Global Pensions gathered key industry experts in London to discuss the latest issues impacting the growing ETF industry and how these relate to pension funds
Alex Beveridge: The last time we held a roundtable on ETFs, there were concerns the market was becoming a little saturated. Since then, even more ETFs have been launched, with new providers entering the space; is saturation a worry in the market at the moment?
Matthieu Guignard: No, I don't believe the market is saturated. We've had sustained growth in 2007 with many new issuers, new products and new asset classes, so the market is still in a dynamic phase, even though markets have been pretty shaky this summer. Passive products such as ETFs have benefited from this market environment, as many investors have shifted from active management to passive management and easily available and transparent products are meeting investors' needs in this area. The market has also witnessed segmentation between various types of products. Some are pure passive products offering clear exposure to asset classes, while others are more active or quantitative products and this may be new in the ETF arena. There are, however, some new legal structures that are sometimes called ETFs, such as ETCs or ETNs, and there may be a bit of confusion in the market today. In this sense, there is a kind of saturation of the market, as ETNs or ETCs do not offer the same risk profile and in a regulatory sense they are not treated the same way as ETFs. We've seen interesting initiatives in this area as some stock exchanges have defined new segments of the market in order to make clear differences for investors between those types of products.
Daniéle Tohmé-Adet: I agree with Matthieu, we are seeing greater assets under management. If we compare the market with the same time last year, assets have increased by about 35%. Today the market is sitting at around US$750bn under management, versus about $500bn this time last year. The type of ETFs that are developing has also been growing, so there are some new underlying asset classes to bring through the capital markets arena to the asset management arena. Secondly, there are various new regulatory rules implemented with MiFID that are centred around transparency and ETFs are seen as a transparent tool that in Germany, for instance, are competing today with certificates and other types of products. We have also seen the added value of the liquidity of ETFs during the summer. We've experienced some trouble in certain underlying asset classes, some of which are presented through ETF wrappers, and the ETF was pretty liquid and flexible for investors, while some of the funds have been closing for revaluation.
Alex Beveridge: So ETFs weathered the storm?
Daniéle Tohmé-Adet: Exactly.
Tony Raw: If you break the growth down by region, we see more accelerated growth in Europe, the Middle East and Africa than in the US and Asia, and specifically in FTSE, for instance, we're now at about 87 issues breaking $24.5bn in ETFs. For the first time in Europe, the value of what's sitting in ETFs is greater than in America, so that's an endorsement of the general statistics in the marketplace. There's still room for scalability, there are newcomers, niche players driving innovation, and to that end we believe that there is a long way to go before there is any consideration of saturation.
Nick Shellard: I agree. Competition in the ETF market is a good thing because it adds credibility to the actual investment segment, but I don't think we're anywhere near saturation in Europe. If we consider one barometer to be mutual fund assets, we're at no more than 1% to maybe 1.5% of mutual fund assets in Europe, so clearly that's not anywhere near saturation. If you look at the US, where the first ETF was launched 14 years ago, the product pipeline is still very robust and healthy. In Europe we have to remember that in relative terms we're still in the infancy stages in terms of education. This is a product currently mainly used by institutional investors, with retail and wealth investors now gaining an increasing understanding, but we still have a lot of room for growth in product innovation, education and for growth of assets under management.
Gijs Kaars Sijpesteijn: In Europe, one very specific change in terms of regulation has been UCITS III, which makes it much easier for entrants to come into the market and start offering ETFs. The investment techniques which are now available, incorporating a certain amount of derivatives, make it much more flexible. In that sense, in terms of what we've seen in Europe in the certificate market, we see a huge potential for ETFs to be applied both to the institutional and retail market.
Alex Beveridge: There has been talk of consolidation, but the opposite has occurred. Can the people who use ETFs expect to see some consolidation in their suppliers?
Nick Shellard: BGI has been a part of that consolidation story this year, with the merger of Indexchange into our business and the creation of BGI Deutschland. Whilst we're a global ETF player, we do feel very strongly that local businesses, serving local needs on behalf of local clients, are very important. It's likely there are going to be additional new entrants into the market, but it's inevitable that, as the ETF industry expands, further consolidation will likely take place.
