www.etfexpress.com special report September 2015

Guide to ETFs for Wealth & Asset Managers

Rise in ETF usage Currency hedged Abenomics aids by wealth and ETFs boom under Japanese market, asset managers Swiss care UK sees RDR boost CONTENTS In this issue…

03 ETF usage by wealth managers in the UK is on the rise By Beverly Chandler

05 Abenomics invigorates Japanese ETFs Interview with Koei Imai & Geoffrey Post, Nikko

07 Currency hedged ETFs boom under Swiss care Interview with Andrew Walsh, UBS

11 Investing smart with buyback ETFs By Fannie Wurtz,

13 Asserting fundamentals over sentiment By Nitesh Shah, ETF Securities

16 Pioneer ETF firm offers essential range Interview with Arnaud Llinas, Lyxor Asset Management

18 RDR aids ETF growth in the UK Interview with Hector McNeil, WisdomTree Europe

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Managing Editor: Beverly Chandler, [email protected] Contributing Editor: James Williams, [email protected] Online News Editor: Mark Kitchen, [email protected] Deputy Online News Editor: Leah Cunningham, [email protected] Graphic Design: Siobhan Brownlow, [email protected] Sales Managers: Simon Broch, [email protected]; Malcolm Dunn, [email protected] Marketing Administrator: Marion Fullerton, [email protected] Head of Events: Katie Gopal, [email protected] Head of Awards Research: Mary Gopalan, [email protected] Chief Operating Officer: Oliver Bradley, [email protected] Chairman & Publisher: Sunil Gopalan, [email protected] Photographs: iStock Photo Published by: GFM Ltd, Floor One, Liberation Station, St Helier, Jersey JE2 3AS, Channel Islands Tel: +44 (0)1534 719780 Website: www.globalfundmedia.com ©Copyright 2015 GFM Ltd. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Investment Warning: The information provided in this publication should not form the sole basis of any investment decision. No investment decision should be made in relation to any of the information provided other than on the advice of a professional financial advisor. Past performance is no guarantee of future results. The value and income derived from investments can go down as well as up.

GUIDE TO ETFs Special Report Sep 2015 www.etfexpress.com | 2 OVERVIEW

ETF usage by wealth managers in the UK is on the rise By Beverly Chandler

Boutique asset managers favour ETFs Wealth and asset managers in the UK was one of the findings of a recent survey are increasingly using ETFs for their clients conducted by research firm TABB Group portfolios and the direct result can be found for software company SunGard. Some 48 in the news that ETF assets have overtaken per cent saw ETFs as an area of significant assets. demand from investors, with many boutique The second quarter of 2015 saw ETFGI managers using ETFs as a low cost way of reporting that there was USD2.971 trillion investing in an asset class and bolstering invested in the 5,823 ETFs/ETPs listed performance through picking and direct globally at the end of Q2 2015, while hedge investment. fund assets over the same period stood at Commenting on the research, Trevor USD2.969 trillion, invested in 8,497 hedge Headley, head of product management of funds according to Hedge Fund Research. SunGard’s boutique asset management The two industries have been locked into , says that ETFs are increasingly a step-by-step competition for greater assets being used as by this group as an efficient within the alternative sector since ETFs base for focused portfolio construction. arrived on the scene, over 20 years ago, but 9

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K NIKKO ASSET MANAGEMENT Abenomics invigorates Japanese ETFs Interview with Koei Imai & Geoffrey Post

