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Supplements » ETFs Report 2013

SPONSORED ARTICLE: Catching up fast

Baudson ValerieAmundi came to the market for exchange-traded funds later than some competitors, but it has grown its market share, due to innovation and low fees, to reach the fourth position in the European ETF providers ranking, says Valerie Baudson, global head of ETF and index solutions.

Amundi started its exchange-traded fund (ETF) business in 2008 with €1 billion in its funds, recalls Valerie Baudson, global head of ETF and index solutions at Amundi.

By her own admission, it seemed a little late to enter the market. Although they were not yet mainstream investment products, ETFs had been around for some years and other firms had managed to gain strong positions in the market.

Amundi asked its clients how it could add value in the ETF business. The firm heard it must ensure its products were liquid, simple and flexible – these after all were among the defining characteristics of ETFs – and that it must work hard to limit tracking error and invest in innovation to ensure the product range was relevant and up-to-date.

But perhaps the most interesting piece of feedback Amundi received was this: even though the fees for ETFs were much lower than actively managed funds, clients wanted them to be lower still. It seemed there was an opportunity to gain significant inflows by being aggressive on cost.

“We decided to aim for a total expense ratio (TER)1 that was 25% lower than our European competition on average,” says Baudson. “We’ve done it. Five years later, I’m sure it’s one of the main reasons we multiplied our assets by ten while the market multiplied by two and a half.”

Amundi now has €10.3 billion2 in assets under management in its ETFs, which have an average TER of 25 basis points3. The company says it continues to reduce its costs thanks to efficiency gains, which allow it to pass on savings to its clients in the form of lower fees.

ETF inflows have continued this year. Baudson says about 60% of the firm’s ETF inflows so far in 2013 have gone to equity products and about 40% to fixed income. There has been a high rotation between them this year, she says, due to macroeconomic events that have encouraged investors to play a risk on/risk off strategy.

A few individual products have done particularly well. An ETF that offers exposure to the lowest-rated investment grade eurozone government debt has seen high demand and now contains more than €500 million in assets. Baudson suggests investors are using this product to take tactical bets on the eurozone recovery, as well as to chase yield in an environment where the yields on highly rated sovereign issuers are low.

Another product that has attracted in excess of €500 million is Amundi’s Japanese equity hedged ETF, which is hedged daily between the euro and the yen. Baudson says the popularity of the product was driven by Japan’s aggressive monetary policy, part of a range of measures nicknamed Abenomics after prime minister Shinzo Abe.

“European investors were underexposed to the Japanese market,” she says. “The signal given by monetary policy gave momentum. We saw these flows mostly in Q2. Obviously, the fact that we provided an innovation in the ETF which was to include the currency daily hedging, was probably a big plus.”

Besides these two products, the other two bestsellers this year have been Amundi’s ETFs tracking the MSCI World and S&P 500 indices – plain vanilla products that allow investors to gain exposure to the equity markets.

Baudson says the company continues to work hard to develop innovative responses to clients’ needs. One interesting area is providing liquid products that track less liquid asset classes.

One way to achieve this aim is by customising existing indices. Amundi ETF recently launched a European high-yield bond ETF. In order to ensure the product maintains a good level of liquidity, the ETF tracks a composite index composed of only the 30 most liquid high-yield non-financial issuers in the eurozone.

“Liquidity is crucial in the ETF world,” says Baudson. “Investors are expecting liquidity when they choose ETFs. An area of development in the near future will be over less naturally liquid asset class, where we choose the index to be sure that the ETF remains sufficiently liquid.”

Amundi is also examining “smart beta” products, in which ETFs are used to track indices beyond conventional cap-weighted indices. However, it will be some time before smart beta accounts for a significant portion of the ETF industry.

“Smart beta is going to be an area of development in the near future,” she says. “Smart beta accounts for nearly nothing of the ETF business today, but it will become significant in future, when the strategy is more popular.”

Baudson expects the market share of passive investment products such as ETFs to continue to grow in Europe, as it has in the US.

“I’m convinced this industry will keep on growing, there’s no reason it should not. The European ETF market only represents 3% of the assets invested in mutual funds overall, so it leaves a lot of room for improvement.”

An interesting trend is that asset owners such as pension funds and insurance companies are starting to use ETFs, whereas in the past the majority of demand came from asset managers. These asset owner clients are using ETFs “not for long, strategic allocations, but more for tactical allocations”, she says.

Another spur to growth could be changes in regulation of the retail investment market, such as the Retail Distribution Review (RDR) in the UK and similar legislation in the Netherlands. These changes may cause more financial advisers to recommend ETFs and other passive products to their clients. At the moment, retail investors account for a tiny slice of Amundi’s ETF business, but this could grow over time.

Baudson says Amundi ETF will stick by the guiding principles it adopted in 2008 as it seeks to gain new customers.

“Low cost is the first one. High-quality, low tracking error is the second. Innovation is the third – being transparent and liquid. We’ve stuck to these key aspects in the last five years and I’m pretty sure this explains our success.”

Amundi ETF designates the ETF business of Amundi, the management company for the funds.
As with any investment, it is important that investors fully understand the way the product works and how it can help to meet their investment objectives at the same time as identifying the associated risks.

1 For Amundi ETF funds, the TER corresponds to the ongoing charges disclosed in the KIID. The ongoing charges represent the charges taken
from the fund over a year. They are based on the previous year figures (or estimated when the fund has not closed its accounts for the first time).
The TER is a measure that compares the annual total management and operating costs (all taxes included) charged to a fund against the value of that fund’s assets.
2 Source for these and further figures, unless otherwise stated, Amundi ETF as at September 30, 2013
3 Amundi ETF comparing the average asset-weighted Total Expense Ratio (TER) of all Amundi ETFs versus that of all European ETFs (including Amundi ETF range) as stated in Deutsche Bank’s Europe Monthly ETF Market Review dated as of 30 September 2013. Important notice: some individual Amundi ETF funds may not be cheaper than their European peers and/or some Amundi ETF funds may not have equivalent European peer group to compare with and vice versa. Analysis excludes third party commissions such as financial intermediary costs incurred directly by investors when trading.

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