Gijs Kaars Sijpesteijn: Another new regulatory aspect, MiFID, is actually anti-consolidatory and therefore there's a possibility that more players will come in. There are so many things you can benchmark and the flexibility of using derivatives to create ETFs means there is an option for more entrants. My only concern with the index providers is there might be a restriction in terms of how many people can participate in the market, because some ETF providers have a liaison with a certain index calculator and dominate that space to some extent. Therefore it's sometimes difficult for new entrants to go into a certain market with the same index underlying, whereas that entrant might have very good distribution capacity in another jurisdiction where the other participant is not really active.
Tony Raw: I see the argument for an element of consolidation, but I do see it opening up further still. Look at a lot of the innovation and niche houses in the US market, something like Health- Shares, which brings in ETFs tracking those that are investing in cardiology. Then you've got IndexIQ, which is quant house-driven, looking to replicate hedge fund strategies within an index and ETFs driven off the back of them. There's a lot of opportunity for niche players to come in, but a lot of the core may get into a few consolidated houses.
Alex Beveridge: Daniele, you're in Asia at the moment, what's the view from there?
Daniéle Tohmé-Adet: At one level there are some consolidation actions taking place, for instance, between exchanges and some of the financial institutions. But on the other hand, we're seeing much more of a teaming up of different entities of the same groups, with capital markets, the trustee side teaming up with the asset management side and the issuer to deliver a service on an international level.
Matthieu Guignard: As long as the market is dynamic, as it is now, there will not be any need for consolidation in a defensive sense where players would need to buy out others in order to grow. Today there are still many opportunities for growth that have not been exploited, both in the product area and in the usage of ETFs, where we know that many pension funds, institutional and retail clients are still not users. Sometimes size matters in order to access specific markets or even indexes, but when looking at size, one should look at each product size, and here EasyETF is a good example of quite a small ETF provider. We have about E6bn of assets under management, which, compared to BGI, is very small, but yet we still have leading positions in specific asset classes, such as commodities or listed real estate, and this is what is important at the end of the day.
Gijs Kaars Sijpesteijn: If you look at the US, in every 401(k) plan there are ETFs and that is a decision made by a retail investor for his own pension fund. Given the fact you now have defined contribution and there will be SIPPs and other instruments in Europe, there is more pressure on the individual to make decisions in terms of what his pension fund looks like. There will be definite growth in ETFs, because, like institutional investors, even the retail investor will approach a core satellite strategy at some point, where the core of their portfolio could well be made up of passively managed products, such as ETFs. There is a certain amount of dissatisfaction with mutual funds from retail investors. Will that go over to ETFs? I think so. Like Nick said, currently ETFs only represent 1% of the total fund assets under management in Europe. If you have a 5% shift from mutual funds to ETFs, you're talking about €75bn currently under management, to €210bn, and that could come mainly from retail investors.
Alex Beveridge: We've talked about the increasing numbers of ETF providers and this leads onto the thorny issue of fees. Is the proliferation of providers driving down fees?
Nick Shellard: If you look at the fee levels in the ETF industry right now, for smaller to mid-size pension funds, ETFs sit in a cost-effective space. Even for larger pension funds, ETF fees can be cost-effective if you factor in the additional revenue they can gain from securities lending, for example, lending the units out on long ETF positions. A pension fund could expect to offset part of the Total Expense Ratio through securities lending or, in certain cases, even achieve index plus, and in these cases they would essentially be receiving an income stream for having a long position in ETFs. Coupled with an increase in product innovation, this has meant there are now solutions not only in the vanilla index space, but also in areas such as alternatives. Pension funds are going to look at what they're trying to achieve, the time span over which they want to achieve it, and the different products that are available to them in order to achieve that exposure. We believe ETFs stack up well against most products when you factor in the cost/risk benefits and the fact that a lot of pension funds will want to have the ability to easily either dial down or dial up their alpha/ beta blend.
Daniéle Tohmé-Adet: It's important to have many players, so that on the one hand you have fee control and on the other you have liquidity. The ETF is a very cheap tool if you want to tackle asset classes that you don't have exposure to, so the UCITS III compliant wrapper has its price and pension funds are ready to pay for this. There are also some underlyings like emerging markets that have difficult access in terms of currency, or accessibility to the stock itself, and there it is handy to go through ETFs as compared to the several stocks replication in your portfolio. Plain vanilla indices might look a bit expensive to the pension fund because of the size that they would invest in them, but there have been specific fee schemes developed on ETFs for pension funds with different classes. With newcomers to the market, more ETF issuing activity and volumes, lending/borrowing platforms should develop further and therefore would offer the possibility of offsetting and optimising a fee - a TER - through the free beta allocations.
