- There is an increasing trend to blend active and passive strategies
- Investors favor passive management products for exposure to the core portion of their portfolios
- 65% of financial advisors in the United States already ETFs, and more than half expect to increase their exposure
- Ivan Pascual: “We are seeing a 'Revolution' rather than an 'Evolution' toward ETFs in the wealth management business"
- Offshore ETFs are used not only by European clients, but also for Latin American and Asian investors
- The advantages of offshore ETFs for Latin American clients relates mainly to the lack of withholding tax (WHT) applied to ETF distributions
In today’s investment landscape, portfolio construction is evolving, and with it, the combination of passive and active vehicles. ETFs are amongst the fastest growing instruments within the asset management industry and are becoming a crucial part of investors’ portfolios.
To further educate clients on trends, uses and implementation of ETFs in conjunction with active funds within portfolios, BlackRock hosted its first ever ETF Investment Seminar with 50 financial advisors in attendance on July 16th, 2015.
The event featured three sessions covering: Building portfolios with active and passive tools, Trends in the use of ETFs in the wealth management segment, concluding with a special session on Offshore ETFs (domiciled outside the United States).
"The trend in recent years is the migration towards portfolios which blend active and passive management tools," said Joshua Rogers in his presentation. Rogers, VP, is a Product Consultant within the US iShares Product Group. He provided some interesting data: in the period running from 2011-2014, the United States has produced net outflows of US $370 billion from traditional active management products (especially US equity funds). However, outcome oriented actively managed funds have enjoyed net inflows of US $750 billion (these include alternative funds, income funds, flexible fixed income, sectoral, and multi asset funds), showing that the investor who pays for an active management product, really wants active management. In addition, net inflows in index strategies (index funds and ETFs) during the same period are still much higher, reaching US $1.17 trillion, with a clear acceleration of this trend during 2014.
Thus, investors favor passive management products for exposure to the core portion of their portfolios (e.g. US equities), as well as for implementing asset allocation decisions reached internally, or for tactical short-term investments. However, for strategies aimed at obtaining outcome, illiquid strategies such as alternatives, or in case of wishing to outsource investment decisions within an asset class, as in the case of fixed income, investors continue investing in active strategies. In any case, the trend is clear: increasingly blending both products.
Other relevant details presented by Rogers referred to the need for maintaining even the best active management strategies in the portfolio for long periods to obtain their best results. According to a study by DiMeo Schneider & Associates, in a 10 year period, 90% of funds in the top quartile of their Morningstar category had at least a period of three years in which they did worse than their peers; 63% experienced at least a five-year period of relatively worse performance. In fact, the average holding period for an active fund among US investors is 3-4 years, given they are not being as “patient”, it would be better for them to be "passive".
On the second session, Ivan Pascual, Managing Director and Head of Wealth Sales for Latam and Iberia at BlackRock (active management products and ETFs), stressed that financial advisors are becoming more akin to the use of ETFs in client portfolios. 65% of financial advisors in the United States already use them, and more than half expect to increase their exposure to these products next year. Moreover, according to a Greenwich Associates survey, 49% of institutional investors surveyed in 2014 maintain ETFs for periods of more than two years, a percentage that is rising compared to previous years. "The inflows come mainly from replacing baskets of stocks and bonds for ETFs, and not so much from substituting actively managed funds for ETFs," says Pascual.
Financial advisors use ETFs to meet three needs. The most obvious is cost saving. ETFs are a low-cost product for those investors who do not need advice. In this case, income for the broker comes from brokerage commissions. However, the industry is evolving towards a more fee-based model for advice or discretionary management, and less commission-based. Secondly, for the advisory business, ETFs represent a tool to create the core component of the clients’ portfolio, especially in fee-based business models. Lastly, in discretionary management solutions, ETFs are increasingly being used to build the firm’s centralized asset allocation view into the clients’ portfolio, efficiently, and at a lower cost. “We are seeing a 'Revolution' rather than an 'Evolution' toward ETFs in the wealth management business," said Pascual. "Also, the importance of the adoption of technology by the end client to obtain financial information should not be overlooked. 45% of customers already use the internet for this purpose and the percentage is growing*. The words most used in search engines for this field are 'investment, cost, liquidity', terms which clearly point to ETFs in building portfolios" he says.
Finally, Justin Wheeler, VP, iShares UCITS ETFs Specialist, provided insight into the offshore ETF market, "primarily, those domiciled in European countries. While Ireland and Luxembourg account for almost 2/3rds of European ETF assets, these products are listed on various European stock exchanges such as London, Frankfurt, or Paris". Offshore ETFs are used not only by European clients, but also for Latin American and Asian investors who increasingly understand the value of these products over their peers listed in the United States. With more than 40 ETF providers in Europe offering over 2,000 products there is extensive choice for investors. According to BlackRock’s monthly ETP Landscape Report, as of April, European ETFs have 500 billion dollars in AUM, and iShares leads this market with a 46% share and 270 different ETFs. The advantages of offshore ETFs for Latin American clients relates mainly to the lack of withholding tax (WHT) applied to ETF distributions, allowing investors to retain more of their returns. "However, investors should be mindful of additional factors, such as the liquidity and execution costs of offshore ETFs, the holding period of the investment, and the distribution yield as these factors impact the extent of the benefits," adds Wheeler.
Gregory Filippone, BlackRock Offshore Wealth Investment Management Consultant, provided context to the sessions and introduced the BlackRock speakers. Isabel Vento, BlackRock Offshore Wealth Investment Management Consultant, and Eduardo Mora, Director Responsible for the LatAm Offshore Wealth Business, both based in Miami, opened and closed the event respectively.
*Source: BlackRock Global Strategy Heatmap, Survey of Consumer Finance, Towers Watson; 2014.