It looks at how, for example, each of the funds will perform when the Fed is in a late-stage tightening cycle or when world trade is growing rapidly.
One of the benefits of investing only through ETFs, says Port, is that you have a good grasp of what you own, because there is no danger of style drift by the managers.
“We spend a lot of time assessing fund positioning in active managers. We look at where things are crowded, whether everyone is in the same names and taking the same style and sector bets, to see where the potential risks are. Even though we are index investors, it is important to understand where the crowded positions are.
“If you combine two or three active managers you have to keep on top of what the style bets are. If you ratchet that up to many holdings across portfolios, there are lots of moving parts. With an index portfolio you have a lot more information.”
The downside of this is you can end up with fewer factors driving performance.
“It doesn’t necessarily mean you get better performance long term but it may reduce your volatility, so it is very much about getting on top of style factors.
“We think about crowding, about different factors and understanding what is driving fund performance,” he says.
Within the firm’s equity holdings, the two key factors playing a role within Nutmeg’s portfolios at the moment are size and value.
The value element stems from Port’s earlier comments about crowding and the weight of money invested in ‘quality’ companies. The size question is more complex.
Says Port: “We are at a distinct point now where QE has reached its limit and the shift is toward relaxing fiscal policy. We have seen this in the UK, Trump is doing it and even the Germans are relaxing fiscal policy.
“That has a dramatic impact on asset classes and it is the reason we are conservative about bonds and positive on equities. Now you have monetary and fiscal policy working together, you are much more likely to get a recovery in growth. It is also why we are happy to have small-cap exposure, although this is largely focused on the US and Japan.”
In the case of Japan, Port says it is the only market in the world where small caps are less volatile than their large-cap counterparts. In the US the reason is twofold: Port wants exposure to the domestic US economy while, in relative terms, the US looks more attractive than its UK counterparts.