Amundi Group has brought innovation to the ETF world without breaking the golden rules of transparency and liquidity, says Valerie Baudson.
Since entering the market in 2008, Amundi ETF has been associated strongly with two dominant and sometimes controversial issues running through the exchange-traded fund (ETF) industry.
The proliferation of products is the first one; the debate about the best way to capture returns from the indices which ETFs track is the other.
Proliferation of ETFs has not been agreeable to most critics, particularly where products have been defined by complexity. Critics have accused ETF providers of cloaking rampant product development in the robes of “innovation”.
Amundi ETF has played its role in the proliferation of products, but for Valerie Baudson, managing director at Amundi ETF, the innovation brought by the firm to the market should not be bracketed with complexity. The funds do not lose sight of what is crucial to ETFs: transparency and liquidity.
“If you want to be a credible ETF provider you must be able to offer a range of products for clients to use like a tool box, and this explains the large number of products that have been launched,” says Baudson.
“We value innovation at Amundi ETF and one-third of products launched were original products in Europe.
“But we have not lost sight of the fact that transparency and liquidity are key. We would never launch anything too exotic because we recognise that investors must be able to understand what a fund does, such as understanding the index a fund is tracking.”
By way of example, the Amundi ETF range offers an ETF tracking the S&P Euro Daily Hedged Strategy index as well as one tracking the Topix Euro Daily Hedged index. “These are innovative funds – yet they are simple, being based on recognisable indices like the S&P and Topix.”
She also points to two fixed income funds that were launched as a potential solution to risk and return challenges for investors arising from the financial crisis. Each one invests in either the lowest or highest-
rated investment grade government bonds.
“It is the liquidity of an underlying index that is important, so when we talk about innovation that’s fine. But we must be innovative while remaining within parameters where it is still possible to provide simple, liquid products.”
The hedging products were designed for two specific targets of client, says Baudson.
These were, first, private banks that did not want to carry out their own currency hedging. Second, Amundi ETF was catering also for medium-sized asset managers and insurance companies who did not want to bear foreign exchange risk. This is particularly important where insurers have regulatory solvency ratios to consider.
If critics are not won by this approach to innovation, which keeps transparency and liquidity central to product design, then Baudson offers this defence: these products are not meant for retail investors, but for professionals.
“I defend our stance on innovation because it is linked to who our clients are. We would not do this for a retail audience,” she says. “In Europe, our underlying investors are mainly professional asset allocators.”
To put it another way, the buyers within the target market for these and other Amundi ETF products are in a position to know and understand how these products work and what the inherent risks are.
And this is a view that relates directly to the other major theme that has pervaded the ETF industry over the past year: the most efficient way to capture index returns.
Concerns were raised about the risks within ETFs that use swaps to match the return of an index. The worries focused on counterparty risks, with critics pointing out that one swap derivative may have several counterparties, each bearing their own risk of default.
This issue is also placed within the broader theme of ETF transparency and simplicity. Amundi, being primarily a provider of swap-based ETFs, has had some explaining to do.
But again, Baudson emphasises that Amundi’s target market is the professional investor who is in a position to make a judgement about which is the best way to access an index.
Competing with swap-based ETFs are those that use “physical” replication, or buy real financial instruments contained in an index.
The issue crystalised in an industry consultation by the European Securities and Markets Authority ESMA), which extended what began as an ETF matter to the wider Ucits-regulated index-tracking funds industry.
ESMA put an end to the synthetic versus physical debate because the consultation improved the transparency of both types of products,” says Baudson.
“People realised that physical products also have counterparty exposure risk within them through stock lending.
“We welcomed extremely positively the results of the debate because it improved transparency overall and it played an educational role in helping investors to better understand all of the risks within all types of ETF products.
“Most of our ETFs are backed by swaps because we strongly believe this is the most efficient way to track an index, both in terms of costs, and because of a lower tracking error.
“People ask how you can provide a high-quality ETF for a low cost. Well, it is the low tracking error that is the sign of a high-quality ETF product and swaps are best for that.”
She says evidence from the market does not look negative for swap-backed ETFs and that, in fact, many investors are buying products based on their needs first and foremost, not on their prejudices for replication methods.
“If you look at flows to the top four providers, two of them are physical providers and two, including Amundi ETF, are synthetic providers.”
The consultation also benefited the industry by drawing a clear distinction between ETFs and other types of exchange-traded products, says Baudson.
“It reminded everyone that ETFs are compliant with Ucits regulations and so they, therefore, have a high level of security and constraints that are extremely strict. It clarified the fact that ETFs are part of a regulatory regime that is highly regarded and globally distributed.”
Amundi ETF designates the ETF business of Amundi Investment Solutions, the management company for the Funds, and part of Amundi Group
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