFs fund structure,” he says. “We can apply a truly active approach to that structure.”
Lorusso says: “We have spent decades in the industry, but the rule change introduced a new structure for our investment process, giving us a clean slate approach to what would suit investors the best.”
“We have found it to be exhilarating going home and knowing we are putting forth this effort to give shareholders the things they deserve such as intraday liquidity, and transparency which should be table stakes,” Klein says.
The firm’s equity long/short strategy (Ticker: CBLS) is among the industry’s first actively managed alternative ETF Lorusso says.
“More financial advisers will become aware of the range of investment strategies that will become available in the ETF structure. In the US, ETFs have been dominated by large firms who offer passive products, but we could see that begin to change.”
The pair dismissed thoughts of launching a semi-transparent ETF model because they felt committed to transparency.
Lorusso says: The semi-transparent structure offers a decent bridge to get traditional funds into the ETF space, but we have launched new strategies capable of providing shareholders with daily holdings transparency.”
Klein explains that the firm’s ‘quantamental’ structure means they use quantitative tools to identify inefficiencies. “If you can picture a bell curve, the most efficiently priced stocks are in the middle of that bell curve and on the tails are the securities with a mismatch between their fundamentals and how the stock is performing. We use these tools to identify securities on the tails, companies that are misunderstood, and we apply a rigorous fundamental analysis to those securities.”
He explains: “It is our job as asset managers to look under as many rocks as possible, but applying quantitative tools into the process enables the team to focus their attention on the most interesting rocks – those with the greatest potential for inefficient prices. Their fundamental research is ultimately the catalyst for considering a security for one of the portfolios.”
The firm also focuses on ESG attributes specifically focusing on companies that are not necessarily covered by ESG rating agencies. Klein says: “There are companies who are doing the right things and taking steps to improve the environment, taking care of their employees and their customers, and when we apply a rigorous ESG mindset and filter to all of our questions, we become excited about what we are learning through that analysis.”
The pair believes that large quantitative ESG data providers are focused on large cap companies, but the investment world has small and mid-sized firms that are committed to all of their stakeholders.
Lorusso says: “Ask a manager about their sustainability initiatives and they are often enthusiastic because they know they are not getting credit for those initiatives. This highlights the opportunity for us, as these companies are not getting credit for some of these objectives today, but we think they will over time. Companies that are better managed tend to have lower employee turnover, higher customer loyalty, and stronger governance structures. This is an exciting area in active management, because these insights are yet to be captured by existing ESG data providers, or the ESG investment vehicles that are prevalent in the marketplace today.”
CBLS has an expense ratio of 1.7 per cent, and CBSE has an expense ratio of 0.85 per cent.