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special report www.etfexpress.com August 2018 Guide to ETFs for Wealth & Asset Managers ETFs keep up their appeal Low cost core ETFs dominate Enhanced income hits the spot
special reportwww.etfexpress.com
August 2018
Guide to ETFs for Wealth & Asset Managers
ETFs keep up their appeal
Low cost core ETFs dominate
Enhanced income hits the spot
GUIDE TO ETFs Special Report Aug 2018 www.etfexpress.com | 2
CONTENTS
Managing Editor: Beverly Chandler, [email protected] Contibuting Editor: James Williams, [email protected] Online News Editor: Mark Kitchen, [email protected] Deputy Online News Editor: Mary Gopalan, [email protected] Graphic Design: Siobhan Brownlow, [email protected] Sales Managers: Simon Broch, [email protected]; Malcolm Dunn, [email protected]; Sales Manager, Property Funds World: Matthew White, [email protected] Marketing Administrator: Marion Fullerton, [email protected] Head of Events: Katie Gopal, [email protected] Chief Operating Officer: Oliver Bradley, [email protected] Chairman & Publisher: Sunil Gopalan, [email protected] Photographs: Shutterstock Published by: GFM Ltd, Floor One, Liberation Station, St Helier, Jersey JE2 3AS, Channel Islands Tel: +44 (0)1534 719780 Website: www.globalfundmedia.com
©Copyright 2018 GFM Ltd. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.
Investment Warning: The information provided in this publication should not form the sole basis of any investment decision. No investment decision should be made in relation to any of the information provided other than on the advice of a professional financial advisor. Past performance is no guarantee of future results. The value and income derived from investments can go down as well as up.
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In this issue…03 ETFs continue to appeal to wealth managers and their clientsBy Beverly Chandler
06 Enhanced income strategy provides income and reduces volatilityInterview with Morgane Delledonne, BMO Global Asset Management
08 Low cost core ETFs earn Lyxor boom yearInterview with Adam Laird, Lyxor Asset Management
GUIDE TO ETFs Special Report Aug 2018 www.etfexpress.com | 3
ETFs by net new assets, which collectively gathered USD105.43 billion during 2018.
The iShares Core MSCI EAFE ETF (IEFA US) on its own accounted for net inflows of USD18.07 billion.
It appears that ETFs asset growths are still driven by new investors arriving in their masses, both from the institutional arena and the private client pool. This is particularly true in the UK, where ETFs are beginning to penetrate the IFA market, despite structural issues that make it, in some cases, hard for them to offer them.
Last November 2017 saw the ETF Securities business being split up and sold off, with the Canvas part going to the UK’s largest investment manager, Legal & General Investment Management.
Market nerves, trade wars and Brexit appear to have had their impact on the apparently unstoppable growth of ETFs across the world, but the ETF phenomenon is still impressive, despite the first signs of outflows in major markets.
Globally, ETF data provider ETFGI reports that ETFs and ETPs gathered USD8.69 billion in net inflows in June. While this figure represents the lowest monthly amount of inflows since January 2014 it does mean that that at the end of June 2018, the global ETF/ETP industry was still sizeable, with 7,430 ETFs/ETPs, with 14,237 listings, assets of USD4.986 trillion, from 376 providers listed on 70 exchanges in 57 countries.
And the data shows that the majority of these flows can be attributed to the top 20
ETFs continue to appeal to wealth managers and
their clientsBy Beverly Chandler
OVERV I EW
GUIDE TO ETFs Special Report Aug 2018 www.etfexpress.com | 4
OVERV I EW
Progeny Asset Management, said: “The whole Progeny ethos is customer-led and this is an example of that. We know investors and their advisers need diversified upside exposure and yield, but also wish to understand the downside risks. They expect this in a modern cost-effective and transparent structure.”
And while many of the wealth managers who do use ETFs are sticking with them for exposure to core major markets within their clients’ portfolios, this last year has seen the launch of a wide range of ETFs from those focusing on political policy change, to gender issues or augmented reality.
Top demand from investors is for Environmental, Social and Governance (ESG), Socially Responsible Investing (SRI) or Impact Investing ETFs as investors increasingly appreciate that no longer does investing ethically mean you have to lose some return.
Studies show that the G, the governance in ESG, can in fact mean that returns improve as well governed companies tend to achieve better results.
Using ETFs as a route to including ESG factors has also been studied by State Street Global Advisors, the asset management arm of State Street Corporation, whose latest research that reveals that 83 per cent of institutional investors and wealth managers expect flows into ESG ETFs to increase between now and 2023. Just over one in five (22.5 per cent) anticipated a dramatic rise.
The largest factor behind this growth was increasing demand from investors, followed by an overall increase in demand for ESG strategies, which accounted for 28 per cent of respondents. One in four (25 per cent) say demand for ESG ETFs will be driven by regulatory changes that make those strategies more appealing.
As companies are more regulated to ensure they are complying with environmental, social or governance issues, they will have to change their practices and the investor, whether directly or through an ETF, will have a chance to be part of that process.