There are convincing signs, including the a local manager with significant assets. recent 18-year high of the Nikkei , “We can invest at a lower cost resulting in that Abenomics is reinvigorating the world’s superior tracking,” Post says. “One of the third largest economy. The Japanese ETF areas we are proud of is the quality of our industry too has enjoyed tremendous growth ETFs – a low tracking difference is one of under Prime Minister Shinzo Abe’s economic the investors’ key decision criteria when reforms and now some leading Japanese ETF looking at these products.” providers are courting Western investors. One of the developments of Abenomics Nikko Asset Management, one of the has been the launch of the Nikkei JPX 400; pioneers of the ETF business in Japan, a new index composed of companies with launched their first ETF back in 2001. - Koei Imai, head of ETF Centre, high appeal for investors and designed to based Koei Imai, head of the firm’s ETF Nikko Asset Management drive change in corporate Japan. Centre, explains that the Japanese ETF “It is a very interesting story and an market underwent significant deregulation important tool for investors as Japanese in 2007 in an effort to encourage greater institutions migrate to this as the default product innovation. Nikko Asset Management index,” Imai explains. “It gives them the saw this as an opportunity and today the opportunity to invest in companies with firm is Japan’s second-largest ETF provider. high profitability and return on investment London-based Geoffrey Post, who is as well as good governance.” Nikko Asset responsible for developing Nikko Asset Management was one of the first to launch Management’s ETFs in Europe, explains: “As an ETF based on the Nikkei JPX400 in Asia’s premier global asset manager our focus January 2014, now the fund has USD500 is on bringing Asian investment solutions to million under management2. western investors as well as global investment Geoffrey Post, head of Real estate investment trusts (REITS) is solutions to Asian investors.” ETFs Europe, Nikko Asset another area in which the asset manager is Management He notes that the firm is differentiated seeing growth. The firm has USD800 million from the majority of large established under management in Japanese REITS and managers investing in Asian markets, as it is Imai reports that it is popular with institutions headquartered in Asia and the majority of its and private investors3. “Real estate in Japan investment professionals are based in Asia. is recovering,” he says, “and there is extra The firm manages USD160 billion in total momentum from the 2020 Olympics and assets1, including USD37 billion of indexed associated development projects, plus in assets. The firm’s TOPIX ETF has USD10.5 a low global interest rate environment the billion under management while their Nikkei current yield is competitive.” 225 ETF has USD12 billion. Imai believes that the ETF market is The ETF range from Nikko Asset poised to continue to grow rapidly in Japan; Management offers distinct advantages. at a recent seminar with investors from “We are in a good position to provide 12 Japanese banks ETFs dominated the products that are run from the local Asian discussion. “Previously, people were not markets,” Post says. “There are a number motivated to invest in the Japanese market of advantages but in particular people can but now due to Abenomics, ETFs are invest when the local markets are open expected to grow significantly,” Imai says. which provides transparency and efficiency Imai adds that the changing needs of for investors.” 1. AuM as of 03/31/2015. investors means the firm is looking beyond 2. AuM as of 06/30/2015. There are other advantages to being 3. AuM as of 06/30/2015. traditional ETF strategies. n

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For marketing and information purposes by UBS. For Professional Clients only. It is not to be distributed to or relied upon by Retail Clients under any circumstances. This document has been issued by UBS AG, a company registered under the Laws of Switzerland. Issued in the UK by UBS Global Asset Management (UK) Ltd, authorised and regulated by the Financial Conduct Authority. This document is for distribution only under such circumstances as may be permitted by applicable law. The products or securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Source for all data and charts (if not indicated otherwise): UBS Global Asset Management. © UBS 2015. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. E8

5Z_1018_UBS_ETFQ2_210x297_EN-UK_v1.indd 1 27.08.15 15:53 UBS Currency hedged ETFs boom under Swiss care Interview with Andrew Walsh

Swiss bank UBS, headquartered in Zurich between GBP100 million and c. GBP20 billion has been offering ETFs for some time across in . continental Europe but it was only in the last He is also seeing more sophisticated few years that they entered the UK market independent financial advisers using from which point their business has been ETFs and an increase in the number of gaining strong momentum ever since. independent financial advisers attending ETF Andrew Walsh, head of UBS ETFs sales events and searching out more information in the UK, explains that the history of on the sector. “There is a lot more awareness active fund use in the UK had held back the than there was even a year ago,” he says. demand for ETFs for a number of years, but For Walsh, the big strength of ETFs is that since 2013 usage has continued to increase Andrew Walsh, head of UBS they allow investors flexible and transparent at a steady pace. ETFs sales in the UK access to a large variety of regional and “Increasingly, wealth managers and thematic exposures, and with currency- independent financial advisers are using hedged ETFs, investors are able to mitigate ETFs to meet their clients’ needs,” he says, the effects of currency fluctuations on their and points to particularly strong growth in returns when investing in foreign markets. UBS’s currency-hedged ETFs. “Currency- The EMU products have seen growth due hedged ETFs have been a key area of to a disparate view on the Eurozone equities interest for investors looking to access market and that of the Euro. This was in part foreign equity and markets.” driven by and events on the macro UBS’s ETFs offering hedged exposure to stage. “For example, there continues to be a the Eurozone (aka ‘EMU’) equities market well-grounded view that even though Greece have had strong inflows. The UBS ETF MSCI is not included in the MSCI EMU index (it is EMU GBP-hedged product launched just in fact in the MSCI emerging markets index), 17 months ago has risen to assets under events in Greece would have a negative management of over GBP600 million, while impact on the Euro itself and as such would the US dollar version, EMU USD-hedged, has decline against Sterling and the dollar. And gathered assets of USD1.95 billion. they were correct,” Walsh says. “Over the “These products have embedded currency last 18 months, those investors who bought hedging in them, which means that investors our EMU GBP-hedged ETF will have fared are able to separate out the equities bet from considerably better than those who bought the implicit currency bet in an easy-to-trade the un-hedged version of the EMU ETF.” and very transparent wrapper,” Walsh says. There have also been more tactical forces “The very large asset managers with for at work. “People believed that what they example over GBP100 billion in AUMs will have saw was an undervalued equity market the ability to do complex currency hedging in Europe,” Walsh says. “If you compared overlays across multiple portfolios in-house, company valuations between Europe and but smaller asset managers and wealth the US, European blue chips offered a real managers may not have these capabilities upside opportunity.” and thus these products have been very well Walsh explains that with currency-hedged received by these types of clients.” ETFs the investor has the ability to separate As a result, the key market for this suite of out the currency bet from the underlying products has tended to be those firms with equity bet. “When, as a British investor, you

