Should consultants get on board with ETFs, or are they, as some suggest, being rushed into them for the sake of playing with new toys, asks Angele Spiteri Paris.
Investment consultants have been reluctant to advise on ETFs. Many don’t know exactly what they are and those that do understand these passive products could worry that their role is being made redundant. However, as the popularity of ETFs can no longer be ignored, consultants are gradually getting on board.
Matthieu Guignard, head of product development at Amundi ETF, says: “We’re in contact with consultants so this proves they’re interested in this type of product. They have found a way of bringing value in ETF selection for institutional investors.”
Danièle Tohme Adet, head of ETF and indexed fund developement Sigma BNPPAM, says: “We’ve filled in a number of RFPs [requests for proposals] for consultants in Germany, Switzerland and France. The crisis helped because more questions were asked about ETFs.”
Isabelle Bourcier, global head of Lyxor ETFs, says: “Seeds Finance [a MorningStar company] launched rating tools which include ETFs. Lyxor has an exclusive agreement with them to teach institutions about ETFs.”
One of the prime concerns on behalf of consultants has been that their value-add is around manager selection. With a passive product, often the manager selection adds little to no value, or so it was thought.
Guignard, at Amundi ETF, says: “Consultants realised that there is a due-diligence process when it comes to selecting ETF providers, in terms of making sense of the set-up of the fund. They need to consider the way the fund invests, whether through swaps or physical replication. They also need to take tax treatment into account.”
Tohme Adet, at BNP Paribas, says: “Consultants need to put their energy into this [the due diligence process], because ETFs are asset management tools and therefore have to be passed through this process. Consultants need to be on top of this.”
Guignard, at Amundi ETF, says: “Institutional investors are demanding ETFs are included in their investment universe and therefore consultants cannot afford to ignore them.”
But not everyone agrees.
Tim Mitchell, head of specialist funds at Invesco, says: “Pension funds haven’t been asking consultants for these products and a consultant’s job is to understand what their clients want and giving it to them, not pushing them onto what they [the consultant] think their clients should invest in.”
John Gillies, director of investment strategy and advice at Russell Investments, says: “Consultants are perhaps being rushed into using ETFs just for the sake of playing with new toys, which has happened in certain markets.”
A further concern is that although ETFs seem to be everywhere, many of the investors themselves, particularly those at the smaller end of the scale, have very little awareness of what the instruments actually are.
Gillies says: “Retail investors and smaller pension funds automatically assume that a new instrument is bound to be risky. This is why some of them might assume that ETFs should be placed in the ‘hedge fund’ box of their considerations.”
And this is the assumption that investment consultants and advisers need to help change.
Bourcier, at Lyxor, says: “The big consultants like Mercer and Towers Watson are becoming more open to ETFs as they’re being asked more questions about them. But it is still very difficult because researching ETFs is quite onerous.”
But in mainland Europe, consultants have taken ETFs in their stride to a greater degree. Tohme Adet says: “ETFs have been more of a continental development. Germany, Austria, the Netherlands and Scandinavia have all been greater adopters of ETFs. These are the most mature pension fund industries and the greater use of ETFs is mainly due to the new architecture of asset management, which now focuses on asset allocation.”
Interestingly, French consultants have been some of the most forward thinking when it comes to taking ETFs on board. Guignard says: “Consultants in France do seem to be more up to speed with ETFs compared to other countries in Europe.”
Slow on the uptake
The clear laggard in the adoption of ETFs, especially on behalf of institutional investors, has been the UK.
Tohme Adet says: “In the UK, no pension funds use ETFs. This is because of the investment consultants, but also because of the tax arrangements around these products.
Bourcier, of Lyxor, says: “The UK is a big index fund market so you can see why the consultants would want to keep ETFs out of institutional investors’ reach. They currently get commission for advising on the index funds; they would get none when advising on ETFs.”
Therefore the way consultants are compensated may be key in getting ETFs off the ground.
John Davies, head of ETF licensing in Europe for S&P Indices, says: “If the UK moves to a fee-based environment, then ETFs have the potential to become more popular investment tools. If commissions go away there should be no reluctance on behalf of consultants to advise on ETFs.”
Manooj Mistry, head of db x-trackers UK, says: “There is resistance in the UK market and no-one has yet found a way of breaking through. The key will probably be in a combination of education and remuneration.
And several providers are quite optimistic.
Tohme Adet says: “The UK will come around. Providers are pushing for consultants to get up to speed with ETFs.”
Philip Philippides, head of institutional sales in UK and Ireland, iShares, says: “Although consultants in the UK have not been proactive when it comes to knowing about or positioning ETFs as a solution to their clients however, we have seen a marked increase in their desire to learn more about them more recently.”
Another potential reason for the lack of ETF take-up in the UK is the way pension funds invest.
Gillies, at Russell, says: “Pension funds have been discouraged from taking short-term, tactical positions. They would delegate such decisions to a TAA [tactical asset allocation] manager. Furthermore, most pension funds in the UK don’t make direct investments.” That is, fund managers make those investments on their behalf. To make tactical plays using ETFs, pension funds would have to buy the securities themselves.
Philippides is more positive. He says: “We are starting to see pension funds being more tactical in their approach and as the industry changes and evolves the tactical areas will grow, which will help the adoption of ETFs.”
Experts say that certain local authority pension funds that have their own in-house expertise have been looking at ETFs.
According to Mitchell, at Invesco: “Those pension funds that have their own investment management capabilities could be the first movers into the ETF market.”
In fact, this could be the root of the disparate use of ETFs between Europe and the UK.
Mistry says: “In Europe, pension fund managers make their own investment decisions while in the UK very few pension funds make direct investments.”
©2011 funds europe