A specialized team paired with a standard investment approach drives First Trust SSI Strategic Convertible Securities ETF FCVT; however, a willingness to amplify its equity sensitivity contributes to a volatile profile, supporting a Morningstar Medalist Rating of Neutral.
The team that runs this ETF consists of several portfolio managers and a dedicated trader, all of whom have specialized convertible investment experience. Five members of the team have worked together for close to two decades, including time together at a predecessor firm. The analyst ranks have seen more frequent turnover, with two departures in the past three years and now comprises just one analyst. Their work around predicting ratings changes and equity performance holds some promise, but its efficacy remains to be proven.
The investment process entails initial screening based on standard measures such as liquidity and issue size, followed by further research into more qualitative aspects such as convertible structures, equity valuation, and industry dynamics. The team overlays macroanalysis onto bottom-up research to inform sector and industry weightings as well as the portfolio’s equity sensitivity, and the quant work provides an additional layer of assessment. While the focus is on balanced convertibles, the equity-like allocation can be just as large at times. That combined with a perpetual underweight in the busted allocation makes the portfolio more prone to volatile movements when the equity-like portion balloons and delta shoots up.
Since its inception, this ETF has had a below-average record in downturns while exhibiting above-average volatility, which has dented risk-adjusted returns relative to its convertible bond Morningstar Category peers. Its willingness to take its equity sensitivity wildly higher than its benchmark has translated to larger gains in risk-on environments, such as parts of 2020 and 2021, but also more staggering losses in risk-off conditions, such as 2022. While delta declined in the first quarter of 2022 which helped to curb losses as equities tanked, the managers’ decision to then rotate into growth names in the second quarter proved untimely as those holdings experienced compression. Overall, it’s been a rollercoaster ride for this ETF since its December 2015 inception.

Analyst Rating

A bumpy ride

Analyst

Chiayi Tsui

A standard security selection process and a relaxed approach to managing equity sensitivity result in an Average Process rating.
The investment process combines top-down and bottom-up elements, with macro views serving as influencers of the strategy’s delta (measure of equity sensitivity) and sector weightings. Initial screening of the universe based on liquidity, issue size, and upside potential identifies a smaller group of names that undergo further review. Candidates are then assessed by factors such as convertible structure, equity valuation, and issuer financial strength; securities with the most favorable attributes are selected. The quantitative-oriented approach that incorporates fundamental and technical variables in predicting rating changes or equity performance serves as a supplementary process.
While the team has avoided defaults, security selection hasn’t always contributed, and efficacy at identifying future equity performance through quant work is uncertain. Furthermore, while the focus is largely on balanced convertibles where the potential to participate in price appreciation is greatest, the strategy’s management around equity sensitivity is not particularly disciplined, and portfolio shifts made based on macro-outlook have at times sustained quite considerable losses. Finally, while the use of synthetics—instruments that are issued by banks and that have exposure to equity chosen by the investor—may help to generate returns and provide some diversification benefits, their existence in the portfolio isn’t contributing to a more cohesive whole.

Average

Process

The portfolio managers leading this strategy have dedicated a good chunk of their careers to convertible investing but lack a broader supporting crew that’s available to some of their peers. The strategy earns an Average People rating.
While most members on this team have been teammates for close to two decades—portfolio managers Ravi Malik, Michael Opre, Stephen Wachtel, Florian Eitner plus dedicated trader Lily Yu have all worked together at convertible specialist Froley Revy before it was acquired by SSI in 2009—that level of stability and specialization is not matched in the analyst cohort, which currently consists of one quant analyst, Charles Rambo. While Rambo comes with a formal pedigree and seems to have made some concrete strides in developing quantitative resources to supplement the team’s research endeavors, he is a shop of one lone quant analyst at the end of the day and it’s a tall order to fulfill duties that used to belong to two roles.
Moreover, unlike larger peers who can leverage their equity or high-yield analysts to assist in bottom-up company or industry research, those responsibilities here fall squarely on the shoulders of the portfolio managers themselves, who serve as sector specialists. In this respect, the team’s access to wider resources to support data analytics, bottom-up research, and risk management is yet to match some of its peers.

People

First Trust meets the industry standard for stewardship, but it could do more to align itself with investors. It earns an Average Parent rating.

This is a team-oriented organization that eschews star managers. While exchange-traded funds represent the bulk of the firm's assets, First Trust bypasses the competitive market for low-cost beta funds, instead opting for complex strategies with higher management fees. However, the firm's focus on ETFs for future product development underpins its commitment to tax efficiency and transparency. Some of its thematic strategies appear trendy, but it stands behind them and rarely liquidates funds. 

The firm is a private partnership, controlled by Jim Bowen, the CEO. Many senior managers are limited partners. This ownership structure helps the firm stay focused on the long term and promotes retention, which has been strong for the investment team. The firm has grown considerably over the past decade and is among the largest providers of actively managed ETFs, as well as unit investment trusts. As it has grown, the firm has expanded its investment team and beefed up its technology infrastructure.

First Trust's focus is on educating advisors and providing them solutions. This may benefit investors indirectly, but First Trust could do more to directly align with investors by cutting fees and limiting trendy strategies.

Parent

First Trust SSI Strategic Convertible Securities ETF

FCVT is an actively managed fund of convertible securities from within and outside the US.

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WHEATON, Ill.--(BUSINESS WIRE)--First Trust Advisors L.P. ("FTA") announces the declaration of the monthly distributions for certain exchange-traded funds advised by FTA. The following dates apply to today's distribution declarations: Expected Ex-Dividend Date: April 23, 2024 Record Date: April 24, 2024 Payable Date: April 30, 2024 Ticker   Exchange   Fund Name   Frequency   Ordinary Income Per Share Amount   ACTIVELY MANAGED EXCHANGE-TRADED FUNDS   First Trust Exchange-Traded Fund III FCAL   N.

First Trust Advisors L.P. Announces Distributions for Exchange-Traded Funds

WHEATON, Ill.--(BUSINESS WIRE)--First Trust Advisors L.P. (“FTA”) announced today that the shareholders of First Trust SSI Strategic Convertible Securities ETF (Nasdaq: FCVT) (the “Fund”), a series of First Trust Exchange-Traded Fund IV (the “Trust”), voted at the special meeting of shareholders to approve for the Fund (1) a new investment sub-advisory agreement (the “New Sub-Advisory Agreement”) among the Trust, on behalf of the Fund, FTA, as investment advisor, and SSI Investment Management L.

First Trust Announces Shareholder Approval of New Investment Sub-Advisory Agreement and “Manager of Managers” Structure for First Trust SSI Strategic Convertible Securities ETF (Nasdaq: FCVT)

WHEATON, Ill.--(BUSINESS WIRE)--First Trust Advisors L.P. (“FTA”) announced today that, in light of the anticipated closing of the transaction described below, the Board of Trustees (the “Board”) of First Trust Exchange-Traded Fund IV (the “Trust”) has voted to approve a new investment sub-advisory agreement with SSI Investment Management LLC (“SSI”) for First Trust SSI Strategic Convertible Securities ETF (Nasdaq: FCVT) (the “Fund”), a series of the Trust, subject to shareholder approval. Reso.

Board Approves New and Interim Investment Sub-Advisory Agreements for First Trust SSI Strategic Convertible Securities ETF (Nasdaq: FCVT)

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