GUIDE TO ETFs Special Report Sep 2015 www.etfexpress.com | 7 UBS

across Europe the figures stand at roughly 85 per cent institutional and 15 per cent retail. Walsh feels that those numbers are set to change. Within the UK, UBS offers an ETF product range of 164 ETFs tracking a range of indices from equities to commodities to . Despite the recent downturn in the commodities markets, broad commodity funds have proved to be of interest with some investors, with money still coming into the sector. Walsh reports that while clients aren’t necessarily bullish on commodities, they want some level of exposure as a way to get some de-correlation from other asset classes. This exposure can be achieved through ETFs. UBS offers the CMCI composite range of ETFs, which track the UBS Bloomberg CMCI broad commodities index, a second generation commodities product which is buy abroad, you are implicitly taking a bet on designed to reduce the effects of negative currency movements as well.” roll yield which is a largely inevitable part of Walsh feels that the British election in May any commodities product which has to roll also had its part to play in driving wealth futures contracts to gain their exposure. advisers to use ETFs for currency hedging. In 2009 commodity spot prices were up “An important message with the EMU by close to 50 per cent but investors only equity market is that, particularly after the made around half that largely because of the Conservatives won their majority, it probably damaging effects of rolling futures contracts reinforced the idea that Sterling will continue across all of these various commodities to to strengthen against the euro,” he says. keep exposure, Walsh explains. “There are also hints of Sterling interest rate A futures curve with an upward sloping increases on the way and all other things shape known as ‘Contango’ hurts investors’ being equal, interest rate rises will strengthen returns, while the opposite shape is called a currency of course.” ‘backwardation’ and benefits investors. When Another development in the wealth adviser investing in a broad commodities product, market has been the greater appreciation of it’s important for investors to consider how the benefits of ETFs trading on-exchange. this process is handled by the underlying “They are more aware that ETFs are an index which the ETF is tracking. alternative to active and tracker funds,” UCITS has its part to play as well. UCITS Walsh says. “Tracker funds don’t trade like diversification rules mean that there must , they are not traded intra-day. So that be five underlying assets in an index being transparency which ETFs offer continues to tracked to be an actual ETF (as opposed to be important and attractive. People can look at an ETC or an ETN), so a broad commodities their online finance pages and see the price index product fits the bill. movements and volumes of an ETF moving Investors are also focusing on ETFs a through the day. If there is a political event or lot more to gain exposure to fixed income. if an interest rate cut was made unexpectedly “They continue to be an area of interest,” in the morning, for instance, ETFs enable an Walsh says. “And offer currency hedging investor to act immediately on this news and embedded into a number of our fixed income not have to wait until the end of the day to ETFs which is an important consideration make a purchase or sale of the fund.” because currency fluctuations usually have In the US, ETF ownership is made up of a disproportionate impact on foreign bond roughly 50 per cent institutional and 50 per returns as compared to that of foreign cent retail investors whereas in the UK and equities investing.” n

