Yuri Khodjamirian, chief investment officer at Tema ETFs, discusses with Opto Sessions Tema’s approach to actively managing thematic ETFs, including the importance of fund managers with a financial background, the benefits of active management and the process Tema uses to build its funds.
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Yuri Khodjamirian is chief investment officer (CIO) at Tema ETFs, a newly launched platform offering actively managed thematic ETFs.
Prior to joining Tema, Khodjamirian spent 10 years at Majedie Asset Management, where he grew the UK Income Fund from £300m to a staggering £1.5bn.
At Majedie, Khodjamirian’s team gained their edge by spending time on the shop floor of the companies they invested in. This enabled them to get a clear understanding of how their businesses operated, the returns they generated on their assets, and — for Khodjamirian, most importantly — the relationship between their valuation and their business performance.
This approach has been carried through into Tema, where Khodjamirian again leverages his biotech knowledge to challenge fund managers on the ins and outs of the businesses they are considering investing in.
Active management in secular themes
Tema’s focus is on multi-decade, durable themes as opposed to trends.
“What you tend to see a little bit in the marketplace is people focusing on trends, like work-from-home, Donald Trump or meme stocks.”
Khodjamirian describes four key criteria Tema uses to determine the themes for its ETFs: differentiation, under-penetration (what he calls the “white space” in the market), compelling long-term structural changes, and expert leadership: “We have to believe that an expert can add value to this particular theme”.
Active management is also key to Tema’s approach. Index-tracking ETFs are “the easy approach” to setting up an ETF. But there are two main reasons why they are unsuited to thematic investing.
The first of these is that themes are inherently forward-looking, whereas indices are inherently backward-looking. “The winners of tomorrow are not the winners of today”, as Khodjamirian puts it.
The second is that themes tend to be “risk-on” bets, with widely disparate returns between different companies. “Passive management just doesn't manage to play that dispersion-of-returns piano, which is what active management does much better,” says Khodjamirian.
“The winners of tomorrow are not the winners of today.”
He also observes a trend for the same few stocks to dominate index-based funds; the fifty or so stocks that comprise an artificial intelligence (AI) ETF will often overlap significantly with those that comprise a robotics ETF, for example. For Khodjamirian, that’s not what thematic ETFs are about.
“It’s about precision of exposure. You want an individual constantly looking and understanding: ‘How is this thing working? How is it changing? And what is the most optimal exposure of stocks I can give you?’”
How to build a thematic ETF
Tema uses a four-stage process to create its ETFs, such as the Tema Luxury ETF [LUX] or the Tema American Industrial Revolution ETF [RSHO].
1. Idea generation
Fund constituents are selected through top-down idea generation. Tema’s goal here is not, Khodjamirian says, to simply define a theme and then weigh its constituent players, but to ask “is this the perfect thematic exposure for this theme right now? And how is that going to change in the future, or not?”
2. Bottom-up security selection
The second state is bottom-up security selection, where the theme is refined by weeding out the underperformers within it. While every fund manager approaches this differently, criteria that Khodjamirian and his team look for are strong insider ownership of stock and strong asset turnover. Security selection focuses on a strong balance sheet, a solid operating base for downside protection, favourable valuations and a competitive edge for upside returns.
3. Portfolio construction and position sizing
Tema has developed a system for sizing its positions based around three possible tiers, with a maximum and minimum exposure to any given stock. This is partly to counteract the behavioural biases that can creep into active management: “People like to buy little tiny positions because they want to have it in their portfolio. But by the time they build conviction in this position, the alpha is gone”.
4. Risk management
Risk management, in the form of exposure monitoring and scenario analysis, involves Khodjamirian, in his position as CIO, challenging his fund managers on a weekly basis on the rationales for their portfolio allocations. Of course, fund managers have already applied their own risk management approaches prior to this stage; Khodjamirian compares the system to having two parachutes when jumping out of a plane.
Multiple layers of risk management, including fund manager risk management, CIO oversight and operational oversights, give Tema greater confidence in the security of its investments.
Domains of expertise
Perhaps unsurprisingly, Khodjamirian’s prediction for the next big thing is the rise of actively managed thematic funds.
“This is the mission that I've bought into. What I want to deliver to the market is these actively managed thematic funds that haven’t existed before,” he says. Active management, Khodjamirian believes, is “not talked about as much as it should be”.
While active management by experts lies at its core, Khodjamirian resists comparisons between Tema’s approach and that of ARK Invest. ARK’s fund managers don’t typically have a background in finance but are instead domain experts in the themes in which they invest.
“This is the mission that I've bought into. What I want to deliver to the market is these actively managed thematic funds that haven’t existed before.”
Tema, while employing dedicated, expert fund managers, differs from ARK in preferring them to have a background in finance.
Khodjamirian explains why: “Fund managers and people who have been working in the investment world, even on the sell side, just sort of get how you go from a driver to a stock return.”
“In my view, you really need someone who’s been in the investment world… through different cycles, through different interest rate environments and so on.”
On the other hand, Khodjamirian believes that good investment professionals are able to pick up the fundamentals of value drivers within a space relatively quickly.
“They just have this hunger for learning, meaning that they can just pick up a topic. I’m often amazed at how, overnight, you’re suddenly an expert on whatever you need to know.”
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