Gijs Kaars Sijpesteijn: I've been in the market for some time and been involved in several new product developments. It started with Bund futures. Brokers would sell them to institutional investors or pension funds at DM25 per contract, and now they trade at 25 cents plus custody fee, making it 75 cents as a whole. But that is a one-off exchange traded product, it's not something which anybody can create and make diversifications on. Then look at AAA-rated money market funds which came over from the USA. Initially institutional investors such as corporate investors and pension funds in Europe balked at the fact that these funds were charging between 15 to 25 basis points, but in fact that industry has grown phenomenally well. Over the last eight years it's grown in Europe from virtually zero AUM to around $525bn in assets under management at fees of still around 15 to 25 basis points and a significant amount of suppliers. Why have fees in Money Market Funds stayed stable, although the funds all look or feel the same? Because providers are not competing for market share on fees, but on service and offer these products as part of a package, ie client relationship. I think that will happen with ETFs too. For the core index ETFs there might be some downward pressure, but for the emerging markets and alternative indices ETFs I agree with Nick. I don't think there's going to be any significant pressure on fees soon. Next to that, it's already quite expensive to run them under UCITS III diversification regulations and on top of that, exchange fees or the index provider fees which the ETFs have to pay to get these products up and running are such that there is not much room to bring down costs.
Tony Raw: There's an argument to challenge the provider and push the price down versus putting it up because it is innovative, where there's a lot of work and fundamental cost to meet the strategy and objectives. So there is a 50/50 play there. It could easily be argued it's exchange-tradable, it's quick in and out; it's more a tick-play sort of market than a high fee market. That would suggest pressure down on the cost of fees on exchange-traded, but there again, price could hold itself, like it has with mutual funds. It's a difficult one to call.
Gijs Kaars Sijpesteijn: There are also lots of possibilities with customisation, especially for institutional investors. Customised ETFs are already being prepared or offered, you have the core FTSE UK, but you also have several varieties of the FTSE theme, there's already some customisation and, again, I don't think there is major pressure on fees there.
Alex Beveridge: Who can pension funds turn to for advice on ETFs and help choosing between the different providers? In my experience, the consultants haven't been falling over themselves to push ETFs as a product and I'm sure there are reasons for that.
Gijs Kaars Sijpesteijn: There are several investment banks which, on the cash equity distribution side, make markets in various ETFs. For instance, ABN Amro , outside the Market Access ETF platform which we just launched, is a market-maker for most European ETF providers such as Lyxor, BGI and EasyETFs. So in that sense, pension funds can come to several platforms other than the actual ETF provider and trade primary and secondary, so I don't think for pension funds there is an issue. The interesting thing is there is not yet a European or global ETF association. Very often with these new products, you have an association of providers which goes out and lobbies regulators to improve various aspects or operations, or to teach the investors. That has not happened yet and I'm actually quite surprised. I think it has a bit to do with the fact that there are a few dominant players who are spending a phenomenal amount on advertisements, and therefore the smaller players piggy-back on that for the time being. Obviously we are also going to spend a significant amount of money on marketing, but to a certain extent, the institutional investor has already been educated about the product itself.
Alex Beveridge: Nick, you have been doing this for a long time, do people come to you for advice?
Nick Shellard: As a leader in the pensions management industry we get a lot of pension funds talking to us in order to get information and clarity around the differences between the products, the product providers and some of the structures. We've also seen an uptick in interest from consultants. The consultants are beginning to see there are certain products offered that could be useful for pension funds in the right circumstances. I believe we have a collective responsibility around this table to continue the education, whether that be of institutional investors like pension funds, or the people that serve and advise them, like consultants. I also see a future role for exchanges, index providers and market data intermediaries to help guide institutional investors as to the differences between ETF products.
Matthieu Guignard: What is interesting with ETFs is that they are visible and transparent, and there may be more [information] available and comparable on ETFs than there is on other mutual funds where it is sometimes difficult to classify the funds or know which type of instruments they are using. Here we have index products that are tracking quite a clear benchmark, so it's pretty easy to have tracking error figures, for example, available on ETFs.