GUIDE TO ETFs Special Report Sep 2015 www.etfexpress.com | 8 OVERVIEW

3 in fact the two market segments have little “Where we do use ETFs, in common. An ETF, or exchange traded fund, is a we typically utilise them marketable that tracks an index, a in asset classes where commodity, bonds, or a basket of assets like market information is an . However, unlike a fund, an ETF trades like a common stock on a stock most transparent and, exchange, with prices rising and falling as consequently, the pricing of the market moves throughout the trading day. ETFs have become increasingly the underlying holdings is sophisticated in recent years, evolving into a extremely efficient.” wider range of underlying markets and into Jordan Sriharan, Thomas Miller more tactical vehicles, allowing investors to select their exposures through applications of , currency hedging or and thirds (68 per cent) of professional investors leveraged options. and advisers in Europe are currently using French ETF issuer Lyxor defines smart ETFs in the portfolios they manage, while 22 beta ETFs as denoting rules-based per cent have used them in the past. investment strategies that do not rely on The survey was conducted among more market capitalisation. than 750 professional investors and advisers Lyxor uses three sub-segments to based in 11 European countries. Each of classify all the products that are included those interviewed were responsible for at in this category. Risk-based strategies least GBP50 million worth of private client based on volatilities and other quantitative investments or GBP100 million of institutional methods; fundamental strategies based on assets. The biggest users among wealth the economic footprint of a firm or state – managers, according to the study, are in through accounting ratios or macro-economic Switzerland, while the smallest take-up is measures, respectively and lastly, factor in Spain. strategies, which include homogeneous It has been the UK’s love of an active ranges of single-factor products and portfolio manager that has held back the multifactor products designed specifically for development of ETFs in the country, but factor allocation. new ETF products and an increasing The US dominates the ETF industry with disenchantment with the performance and some USD2 trillion in assets, roughly 75 per fee structures of traditional active funds are cent of the market against Europe which has pushing ETF growth. close to 15 per cent. Jordan Sriharan, investment analyst, with ETFs in the US are stronger in the retail GBP2.9 billion Thomas Miller Investment is sector than they are in Europe. In the US, at the sharp end of creating portfolios and ETF ownership is split roughly into two selecting ETFs. Thomas Miller Investment’s parts, 50 per cent institutional and 50 per Managed Portfolio Service manages cent retail. In the UK and across Europe GBP400m in multi-asset portfolios for private the figures are 85 per cent institutional and clients managed through model portfolios 15 per cent retail, as private investors have which are constructed using long term asset been slower to buy ETFs, a situation that is allocations. The four model portfolios have clearly changing. been designed to achieve performance Observers and practitioners in the industry targets of cash plus 2 per cent, 3 per cent, believe those European figures are set to 4 per cent and 5 per cent on a net of balance up, as sophisticated investors and fees basis. wealth managers increasingly use ETFs for “Where we do use ETFs, we typically sector exposure and tactical purposes in utilise them in asset classes where their client portfolios. market information is most transparent One of the key providers of ETFs in and, consequently, the pricing of the Europe, Source, published research earlier underlying holdings is extremely efficient,” this year which revealed that more than two- Sriharan says. 14

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GB_Amundi_Pan_europe_Wealth Advisers_ETF Guide_210x297H+3.indd 1 31/08/15 14:16 AMUNDI Investing smart with buyback ETFs By Fannie Wurtz

