SPONSORED FEATURE: A source of power

Following Invesco’s acquisition of Source, the combined firm is eager to show Europe what the two ETF providers can achieve together.

Invesco’s acquisition of Source was one of 2017’s notable events within Europe’s asset management industry. It was just as relevant to the nascent smart beta sector, too.

This is because Invesco operates the Invesco PowerShares ETF business that has focused on funds benchmarked to non-traditional indices since before the ‘smart beta’ moniker was widely used.

For its part, Source has similarly strong history in innovative content, having partnered with some of the world’s largest asset managers.

And now, with the acquisition complete, the combined firm has an “aggressive pipeline” of new fund launches for the coming months, says Matthew Tagliani, Head of Product and Sales Strategy at Invesco PowerShares.

PowerShares now oversees about $30 billion of ETF assets in EMEA including $7 billion in externally managed assets that came via the Source acquisition and is eager to show the world what can be achieved.

And innovation has come quickly – in October, PowerShares launched a ‘first’ for the European market in the form of an ETF that tracks the performance of US preference shares. The PowerShares Preferred Shares UCITS ETF is a version of an similar fund offered by PowerShares in the US, says Tagliani.

A nice alignment
The launches are a sign that the acquisition is already working. Tagliani says there has been a “continuity of product development” aided by little overlap of existing ETFs and by shared aims. “Source’s and PowerShares legacy product offerings align nicely and the next products to be launched will show we’re even stronger as a combined entity,” says Tagliani.

Product development will incorporate equities and bonds in both traditional and smart beta ETF vehicles.

Tagliani highlights two product areas which he says are of interest to clients: products to generate yield is one, and demand for ETFs that incorporate environmental, social and governance (ESG) features is the other.

The demand for yield is a natural consequence of the low level of interest rates globally. Despite early signs of normalisation by some central banks, Tagliani believes that the hunt for yield will continue as a theme among investors for years to come.

“Even under the most hawkish scenarios we are not talking about core rates going back up to 5%. Instead, we are looking at rates gradually ticking back up towards 2%, in-line with inflation” he says.

“So while this is healthy for the market, rates are still very low and investor need for higher-yielding fixed income products persists. It’s also a very nice environment for equities as such moderate steps by central banks are unlikely to drag meaningfully on growth.”

ESG, meanwhile, is a topic “we see at every product development forum”. But there is a lot of work still to be done in this area. Why?

The main issue is one of consistency. Different investor groups have different definitions of what it means to be ethical, which is a challenge when constructing new products.

“ESG introduces non-economic factors into the product development process, which are more subjective than traditional economic considerations. Investors also have very strong views – in some cases even outright restrictions written into their investment policy.”

“So while arriving at a broad consensus may be difficult, the trend towards ESG investing is a very positive one because it promotes good corporate behaviour. ESG products at this stage are still viewed as a separate category, but I expect that will change. In the future new products may incorporate some of the more generally accepted criteria – such as a low carbon footprint – even without an explicit ESG branding.”

With the combination of Invesco PowerShares and Source, the ETF market has seen some of the consolidation many had predicted for it and, now, all eyes will be on what these two firms can achieve.

©2017 funds europe