John Soutsos explains why he thinks using ETFs as a discretionary portfolio manager is "cheating"
With nearly 40 years in the industry under his belt, John Soutsos has defined his way of doing things. The Portfolio Manager at IPC Securities Corporation in Mississauga has built a model core portfolio that invests directly in a select group of 20-30 US-listed stocks. Soutsos refuses to use equity ETFs in any client account over $100,000, arguing that his clients are paying him for his ability to make discretionary decisions.
Soutsos explained why he considers a more concentrated approach to be more effective in capturing upside. He outlined some of how he built his model and highlighted key areas of recent outperformance against other indices. He explained what he sees as some of the hidden drawbacks of ETFs and index-tracking strategies while also noting how he manages the issue of valuations now.
“To justify the fee I am paid, I should be doing what a discretionary Portfolio Manager does: assembling a stock portfolio. ETFs are passive instruments and if, if somebody is using ETFs actively in their principal mandate in managing client money, they're essentially overcharging,” Soutsos says. “So if you say, as a portfolio manager, I want exposure to this particular sector it should be incumbent upon you to identify the best securities in that sector. That's what you're being paid to do. If you're just choosing an ETF to represent the entire sector, then you're not exercising what you've been trained to do. I consider it a cheat.”
Soutsos notes that he will use model ETF portfolios for accounts below $100,000 in value, purely because a certain amount of capital is required to efficiently operate his direct stock buying model. When accounts go above that threshold, though, they go into Soutsos’ Med-Wealth Defensive Growth portfolio.
That portfolio holds only 20-30 stocks. Soutsos subscribes to the belief articulated by Warren Buffett that too much diversification caps upside potential. He believes that some degree of concentration is necessary for wealth building. Beyond management fees, Soutsos’ primary argument against passive ETFs is that, “they’re too diversified.”
Without giving away his “secret sauce,” Soutsos notes that he assesses a stock’s quality along similar criteria articulated by Jeremy Grantham. He uses tools like the Sortino ratio to measure risk-adjusted return and seeks demonstrations of relative strength in a stock. He argues, too, that US exposure is all that’s required. He believes global diversification hasn’t proven resilient in the face of financial crises while the US, despite its flaws, remains the most attractive place for capital in the world.
For those clients more interested in wealth preservation, rather than accumulation, Soutsos offers a more balanced model where his stock portfolio is balanced against a roughly 35 per cent allocation to fixed income. He notes that he will use fixed income ETFs as his expertise lies in equity selection. Within that bond side, though, he’ll use ETFs to offer more specific forms of exposure and duration that suit his clients’ needs, rather than buying a broad index product.
On a philosophical level, Soutsos pushes back against the idea that investors now need advisors just to keep them wealthy. Accumulation and growth, he argues, are still necessities in an investor’s plan and growth that outpaces inflation is essential over the long-term. Moreover, he cites his own fund’s performance relative to other major market indices at volatile periods to demonstrate that a concentrated equity portfolio can help preserve wealth.
The above chart shows volatility through April of this year, when President Trump’s “liberation day” sent markets into a temporary correction. Soutsos does not claim to have expected this move down, but he notes that the arrival of DeepSeek in February made him see a trend change in the market away from US AI and semiconductor stocks. He therefore de-risked the core portfolio and shifted into more defensive stocks, staying in those positions until the second market dip around April 21st. At that point he added risk again and rode the market upswing.
That market upswing has seen valuations on US stocks rise back to very high levels. While he buys that expensive market directly through stock purchases, Soutsos argues that valuations have been a perennial issue. He manages them through those same metrics of relative value and risk-adjusted return, while also using pullbacks in the market to capture opportunity. He notes that valuations often remain high for extended periods, longer than an investor can sustain being out of the market for. That kind of thinking and operation is what, in Soutsos’ view, clients expect from a discretionary portfolio manager.
“If you're a licensed individual in this industry, and you hope to survive competition, you need to move along the same lines,” Soutsos says. “And if you're not prepared to move along the same lines, because you don't have the interest and you don't have the expertise or both, then you seriously have to focus in on perhaps getting clients into private wealth solutions, as opposed to ETFs or mutual funds.”