The development of Smart Beta solutions Buybacks have been a very popular has become a major field of innovation shareholder remuneration policy in the US in the ETF industry: the wide range of since the 1990’s1, Current market conditions both mono and multi-strategy ETFs allows could lead to a similar trend in European and investors to benefit from a broad choice of Asian markets in coming years, aided by the tools to meet different investment needs and low interest rate environment and liquidity, weather changing market conditions. In the provided by local QE policy. case of ETFs which track Buyback indices, investors may be able to access significant An improved attention to risk yield through a return-oriented filter to the Many of the buyback indices currently underlying investment universe. Furthermore, Fannie Wurtz, Global Head of available apply Equal Weighting methodology, stock selection can be improved with an ETF, Indexing & Smart Beta a Smart Beta filter that aims to help improve Sales, Amundi equal-weighting scheme applied by the index long-term performance by reducing bias provider to ensure unbiased exposure to the towards the largest individual companies. underlying theme. Equal weighting Smart Beta strategies are a useful way to diversify portfolios by providing Buyback ETFs: a return-oriented more balanced exposure to risk factors. This is particularly relevant when investing Buyback indices are designed to include in markets where companies performing stocks of companies which have chosen buyback policies can have a high risk of to apply an own-stocks repurchase policy, concentration. thus reducing the amount of outstanding Moreover, the use of ETFs allows shares and returning value to shareholders. investors to reduce the cyclical specificities Buyback programs are, therefore, a form of the buyback investment theme, as the of remuneration for existing shareholders, periodic rebalancing of the index gives alternative to . automatic and constant access to the Following the buyback theme is companies performing buyback policies in compelling for many reasons: first of all, the period, so as to capture long-term equity it boosts EPS (Earnings per Share) by market performance. deploying cash. Moreover, a buyback program is more tax efficient for the Amundi’s strength in Smart Beta company than payouts, as the 1. Source: S&P – Amundi is fully committed to finding specific money is directly spent by the company in 31/12/2014. solutions to client needs and its broad range the market but no cash is paid directly to 2. European ETF Monthly of mono and multi factor Smart Beta ETFs Report, June 2015 – shareholders. make it one of the major players in the Deutsche Bank. Furthermore, ETFs tracking buyback 3. Transaction cost and European Smart Beta ETF market2. indices provide access to a basket of commissions may occur At Amundi ETF, all innovations are client companies with shareholder friendly when trading ETFs. driven. We take a pragmatic approach to management, willing to return capital to Financial promotion issued innovation and it represents one of the by Amundi, an investment investors; companies that run share buyback central pillars of our focus, alongside quality manager regulated by the 3 programs are normally in good financial AMF under N° GP 04000036. products and competitive pricing . Amundi health, present undervalued shares or have Registered office address: ETF launched the first ETF in Europe excess cash on the balance sheet. This 90, Boulevard Pasteur 75015 tracking the S&P 500 Buyback Index in Paris Cedex 15 – France – n creates a de facto quality filter. 437 574 452 RCS Paris. February 2015.

GUIDE TO ETFs Special Report Sep 2015 www.etfexpress.com | 11 Intelligent access

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Corporate-multi-asset-A4.indd 1 27/08/2015 14:23 ETF SECURITIES Asserting fundamentals over sentiment By Nitesh Shah

The commodity cycle is turning. Excess elsewhere has been slashed. A recovery in supply is being cut back across a broad prices between March and June this year range of commodities. While it will take time threatened to undo some of the production to reduce surplus stock, the trend is now cuts that we had expected. US oil rigs rose set in the right direction. Sentiment however, in response to the increase in price and remains stubbornly negative as multiple producers elsewhere remained vague about years of poor performance has jaded how exactly they will cut back. investors. We assert that if sentiment starts However, prices have declined once to realign with fundamentals there maybe again in recent weeks, pressing high-cost scope for strong price gains. Exchange producers (primarily non-US, non-OPEC) to traded products (ETPs) allow investors to Nitesh Shah, Research cut investment. The dearth of investment capitalise on such investment themes. Analyst, ETF Securities today will mean that high cost production, There are plenty of examples within the particularly deep-water and capital intensive commodities space where sentiment and conventional oil production that was fundamentals are currently misaligned. Take expected last year, will fail to come to market industrial metals. Although fundamental and therefore tighten the supply-demand conditions appear to be tightening for a balance. At the same time weak oil prices range of industrial metals, other factors are have spurred demand from developed and keeping gains in check. A strengthening US developing countries. Once again we are Dollar and concern over Chinese demand moving toward a supply-demand balance. are having a restraining affect, but we expect There are plenty of examples beyond the influence of these factors to fade over industrial metals and oil which highlight the coming months. We think those fears the misalignment between sentiment and over dollar strength and weak Chinese fundamentals. Sentiment is fickle and if demand are overdone. Strengthening of history is a guide, negative sentiment could the US Dollar only comes in the context of shift suddenly, potentially giving rise to sharp a strengthening US economy – something price gains. that bodes well for industrial metal demand. Commodities are one of the largest markets China’s commodity imports have been opened up by ETPs, allowing investors resilient despite the lacklustre economic to buy anything from industrial metals to performance so far this year. We see grain without worrying about the logistics of the country’s demand for commodities storage, transport and insurance. Frank Spiteri, increasing as the postponed infrastructure Head of Retail Distribution, ETF Securities, spending from last year gets accelerated. says: “The advent of commodity ETPs has Weak prices tend to generate demand, revolutionised the way in which investors in turn helping prices to strengthen. The access commodity markets, providing a variety oil market is an example of this dynamic of investors with exposure to both physical in practice. Following a glut in supply after spot and future commodity returns. ETPs OPEC abandoned its previous policy of have seen tremendous growth since their trying to balance the market, oil prices European debut over a decade ago and we more than halved between June 2014 and expect the retail market share to continue to March 2015 and US oil rigs in operation fell grow steadily as more intermediaries look to by 60 per cent. Investment in oil production introduce clients to ETPs.” n

