Experienced managers lead the First Trust Institutional Preferred Securities and Income ETF FPEI, but a relaxed approach and spotty downside protection leave the process wanting. The strategy earns a Morningstar Medalist Rating of Neutral.
This strategy—one of a few under Stonebridge Advisors (a subadvisor to First Trust), an asset manager that specializes in preferred and hybrid securities—is run by four managers whose diverse experience includes trading, portfolio management, credit research, and analytical tool development. Many of them have been with the firm since before this exchange-traded fund's inception, but their long tenure hasn't translated into greater dedicated investment in this fund. A small supporting cast rounds out the team.
The team's process blends macro and fundamental analysis with screening tools to find issues with attractive credit traits and structures. Efforts to refine data fields and tools are intended to improve analysis, but security selection hasn't been consistently additive. The managers consider what they believe to be the salient risks in portfolio construction but don't set any explicit guardrails, adopting a rather relaxed attitude in managing those risks. Overall strategy execution has led to mixed results.
A shorter duration profile throughout 2022 and an emphasis on fixed-to-floating rate securities, for instance, led to relative outperformance as the year turned out to be one marked by rapidly rising rates, and the fund was a top-decile performer in the preferred-stock Morningstar Category that calendar year. Its losses are sometimes exacerbated in stressed environments, however. In the first quarter of 2023, as the market got shaken by banking woes, this fund landed in the bottom 10% of its peer group, illustrating the direct negative effect of financial system whims.
Such impact is hard to avoid for preferred-focused strategies, as banks and financial institutions make up the bulk of issuers of preferred securities. Indeed, the portfolio breakdown from an industry perspective has remained rather constant with banks accounting for about half of assets, and insurance and utilities representing another 25%. The portfolio's other features are changing, though: Duration is getting extended as the managers believe that rates have neared their peak, and credit quality is migrating upward because of recession concerns. Investment-grade securities accounted for 75% of the portfolio in first-quarter 2023, up from 68% one year prior. Whether that's enough protection for the next rough patch is anyone's guess.

Analyst Rating

Vulnerable to banking woes.

Analyst

Chiayi Tsui

This research-driven approach benefits from efforts to develop tools to be more systematic but hasn't led to particularly strong security selection. That and inconsistent downside protection warrant an Average Process rating.
The team uses a blend of macro, fundamental, and technical analysis to construct a portfolio that it believes mitigates downside risk and adds alpha. Macro views are developed based on the assessment of interest rates, yield curves, global economic trends, and the political and regulatory environment. The managers identify the biggest risks that will affect the portfolio and enact measures that should lessen those risks. Fundamental analysis ensures that all issues are approved from a credit standpoint before they become portfolio holdings. Technical analysis is employed to gauge liquidity and to monitor flows, market supply and demand, and relative valuation to find superior security structures and features.
Improvements from a tool perspective have supposedly made the process more systematic over time, and the team has continuously refined data fields used in their analysis, but results have been mixed and the team hasn't been able to demonstrate particularly strong fundamental research chops. While the hire of experienced senior analyst Jeff Bernstein should be additive in bolstering the team's financials sector expertise, a somewhat casual investment approach lacks rigor in limiting risk.

Average

Process

The managers running this strategy have plenty of experience, and there is good stability among their ranks, but the same can't be said for the supporting cast, and the alignment of interests with shareholders is lacking. The strategy earns an Average People Pillar.

Chief executive officer Scott Fleming is the figurehead here and has decades of experience investing in preferred securities, having previously run another preferred-securities-focused asset manager before founding Stonebridge in 2004. Three other individuals join him in managing this strategy: chief investment officer Robert Wolf, who has two decades of fixed-income experience in portfolio management and credit research; chief strategist Eric Weaver, who oversees the development of proprietary tools to facilitate trading and other parts of the investment process; and head of credit research Angelo Graci, who directs the firm's research efforts and brings preferred-specific sector knowledge. They receive support from one risk analyst, three traders, and three research analysts (one of whom is Fleming's son). 

While the managers bring tenure and experience to the table, their personal investment in this ETF remains low. Each manager has invested no more than $50,000 in the fund except for Fleming. Moreover, preferred-specific experience among the supporting crew remains modest, and departures in the lower ranks have detracted from the overall tenure of the team, whose two newest members joined only in 2022.

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 Institutional Preferred Securities & Income ETF

FPEI is actively managed to provide current income and total return by investing in global institutional preferred and income-producing debt securities.

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WHEATON, Ill.--(BUSINESS WIRE)--First Trust Advisors L.P. ("FTA") announces the declaration of distributions for 133 exchange-traded fund(s) (each a “Fund,” collectively, the “Funds”) advised by FTA. The following dates apply to today's distribution declarations: Expected Ex-Dividend Date: March 21, 2024 Record Date: March 22, 2024 Payable Date: March 28, 2024 Ticker Exchange Fund Name Frequency Ordinary Income Per Share Amount ACTIVELY MANAGED EXCHANGE-TRADED FUNDS   First Trust Exchange-Trade.

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News for First Trust Institutional Preferred Securities & Income ETF ETF (FPEI)