Look inside your ETF

Instead of gold, he is putting his clients into hard assets such as real estate and ownership in productive enterprises such as GlaxoSmithKline, Nestle and Unilever. "People are going to keep on cleaning their houses, getting sick and drinking coffee," he says. "They might buy cheaper brands, but this will carry on."

Asset allocation is Mr MacKinnon's focus and he implements the Thurleigh house investment view mostly using exchange traded funds (ETFs) and third party managed funds - there is no stock-picking. Thurleigh accesses its favoured global brands via actively managed funds such as JP Morgan Consumer Trends, Fidelity Global Real Asset Securities and Morgan Stanley Global Brands.

Mr MacKinnon also thinks corporate debt remains very good value because companies are improving their balance sheets - Thurleigh clients are invested in the JP Morgan Strategic Bond fund.

However, he puts the firm's choice of actively managed funds into perspective by pitting them against what clients would have achieved in an ETF.

"The really sad thing is that active managers relentlessly underperform," he says, citing figures from BlackRock showing that 95 per cent of active managers underperformed their index over three years.

"The good guys may outperform by a huge amount," he says. "But we own IUSA, the ishare that tracks the S&P 500 index. It has done better than the active funds that we considered buying. We always consider what we didn't do as well as what we did do."

He says there can be decision-making advantages to holding the index rather than individual shares. "Would I have bought Apple shares four months ago? No. But 10 per cent of the rise of the S&P 500 is due to Apple. Owning the index meant I did not spend time on the choice and did not avoid the choice to buy Apple."

However, he points out that not all indices are perfect and not all ETFs are the same. "People are producing ETFs with only the faintest connection to their indices. They can be expensive and people need to pay attention to what is inside."

He gives the example of water ETFs. "Investors probably think 'water is a valuable resource so we must invest in it'. Holders of ETFs probably think they are investing in global clean water, but the holdings are mostly actually sewage companies."

One of Thurleigh's largest positions is in IEEM, the ishares MSCI Emerging Markets ETF. On the day I met him, this ETF was up 2.92 per cent. He uses this to illustrates why he doesn't really care about tracking error - the risk that the ETF doesn't return the same as the index it follows.

"If yesterday IEEM had an eight basis point failure to track its index it might now be 10 basis points out. For most real individuals who are spending up to 30 basis points doing a transaction, does this matter?"

He accepts that synthetic ETFs - that replicate the performance of an index using derivatives such as swaps - will have a better tracking error, but he says this would not be his reason for picking a synthetic ETF over a physical. Rather, he would use synthetic ETFs for indices such as UK Smaller Companies that are difficult to construct with physical stocks, while using physical ETFs that hold the underlying stocks for indices that track developed markets.

"I'm actively pro synthetics in some cases," he says. "But there is no reason to track the FTSE 100 using synthetics. We took a £30 million position in the iShares FTSE 100 and knew that they could have delivered those stocks to us in physical form."

There is another advantage of physical replication and that is the ability to earn extra money from lending out the stocks in that index. "IEEM or the more exotic ETFs can extract very high rent when they lend the stock out," he says. "Stock-lending thrills me - it's just fantastic."