GUIDE TO ETFs Special Report Sep 2015 www.etfexpress.com | 13 OVERVIEW

9 “By and large we use ETFs in the equity “More education on platforms space. We use them considerably less in fixed income because of the issues around would be an added bonus benchmark construction in the asset class. for advisers when making a In alternatives, such as commodities and selection on which product hedge funds, we use active managers because the space is more complex and to use and what product requires more detailed fund selection.” might be suitable for There is also a geographical aspect to the firm’s use of ETFs. Sriharan explains: their clients.” “We tend to use equity ETFs in developed Lynn Hutchinson, Charles Stanley markets rather than emerging markets because emerging markets are more opaque and are prone to suffering more idiosyncratic provider which looks at the whole of the bouts of risk aversion. We require active European passive product market and managers for that because they are, typically, selects a list of products for their internal on the ground and understand their markets wealth managers across global asset classes well, helping them to navigate the space based on a number of factors. They also more successfully. Developed markets offer a facility for external wealth managers. equities have a larger and more developed Lynn Hutchinson, associate director, investor base which leads to more efficient explains that the factors include, among price discovery, so buying the indices can others, tracking difference vs underlying work for us.” index, cost, transparency of product and Sriharan’s approach is not cut and dried provider information. and can be moulded to fit certain situations. “As there are an increasing number of “It’s not a one way street because some products available from the providers, with developed equity markets have nuances, many of them having the same objective to such as the FTSE 100 which is dominated by track the same index, there is a ‘preferred’ oil and gas and financial companies. These list of available ETFs that is available within sector biases can slant a portfolio exposure the Group,” she explains. “This list is not so we would try and use both ETFs and an static and will update with new products or active manager or managers in the UK.” changes from existing products, it does not Smart beta ETFs, designed to offer a mean that Pan Asset suggests selling the particular exposure are also employed by current product that they may hold but does the firm. make available any new products to new “We would use smart beta ETFs if we investments within portfolios.” were trying to build a deliberate exposure The Pan Asset list tends towards London within an asset class. We have looked at Stock Exchange-listed products, primarily them and will look at them again going GBP class where available, because of the forward but we have, historically, tended predominately UK based client portfolios, to focus on traditional . We but Pan Asset also encourages investment manage within the constraints of our long managers to call the Pan Asset team to term asset allocation benchmarks so we are discuss products that they may be looking mindful of taking significant off-benchmark for that are not yet in the list. risk,” Sriharan explains. Hutchinson explains that additionally, the The ETF live price feed advantage doesn’t list does not dictate what an investment always work so well for wealth managers manager can or can’t buy but is a guide who need to use a single price to reflect to what is available. For non-sterling based consistency across discretionary and client portfolios the investment managers managed portfolios. In this instance, tracker are aware that there are different currency funds might prove the more popular route to classes available within a lot of the ETFs. index and benchmark exposure. “External wealth managers are able Pan Asset, a division of Charles Stanley to access our expertise in this area via Group, is a specialist passive product model portfolios where we combine best of 19

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ETFs & INDEXING • ALTERNATIVES & MULTI-MANAGEMENT • & SOLUTIONS

THIS COMMUNICATION IS FOR PROFESSIONAL CLIENTS ONLY. *Bloomberg source: data from 30/12/2013 to 31/12/2014. These products comply with the UCITS Directive (2009/65/EC). Lyxor AM recommends that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID in English are available free of charge on www.lyxoretf.com, and upon request to [email protected]. Lyxor Asset Management (Lyxor AM), société par actions simplifiée having its registered office at Tours Société Générale, 17 cours Valmy, 92800 Puteaux (France), 418 862 215 RCS Nanterre, is authorized and regulated by the Autorité des Marchés Financiers (AMF) under the UCITS Directive and the AIFM Directive (2011/31/EU). Lyxor AM is represented in the UK by Lyxor Asset Management UK LLP, which is authorised and regulated by the Financial Conduct Authority in the UK under Registration Number 435658. LYXOR ASSET MANAGEMENT Pioneer ETF firm offers essential range Interview with Arnaud Llinas