ETFs are a useful tool in the wealth managers’ armoury and the growth of their assets demonstrate their appeal for advisers and investors alike. n
At the time, head of UK Retail at LGIM, Simon Hynes, commented that the purchase would enable LGIM to bring ETFs to the UK’s IFAs and wealth managers.
“IFAs have not yet adopted ETFs in a great number in the UK because of platform access issues which came out of the fund world, rather than the listed world, but post RDR, we are seeing an uptick in investment trusts and the same thing will happen with ETFs,” Hynes said at the time.
Many UK IFAs, particularly those without direct stockbroking facilities, have struggled with ETFs but one sector that does like them is, of course, the robo-advice sector. Here the aim is to offer broad baskets of portfolios at low cost and entirely through using ETFs.
Writing for the London Stock Exchange on the advantages of ETFs for financial planners, Alan Miller, Founder and CEO of SCM Private, writes: “There is never a completely ‘free lunch’ in investments but ETFs used sensibly are about as close as you can get. Not just because there is significant evidence that over time, simply as a function of cost, an index fund will produce more performance at less cost and with lower volatility than a conventional active fund.
“Of course, there will be exceptions but the odds definitely are working in investors’ favour when using ETFs. In addition, there are significant advantages particularly in today’s volatile markets of knowing the price before you deal rather than after.”
And there have been other start-ups within the wealth management and IFA arena, built entirely upon ETFs. Earlier this year saw Progeny Asset Management launch a multi-asset ETF solution for investors seeking efficient upside exposure and yield.
Their Optimised Passive Income 60/40 is designed for investors who wish to have exposure to a range of global asset classes and a target yield of 3 per cent a year but with modelled annual drawdown in any 12-month period, not expected to exceed 7 per cent.
Progeny writes that this will be implemented via exposure to up to 14 industry-leading iShares ETFs and this product will be available via financial advisers only, not direct to clients.
At the launch, Ian Hooper, Director of
Precision engineering with BMO Enhanced Income Equity ETFs
© 2018 BMO Global Asset Management. All rights reserved. Issued and approved by BMO Global Asset Management, a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority. CM17579 (08/18) UK, IE
For professional investors only
Learn moreVisit us at bmogam.com/enhanced-income-etfsor call us on 020 7011 4444
Telephone calls may be recorded.
BMO Global Asset Management (EMEA)
@BMOGAM_UK
Our new Enhanced Income Equity ETFs offer equity exposure to three major market indices, utilising covered call options to provide an enhanced, sustainable yield and smoother return profile than their respective index.
BMO ETFs are carefully constructed to target desired levels of income and risk, helping you achieve diversification and stability of income in your portfolio with precise investment engineering.
Capital is at risk and investors may not get back the original amount invested.
CM17579 ETFs Enhanced Income_v1.indd 1 09/08/2018 16:40:19
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BMO Global Asset Management has a proud heritage in developing index linked products. It launched its first ETF in Toronto in 2009 and now has over 100 ETF listings globally. The firm is the second largest ETF provider in Canada. BMO Global Asset Management has CAD48.4 billion (as of April 2018) assets under management across its Systematic and ETF strategies.
Morgane Delledonne, ETF Investment Strategist at BMO Global Asset Management, explains that the firm’s Enhanced Income Equity Strategy has proved particularly popular in recent years. The strategy has been running in the UK for a year and is implemented by selling (writing) index call options against part of the equity portfolio, which replicates one of the regional stock indices (US, UK and eurozone).
Delledonne explains that by writing call options against an equity index, they forfeit some potential upside participation in exchange for an immediate additional cash flow over and above what would be received by simply holding the stock. Approximately half of the portfolio serves as collateral for the option writing strategy, and the other half fully replicates the underlying index.
The strategy is most likely to outperform in bearish, non-directional and slightly rising markets. Conversely, the strategy underperforms in a strong market rally.
Over the long-term, the strategy provides equity market exposure with greater income and lower volatility.
“We are currently seeing investors observing that volatility will increase in the medium term due to a combination of factors, which shows that there will be a need for more defensive strategies but also that higher volatility means we will be able to get a higher premium from selling
call options on the portfolio so we target to increase the yield from 2 per cent to 3 per cent in the medium term.”
The product is popular with investors seeking income in the low interest rate environment which still exists, despite central bank interest rate increases in the US and the UK. “It offers an additional income stream that doesn’t increase risk and lowers the volatility because the option premium is diversifying away from traditional equity investing,” Delledonne says.
“At BMO in the UK we are focusing on providing a wide range of income solutions, and this innovative product democratises a strategy that has been used by institutions for a long time so it is quite timely.”
Delledonne has noticed that in the UK and across Europe, the use of ETFs is growing. “Now we have strategies that are performing well and clients are increasingly looking at long term allocations not just tactical.