Daniéle Tohmé-Adet: There is also the aspect of how ETFs tracking the same index are managed from the standpoint of two different managers. What is the delivery of the performance in terms of tracking error etc? I agree with Gijs, there is a lot of effort on behalf of the exchanges, index providers, issuers and the press, but this has a very promotional image. It's a good idea to have an association, because as ETFs move into the retail arena, there will be a greater need for education. On the pension fund side, we're seeing a lot more RFPs coming from the consultants on these tools and more appetite from the pension funds for an asset allocation tool. There is a role for asset management to play in terms of asset allocation advisory that should go in parallel with the offers of the underlying tools that we are providing. After all, if ETFs are going to become like futures, just a tool, then you need to assess strategies for leading you to this or that one.
Tony Raw: As an index provider, we're trying to be as proactive as we can. Today within our group we have relationship managers who are very much focused on the institutional investors, so we steer them to put the knowledge out there and share that with the pension funds. Next year, because we are such a key enthusiast of ETFs, we're going to motivate all of our customer-facing teams to be more proactive in this interface with those potential audiences. It would be great to get an association. In keeping with that, a sort of educational or informative portal is something we have been looking at, whereby we could then turn to everyone here today and other key providers and put a lot of the text within that portal for the promotion and awareness and provide access to that globally. But ultimately, the best way to do that would be an association.
Alex Beveridge: What growth areas are left for ETF providers?
Gijs Kaars Sijpesteijn: The universe is very open. There are some studies out now which were conducted amongst asset managers about the actual usability of benchmarks, i.e. indexes, and although every institutional investor uses benchmarks to measure themselves against or to implement certain strategies, they did feel that some of the indexes were not optimal in that there was either a style drift or a capitalisation drift which didn't help them to perform. A lot of them are actually implementing a combination of a capitalisation index with a sector index, or with a style index, to get a better performance. That in itself already gives potential for use of more ETFs. Why? Because as an institutional investor you can use other derivatives, like swaps or futures, but in terms of futures there is not enough deliverability for underlying; it's very limited. With swaps you have counterparty risk and in the current environment a lot of people have concerns about that, therefore a fund wrapper is probably a more acceptable tool. I recently visited several of the larger pension funds in the Netherlands and they're all saying, 'We look at ETFs and occasionally we use them, but for very specific reasons.' I have a feeling that they will start using them more because of the fund wrapper aspect.
Matthieu Guignard: I see growth in several areas. In the geographical area there is still some growth potential where Europe is a little bit behind the US, even though it's catching up. Asia should also be quite an important area for growth in coming years. On the client side, you're right to underline that the spread of this core satellite approach for institutional is still ahead of us and here again I would compare the European situation to the US; there is still a lot of potential in the usage of passive management in Europe. In France we've seen quite an interesting example with the biggest pension scheme in France, the Fonds de Réserve pour les Retraites, issuing an RFP for passive management on commodities recently. That's a sign of pensions increasingly using passive management.
Alex Beveridge: Daniele, are you talking to pension funds in Asia?
Daniéle Tohmé-Adet: Yes, we have definitely seen interest from pension funds in Asia. Geographywise, Asia is still lagging behind, but the regulators are considering ETFs like stocks instead of considering them as funds. With what we experienced last summer, the wrappers that are less constrained in a regulatory sense or in terms of maturity and administrative hassles are going to further develop in terms of new underlying classes. There will be more and more mentions of specific ETFs, like the ETC, and the structured ETFs, although the structured ETFs are still a little bit less transparent than the regular ETFs.
Gijs Kaars Sijpesteijn: I believe the Korean Stock Exchange has a turnaround of about US$2.5bn a month in ETFs, which is significant. That's up there with the European exchanges.
Nick Shellard: In addition to the growth we are experiencing in our US and European business, we are also seeing an increase in appetite for iShares from pensions funds in other parts of the world, for example in the Asia, Pacific and Latin American markets. The growth areas on the product side and the local availability of those products are going to be very much driven by client demand. The institutional marketplace is looking for diversification tools and there is an increased focus across investor segments on the separation of alpha and beta. We are also experiencing institutional investors using beta products to actively allocate assets. If you're looking at a benchmark that's got a 10% allocation to emerging markets and you allocate 15% via a beta product , you're taking an active bet relative to that benchmark. There is still plenty of room for innovation in areas such as fixed income, and solutions for difficultto- access markets where pension funds may not want to actually take on active or stock-specific risk.
Gijs Kaars Sijpesteijn: In the wealth area, there is huge potential for ETFs which are shorting, because for a retail investor it's virtually impossible to go short an ETF and it's also difficult to go short an index, other than the core indices such as S&P 500, through futures.
