May 2009

FRANCE: ETFs triomphe

French consultants are beginning to accept and understand exchange-traded funds. Providers say they should now set up a database of products. Angèle Spiteri Paris reports... Investment consultants have historically been wary of advising their institutional clients about exchange-traded funds (ETFs) since the passive nature of these vehicles makes their job as investment experts redundant. But providers claim that French consultants are getting used to the product.

Isabelle Bourcier, global head of Lyxor ETF, says: “It’s changing. It’s slow in terms of progress but it’s happening. I remember discussing with consultants saying that although they liked our ETFs their job is to help their clients select the best performer. Since ETFs track the index performance, they said there was no value-added on their side.”

The financial crisis has pushed ETF products into the limelight and providers and products have mushroomed as a result. According to Barclays Global Investors, as at April 2009, in Europe there were 672 ETFs with 1,706 listings on 21 exchanges. Assets totalled US$135.6bn (€102.5bn) and there were 29 providers.

This figure is due to grow. Valérie Baudson, managing director at Crédit Agricole Structured Asset Management ETF (Casam ETF) says: “We are launching ten new ETFs every three months.” Although Casam had launched three ETFs in the early 2000s, it has re-energised its ETF production, launching 33 new funds last year.

The seemingly unstoppable growth in the market suggests that, whether they like it or not, investment consultants are going to have to tackle ETFs.

ETF education
Baudson says: “In France, more and more consultants are trying to understand precisely what are the main differences between the different ETFs available. It depends on the consultant of course.”

Benoit Magnier, co-president of Altedia Investment Consulting, a French consultant, says: “Investment consultants in France
have historically not advised on ETFs. The reason is mainly the weakness of the ETF offering.

“But now, some managers have developed their offerings for French institutional investors, and it has been a great success.”
Providers must also play a role in the education of consultants. They need to properly understand the difference between a swap-based ETF and one based on physical replication. They need to know how dividends and taxation are dealt with by the particular vehicles.

“Some are receptive, some are not yet,” Baudson says of French consultants, adding that the ones who are more receptive are encouraged by clients that ask questions about ETFs.

“I recently visited two French consultants that wanted to really understand the product. There are around ten active consultants in France so this is a good start,” Baudson notes.

Bourcier, of Lyxor, says: “ There’s some work to be done on our side as ETF providers. It is our job to convince the consultants that they can have added value.”

Economic climate
She is convinced that consultants’ willingness to consult on ETFs will change as a result of the current market situation. “A lot of active funds have been so bad in terms of performance, plus all the issues raised by funds being closed. All those aspects will lead to consultants being more receptive to ETFs,” she says.

Magnier, of Altedia, agrees. “Things may change also because of the difficulty for asset managers to deliver high and constant return above the benchmark.” He adds that Altedia implemented ETFs in its research three years ago and its clients began investing in the space in 2008.

Danièle Tohmé Adet, head of BNP Paribas Asset Management’s EasyETF, says: “On the institutional side there has been a shift from active to passive. Investors are keen on saving tracking error for allocation to real alpha, consuming the minimum of the global risk budget for benchmark allocation.”

This shift in demand from investors is therefore bound to put pressure on consultants to find a way to add value
with ETFs.

Bourcier says: “What institutional investors are going to be looking for from consultants is a database, somewhere they can see all the products, get an analysis of all the products and be able to compare one to another.

“The number of ETFs is huge and the number of players keeps growing. When you want to compare one ETF with another it’s quite complicated. It’s not just a question of looking at the fees, there are many other things to consider.”

Compare and contrast
A cursory comparison could be deceptive. Tohmé Adet, of EasyETF, says: “While management fees for French-domiciled funds are all inclusive, the management fees for funds domiciled in Luxembourg are not equal to the total expense ratio because they do not include custody, administration or TA fees.”

Bourcier says: “Investors need to be able to compare which product is going to be more efficient than another. So database management would be very important.”

A few data providers like Morningstar and Lipper have attempted to meet the comparison requests. Difficulties for any data providers centre on how the data is put together and how simple it is for investors to discern between products.

Drivers for change
Although historically French pension funds have not invested in ETFs, the situation is changing for various reasons.
Tohmé Adet says: “Before the crisis, pension funds used ETFs for diversification or to make tactical plays. ETFs were too expensive when addressing the core allocations as compared to passive mandates.

“Now they choose ETFs for their core allocations as well. This is essentially for market-timing reasons, market volatility being too high during the day. It is also for transparency, since the portfolio could be valued on a real-time basis at any time for assessing risk management.”

©2009 funds europe

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