In terms of ETF assets under management, terms of bid offer spread, trading at less Lyxor Asset Management is in the top three than 10 basis points,” Llinas explains. “We in Europe, with USD54 billion in assets in have changed some features for some of ETFs, behind iShares and Deutsche Bank. them – created a distribution share class Arnaud Llinas, Head of ETFs and Indexing where it is needed, and refreshed certain at Lyxor Asset Management says: “We are characteristics to make sure they are perfect one of the major players in this industry in in all aspects.” Europe , and the second largest issuer of It is these ETFs that Lyxor will propose ETFs in Europe in terms of inflows year to to clients who want a model portfolio. “Here date.” The firm first launched ETFs in Europe we have created a range of ETFs, which in 2001. “What we have particularly focused Arnaud Llinas, Head of ETFs can form the building blocks of any portfolio; on since our creation is innovation. We try to and Indexing at Lyxor Asset whether it is aimed at retirement savings, Management be at the forefront of innovation, launching aggressive growth, or a simple balance of emerging market or smart beta ETFs.” global equities and bonds. The aim is to The Lyxor ETF Essentials range of ETFs is make it easier for new clients by cutting the subject of their focus at the moment. through the overwhelming choice, and “The problem that investors are facing, focusing on just a few key exposures.” specifically retail investors and allocators, Llinas believes that until now ETFs have is how to choose from the vast number of been used in Europe by institutional clients ETFs available,” Llinas explains. and that ETF issuers have worked to serve “There are more than 4,000 ETFs in the the needs of institutional clients. world, while in Europe there are 1500, so “The idea of this is to increase our plenty. And if you take an index like the offering and added value for clients, directed Euro Stoxx 50, you will find more than 15 towards distribution types of clients such ETFs tracking it. Not only is it a question of as private banks, retail clients and wealth choosing between issuers, but also the basic managers.” building blocks of your portfolio.” Lyxor also caters for the more Lyxor decided to select an essential range adventurous investor. “We have a lot of from its offering of 230 ETFs. “We tried to ETFs which are not available from other make a tight, very concentrated selection competitors, especially in emerging markets of the best ETFs, which represent the and other remote and complex underlying major equity and bond indices from across markets. As soon as the underlying liquidity the world.” is enough to support an ETF, we make sure Some 14 existing Lyxor ETFs were our clients can access it.” selected, based on the best indices in Another focus has been on finding better terms of liquidity, performance and their ways to construct indices than the classical representation of the underlying economies, capital market weighted way. “As a wealth both from equities and fixed income. manager, the proposal of Lyxor is that we The ‘best in class’ selection contains can help you invest the way you want to. ETFs with a minimum of USD1 billion, Whether that is using core, liquid indices, represent 50 per cent of all assets held in or getting more granular, and focusing on a Lyxor ETF, and are each in the top 100 of the specific region, country or, sector, or even a most traded ETFs in Europe. specific quantitative or fundamental strategy. “These ETFs are liquid and tight in That is the flexibility Lyxor can offer”. n

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This communication has been provided by WisdomTree Europe Ltd. which is an appointed representative of Mirabella Financial Services LLP which is authorised and regulated by the Financial Conduct Authority. If you wish to read our full disclaimer please visit www.wisdomtree.com. WISDOM TREE RDR aids ETF growth in the UK Interview with Hector McNeil

The Retail Distribution Review has aided the “People are realising that if recent rapid growth in ETF usage in the UK says Hector McNeil, Co-CEO, WisdomTree you want to express a low Europe. “Increasingly with the move to fee- cost beta solution, an ETF based models, the alignment of the wealth wrapper is a great way to adviser and investors is more apparent,” he says. “It’s now a much more symbiotic access better risk adjusted structure and basically the structure that they returns to the market.” have in the US, where ETFs have taken off.” ETFs are cost effective, transparent and liquid, McNeil says, allowing a blend in asset Hector McNeil, Co-CEO, resonating with wealth managers who are allocation of active and passive funds. WisdomTree Europe increasingly using ETFs for plain beta, “The majority of products are Delta one McNeil says. “The plain beta battle has been using either asset allocation or a core won by ETFs by now. People are realising satellite type of approach, so tactically, they that if you want to express a low cost beta might think China is going to rebound in the solution, an ETF wrapper is a great way medium term or that they need to hedge to access better risk adjusted returns to against Greece.” the market.” In the UK, WisdomTree Europe has been McNeil believes that the decision on part of the initiative to work with other smart beta is different, because managers leading ETF providers ETF Securities and are looking for returns after fees with smart Lyxor, on education on the use of Short beta rather than just the lowest cost as and Leveraged ETFs. “Most wealth advisers is the case with plain beta. They are not don’t use Short and Leveraged, but usage so concerned about management fees is growing,” McNeil says. “But in each of when they are looking for diversification or the main wealth firms there is probably a replacing an active strategy. more sophisticated user or group of users “Smart beta is challenging that world,” who use them as derivatives light instead he says. “There is a grey area between of futures and options where they want to passive and now and express an idea.” it is starting to spread across the UK. Our WisdomTree Europe offers ETFs through WisdomTree strategies have been around two different platforms, the WisdomTree since 2007 or 2008 so have significant live UCITS ETFs platform and the Boost Short track records but most products are new so and Leveraged platform. WisdomTree bought they are relying on back tested data which Boost in 2014, and the firm has seen a 300 should be viewed with a pinch of salt.” per cent growth in assets, year to date, from Another trend has been that asset USD170 million to GBP650 million, reflecting managers use ETFs to achieve a broader the increasing use of ETFs in Europe. McNeil geographical spread in their portfolios. “You estimates that currently roughly 4 to 5 per tend to find that wealth advisers believe they cent of wealth adviser assets are in ETFs can differentiate in their local markets using and confidently predicts that it will grow to stock picking or active management, but use 30 per cent over the next five years. ETFs for foreign markets where they can’t The smart beta approach is increasingly easily add value.” n