Daniéle Tohmé-Adet: We could develop a lot of underlyings and inverse positions, but we definitely need market-makers to follow. Look at Asia for instance, it is hard for market-makers to make prices on a real time basis on underlyings that don't belong to the geographical allocation in Asia, because the access to the US or European market is much tighter. The appetite we see today from market-makers in terms of equities, for instance, to be a bit more aggressive on indices, will become global.
Tony Raw: If you take the asset side, in 2007 we built a Turkish government bond index and in two weeks of trading it became the largest ETF on Istanbul. On the regional side, Lyxor put out a product not long ago, an ETF tracking Russia indices. The one other thing I would add is themes as opposed to just innovation, and when I say themes I talk about the clean tech world or style or anything in that area. FTSE's just launched ET50 in partnership with Impax, greenhouse, clean technology, climate change, that sort of themed investment. We've already got parties possibly looking at ETFs on the back of that.
Alex Beveridge: How many different uses does a pension fund have for ETFs?
Tony Raw: Equitising cash quickly is one, so if you've got it sitting around, you can drop it in very quickly.
Nick Shellard: If you look at the recent high levels of volatility in the market, the ETF industry, as Matthieu said, has prospered from that due to the product's versatility and properties as an effective risk management tool. Any pension fund managing money internally that is concerned about periods of high volatility and missing their benchmark return can use ETFs extremely cost-effectively to manage the risk around not achieving that return. As I said earlier, it's the ability to use ETFs as an effective risk budgeting tool, to dial up and dial down the mix of active risk and beta exposure in a portfolio, that makes the product attractive to an increasing number of investors.
Alex Beveridge: How do ETFs fit into an LDI strategy? Is that a question that you're asked by pension funds, Nick?
Nick Shellard: Yes and right now if you're a pension fund and you're using physicals to manage your LDI strategy, then obviously there could be a place for ETFs to be used as a core or a satelite in that strategy. At this point, many pension funds will actually be using long term swap positions in order to achieve their strategy. However, I believe ETFs could have a role to play in that process too, especially between swap resets, where ETFs can be used as an effective cash management tool to help them manage any short term asset liability mismatch they may have in that strategy.
Matthieu Guignard: For the long term part of their investment they usually prefer to have a dedicated mandate that may be more cost-effective through swaps or direct investments, but definitely for the satellite part of their portfolio they have an appetite for funkier asset classes that can be accessed easily through ETFs, sometimes for a very short period of time.
Alex Beveridge: Daniele, is this something you've come across?
Daniéle Tohmé-Adet: Yes, from my point of view ETFs have had a lot of optimised risk budgeting within a portfolio. It's a perfect tool to better use the risk budget and allocate even for a very short period of time in a tactical way, saving the chunk portion of risk budgeting for pure alpha strategies.
Alex Beveridge: Gijs, you said you were talking to some Dutch pension funds. LDI's obviously quite a popular theme in Holland.
Gijs Kaars Sijpesteijn: Yes, I suppose some of them look at target date and target risk approaches on LDI and lifestyle management of their pension fraternity. So it's definitely there, and as Daniele says, it budgets the risk aspect so much more compared to other pension products.
Alex Beveridge: How much easier is it to create ETFs in some sectors than others? Do certain areas require more research?
Matthieu Guignard: The iTraxx design of a total return index, for example, has taken a very long time: it is sometimes painful to design an index that is suitable as a reference for the ETFs we have issued. So it's definitely more difficult sometimes, but it's also the kind of area where an ETF makes sense. For retail investors, as long as an asset class is only accessible through swaps, an ETF is sometimes the only way for them to access the asset class. Commodities are a good example of this, where, for retail investors or small to mediumsized pension schemes entering into swaps or derivatives, it can be difficult both from an operational, regulatory and credit risk point of view.
Gijs Kaars Sijpesteijn: All of us as providers are innovative and we try to cover every single index. The problem, though, is with the creation of ETFs there is a regulatory environment which is not adaptable to very fast issuance. The process of actually creating an ETF is still very slow and that is partly due to the fact that, on the regulatory side, there are serious issues in terms of understanding the underlying product which is being wrapped into ETFs. The more innovative we are, the more problems we are creating with the regulator. We can issue 500 certificates a week, there's no problem in any underlying that we want to do, but if we want to issue a new ETF, it takes at least two to three months, and then you have to go through the whole passporting procedure, so it's six months before it's up and running. As a provider, it is sometimes hard to assess which area or what type of underlying to go for, assuming that in six months' time there is demand for that type of product.