“This is a long-term investment, reducing the risk of the overall portfolio and saving you some space to go for a more conviction trade. ETFs are now useful for tactical and short-term allocations as well so they have a broader use than in the past.” n
For professional investors only. Capital is at risk and investors may not get back the original amount invested.Shares purchased on the secondary market cannot usually be sold directly back to the Fund. Secondary market investors must buy and sell ETF Shares with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current Net Asset Value per Share when buying ETF Shares and may receive less than the current Net Asset Value per Share when selling them.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.
© BMO Global Asset Management. All rights reserved. Issued and approved by BMO Global Asset Management, a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority.
Enhanced income strategy provides income and
reduces volatilityInterview with Morgane Delledonne
Morgane Delledonne, ETF Investment Strategist at BMO Global Asset Management
BMO GLOBAL ASSET MANAGEMENT
This communication is for professional clients only.This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets In Financial Instruments Directive 2004/39/EC. These products comply with the UCITS Directive (2009/65/EC). Lyxor International Asset Management (Lyxor ETF) recommends that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID in English are available free of charge on www.lyxoretf.com, and upon request to [email protected]. Lyxor International Asset Management (Lyxor AM), societe par actions simplifiee having its registered office at Tours Societe Generale, 17 cours Valmy, 92800 Puteaux (France), 418 862 215 RCS Nanterre, is authorized and regulated by the Autorite des Marches Financiers (AMF) under the UCITS Directive and the AIFM Directive (2011/31/EU). Lyxor ETF is represented in the UK by Lyxor Asset Management UK LLP, which is authorised and regulated by
the Financial Conduct Authority in the UK under Registration Number 435658.
‘Source: Lyxor International Asset Management. Based on the average TER reduction across 16 Lyxor Core ETFs. TER data from Bloomberg as of March 2018
With TERs from just 0.04%, our Core ETFs offer the lowest-cost portfolio building blocks in Europe, up to 40% cheaper than the rest1*
Cutting costs doesn’t mean compromising. We stick to mainstream exposures, use physical replication and avoid securities lending. So for a rock solid core, take a look at Lyxor.
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Rock solid funds from one of Europe’s largest ETF providers
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Low cost core ETFs earn Lyxor boom year
Interview with Adam Laird
than we were before,” Laird says.“There has definitely been a much higher
proportion investing in ETFs than before,” he says. “I think the important point is that we no longer need when we are meeting to explain what an ETF is. They know that and they want to hear what they do and what they should be investing in.”
Mainstream markets, such as those represented by Lyxor’s new core range of products, are still the bulk of the wealth managers’ portfolios.
Laird points out that traditionally Lyxor has been managing quality core investments for a long time. Lyxor’s Euro Stoxx 50 ETF was first launched 2001 and Lyxor was the first issuer to launch a US equity fund 17 years ago.
“But our specialism was on innovative products and our big sellers had been more niche areas. Inflation protection, smart cash funds or our quality income range have performed well but they are still satellite investments. With the launch of this range we are now being used as the core in wealth managers’ portfolios.”
Looking to the future, Laird believes that simple, mainstream markets will be core to Lyxor’s success.
“We’re in a fortunate position that we’ve got almost two decades of ETF experience. We have the resources and expertise to run simple, mainstream investments. Markets are uncertain enough, investors expect simplicity. That’s where we will see the growth.” n
Adam Laird, Head of ETF Strategy, Northern Europe, Lyxor ETF, reports that product launches have resulted in a strong 2018 for the firm. The boom has come from its March launch of a new range of 16 low cost Core ETFs. They cover the major equity markets as well as gilts and TIPS on the fixed income side. The TER on each fund in the range is less than 0.12 per cent with two funds – Lyxor Core Morningstar UK NT (DR) UCITS ETF and Lyxor Core Morningstar US (DR) UCITS ETF – charging 0.04 per cent TER.
“It was an important moment for us because we could launch the lowest cost core range of ETFs available in the European market,” Laird says. “The range has done really well raising over EUR1 billion so far this year.”
The range is a mix of new low cost funds, and existing funds whose charges have been cut. However, quality was a focus for Lyxor in launching the range.
“We aren’t cutting corners in our core range. These ETFs are fully physical with no stock lending. We are keen to ensure there’s no skeletons lurking in the closet,” Laird says.
The main users of the range have been private banks, wealth managers and multi-asset investors.
“The important point is that it shows that fees are still one of the biggest drivers of ETF growth,” Laird says. “It’s not a new story, but investors are much more critical of the costs they are paying for investments and the MiFID rules, that came in at the start of this year, have also put a fresh emphasis on accountability for the costs investors are paying.”
Laird reports that from the Lyxor point of view, the firm has expanded out its team of relationship managers in the UK this year. “We have grown our team and we have been much more in contact with the networks of investors and we talk to many more offices
LYXOR ASSET MANAGEMENT
Adam Laird, Head of ETF Strategy, Northern Europe at Lyxor ETF
“We aren’t cutting corners in our core range. These ETFs are fully physical with no stock lending. We are keen to ensure there’s no skeletons lurking in the closet.”