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14 active asset allocation with best of passive “You are not trading in implementation,” she says. Pan Asset reports that the most popular a black box and you are ETFs with British wealth managers this year trading with the house.” have proved to be GBP currency-hedged Ben Thompson, Lyxor Asset ETFs, particularly in Japan and Europe, Managment probably driven by rising FX volatility. Hutchinson says: “Within these products, currency exposure of the underlying equities the benefits of Short & Leveraged Exchange is typically hedged by buying forward Traded Products at the London Stock contracts and rolling them over monthly Exchange. Société Générale’s director however there may still be some small of Listed Products and Lyxor ETF, Ben currency exposure if the currency fluctuates Thompson explained that this could never during the month (contracts between the happen with ETFs because investors in rolling one month contract are adjusted for ETFs never risk more than their original money going in/out but not for currency investment. fluctuation during the period).” Hector McNeil, co-CEO, WisdomTree The firm also notes that dividend-focused Europe says: “Leveraged ETPs are the ETFs are also becoming more popular as next generation of leveraged trading. OTC investors look for a way of increasing the leveraged products are doomed to disappear yield within the portfolios. over time.” Hutchinson also comments that for Townsend Lansing, executive director external wealth managers using platforms, and head of Short & Leveraged Platform for there are still some issues with trading costs ETF Securities opened the session at the for ETFs depending on the platform that they LSE explaining that there are 880 products use – although, she comments, a lot of ETF available with about USD60 billion in assets providers are in discussions with platforms under management globally in Short & to try to reduce this problem. “Most ETF Leveraged ETPs, spread across commodities, providers are continuing their ETF education equities, foreign exchange and debt. programme with wealth managers which Equities lead the way in terms of assets is helpful but more education on platforms under management and use is growing would be an added bonus for advisers when with currently the products seeing some making a selection on which product to use USD637m in flows, year-to-date, in Europe. and what product might be suitable for their The experience of the three firms was that clients,” she concludes. wealth managers and sophisticated investors In that very vein, of continuing education, are using Short & Leveraged ETPS to trade three of the leading UK issuers got high conviction views more regularly in the together earlier this year in an industry current high-volatility market environment. initiative to promote the greater safety of The products allow investors to run a short and leveraged ETFs compared with leveraged long or short position from within spread betting. an exchange environment. The leverage is The initiative in March was jump started on the daily performance and resets every by The Independent newspaper who ran day which reduces any loss on a daily a story of how the Swiss National Bank’s basis, plus there is an ‘airbag’ mechanism January move to scrap its ceiling against designed to prevent losses in extreme the Euro impacted on spread betters, market conditions. with a pianist’s GBP2 bet ultimately Asked at the event if the products are costing him GBP5,500 and a teacher, on retail or institutional, Lansing said that GBP18,000 a year, ending up with a close to they worked for a wide range of investors GBP280,000 debt. who don’t have access to futures, while Three leading ETP providers, Société McNeil described them as ‘derivatives Générale, ETF Securities and WisdomTree’s light’. Thompson says: “You are not trading Boost joined up to speak to wealth in a black box and you are trading with managers and sophisticated investors on the house.” n

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