Alex Beveridge: Nick, is that a problem for BGI?
Nick Shellard: When we look at our product pipeline, first we need to select an index that is representative of the market segment we're trying to represent. Secondly, the products are exchange-traded funds, so we need to ensure that the market-maker is able to make an efficient market in the actual ETF itself, and therefore the liquidity of the underlying portfolio is a factor we need to take into account. We are in the business of delivering quality products, so we also need to feel confident before we bring a product to market that is robust, transparent, and offers the client the value they demand. In theory, there's no threshold to product innovation, but the reality is this is an open-ended exchange-traded instrument fungible with its underlying components, so the liquidity of the underlying needs to be present and accessible too.
Tony Raw: It's important, though, that as we educate the industry and say, 'Look, these are clear, transparent, easily tradable instruments,' we ensure that whatever exposure we produce is able to live up to that billing. We won't bring out a product unless we're absolutely sure it can pass the standards our clients demand.
Daniéle Tohmé-Adet: Yes, that's very important. You can come up with a good idea which is usually the result of research you've conducted with your customer base, but as Gijs was saying, if you have to issue the product six months later because of legal hurdles, it's not that efficient. Secondly, you have to make sure that the marketmakers will be there and thirdly, we work very closely with our index providers, and we often work out some indices or ideas or themes, as Tony was saying, together. It's like teamwork between the market-makers, the index-providers and the issuers of ETFs, and this results from how you sense your customer.
Matthieu Guignard: It's also a very interesting limit that regulators put on ETFs under the mutual funds form; others are either certificates or notes, as you underlined Daniele. But it is definitely good protection for investors to have those UCITS III rules. There are strong limits, for example, looking at the diversification rules that this regulation imposed on ETF issuers.
Gijs Kaars Sijpesteijn: That's why an ETF association has a huge role to play with the regulator. UCITS III protects the investor in terms of diversification rules, which is very important, but UCITS III is applied to mutual funds as well as to index funds. In an index fund there is no human intervention, it's just following a rulebased index, and therefore, for that aspect alone, there might be something to lobby with the regulator to say, 'Apply a different approach to risk with an index product compared to an actively managed fund.'
Tony Raw: From an index-provider point of view, I endorse your point about working closer together; we've started to do more of this. We are, to that end, investing in our quant and research teams and building them up, and we are having capital investment in our systems for customisation, so that we can start to more rapidly work with you if you're looking for a core index, but you want to enrich it, quant it, customise it. Our quant teams can work with you, take on the methodology, back test it, prove it, turn it around very quickly and implement it. We're certainly not going to hinder the pace at which this market grows and we see a lot of opportunity in that and want to work more with you.
Alex Beveridge: Apart from direct investment in ETFs, are there ways that pension funds could become indirectly exposed to them, for example through investment in a vehicle which has some exposure to them?
Nick Shellard: Yes. Institutional asset managers managing money on behalf of pension funds could be using them in all the ways we've already mentioned that pension funds managing internally are. Additionally, ETFs are increasingly being used as the basis for a variety of structured products, where the issuer will apply some kind of wrapper around the ETF and and distribute it that way, so there are an increasing number of ways in which you can indirectly access ETFs.
Gijs Kaars Sijpesteijn: One very specific area where pension funds use a core satellite approach is when they include hedge funds in their satellite strategies. Hedge funds tend to use ETFs very actively, so they have a high exposure to ETFs through hedge funds.
Alex Beveridge: Do you think the pension funds are aware that they've got this extra exposure, and does it matter?
Gijs Kaars Sijpesteijn: I don't think it matters. As long as they provide the returns and the alpha, they are not going to quiz you as to what type of instruments they use.
Tony Raw: I can see funds of funds developing pretty quickly.
Daniéle Tohmé-Adet: More and more funds of funds are using allocation through ETFs. A lot of funds of ETFs have been developed for lower fees.
Alex Beveridge: Looking into your crystal balls, what developments can we expect in the next six months to a year for the ETF market, particularly in light of what happened over the summer?
Daniéle Tohmé-Adet: What happened this summer will bode well for ETFs because of their transparency, their flexibility, their lack of counterparty risk and the wrapper being UCITS III. We might have more developments in underlying classes, because this has been a very successful angle for the development of ETFs. The need for diversification in the portfolio we have seen during the summer, de-correlation of certain assets, will pave the way for more new underlyings accessible through ETFs. I'm also increasingly hearing of people needing inverse ETFs, as they are concerned about a bubble; hedged ETFs or some of the protected structured ETFs. I think in that area we're going to see more development.
Matthieu Guignard: I still see a sustained growth of this market, with perhaps more players or more issuance for each player. In the quantitative field especially there will be many innovations and the market is still going to structure and segment itself more clearly for investors. We will have pure passive products, some more quants and some more active products made clearer for the investors.
Nick Shellard: Recent market events have brought ETFs into the limelight as a risk aversion tool, and more institutional investors are experiencing the benefit of how they can manage their risk around their portfolios using ETFs. I also think that, given the current regulatory environment, we are seeing an acceleration in the demand for education in the wealth space, around what role ETFs can play in the construction of a diversified portfolio. ETFs are receiving more attention because they fit nicely into the direction the industry is moving and the demand for products that are both empowering and transparent.
Gijs Kaars Sijpesteijn: Like what we've seen in the certificate business over the past five years, this is going to grow explosively. Our research unit within ABN Amro , Delta 1 trading, is forecasting that growth of ETFs traded on the LSE for example, which was £1bn in January 2006, will grow to £3bn by mid-next year. This growth will likely be across all areas in terms of asset classes, new issuers, and new users. ETFs are going to be a very viable alternative to the mutual funds industry.
Tony Raw: You've got two key catalysts that seriously help - one's MiFID and one's the credit crunch - as long as we can drive education and pursue the regulation, as they're the only obvious possible hindrance. The only other thing that jumps to mind is frontier markets, the question of whether the worlds of Iceland, Mexico and the like come into play or not. Other than that, all we have spoken about - themes, quant, customisation, more regional play, finding the marketmakers, pushing the regulators - is there and it's happening.
Alex Beveridge is the editor of Global Pensions. Prior to joining the magazine, he was a news and website editor for Charterhouse Communications, where he covered the UK mortgage market. Alex has a degree in politics and communications studies from the University of Liverpool and a post graduate diploma in journalism from the Journalism Training Center in London.
Matthieu Guignard is co-head of EasyETF development and as such is in charge of developing the EasyETF range for AXA Investment Managers. He joined AXA Investment Managers in 1999 as head of product engineering, in charge of the project management of all new product launches for AXA IM. Within the organisation, Matthieu has been a fund manager for Index Funds and ETFs and chief operating officer for Investment Solutions.
Gijs Kaars Sijpesteijn is currently head of distribution for the new ABN AMRO Markets ETF platform, MARKET ACCESS. He has been involved in the investment and asset management business for over 20 years, having started his career in fixed income and derivative sales for some well known names in the industry, including JPMorgan, S.G. Warburg, and Industrial Bank of Japan.
Tony Raw is deputy managing director for Europe, Middle East and Africa, the largest business unit within FTSE Group. He joined the company in August 2007 and holds responsibility for FTSE's regional business strategy, development sales, client services and marketing activities, in Europe, Middle East and Africa.
Nick Shellard joined Barclays Global Investors in 2004 and is head of sales & business development for BGI's exchange traded fund business, iShares, in the UK and Switzerland. Prior to joining BGI, Nick spent ten years at Morgan Stanley & Co Ltd in London, where he was responsible for ETFs and other portfolio products, sales and sales trading in the firm's Institutional Equity division.
Danièle Tohmé-Adet is head of business development, ETF and indexed funds at BNP Paribas AM and co-head of the EasyETF platform. She joined the EasyETF business development team in 2005. She has 19 years of experience in financial products and has been with BNP Paribas since 1997. Before joining the EasyETF team, she helped develop the currency overlay management business (begun in 2001) for BNPParibas AM and Overlay Asset Management. In association
Most respondents in this week's Pensions Buzz do not think businesses should be able suspend AE contributions if in financial distress.
Former BHS owner Dominic Chappell has lost the appeal against his section 72 conviction and sentence for failing to hand over information to The Pensions Regulator (TPR).
This week's top stories include Marsh and McLennan Companies agreeing to buy JLT, and the home secretary calling for AE to be scrapped in a no-deal Brexit scenario.
Lesley Titcomb says the watchdog wants closer interactions with pension funds to spot problems sooner and act before having to use its more stringent powers