The latest Spear’s breakfast briefing took on the billion dollar-a-day business of ETFs, and found out why they're now known as the 'asset allocator's toolbox’
Over the last 20 years, exchange-traded funds (ETFs) have gone from zero to hero with barely pause for thought. With combined assets rising from $700 billion around five years ago to a near $5 trillion today, and current growth at a staggering daily $1.7 billion, it's predicted that ETF assets will be close to hitting a massive $8 trillion by the end of 2020.
Indeed, the rise and rise of ETFs has gripped the finance world with BlackRock CEO Larry Fink claiming last year that growth of the funds was still in the early stages, and ETFs will continue to grow in both equities and fixed income in the years to come. In fact, the chief of the world’s largest asset management firm told TV news last year that when it comes to ETFs - ‘this is just the beginning.’
The challenge for industry leaders meeting at the latest Spear’s breakfast briefing at Browns Hotel in Mayfair this week was multi-asset investing - how to get the best out of ETFs, and use them to build compelling portfolios.
Taking up the challenge invitees from across the finance and wealth management world heard from Morgane Delledonne, ETF Investment Strategist at BMO Global Asset Management; David Amphlett-Lewis, partner at Smith & Williamson; James McManus, head of ETF research at Nutmeg; and Verona Kenny of Seven Investment Management (7IM).
Spear’s editor Alec Marsh kicked-off the discussion, asking the assembled experts just why ETFs are - in short - so hot right now? The answer quickly emerged: price, choice, simplicity and access.
With ETFs giving access to commodities, property funds, currency, equity, fixed income investments and more, David Amphlett-Lewis told the room that investors are increasingly able to access asset classes that were previously the preserve of institutions. For Verona Kenny, it was about cost efficiency. Fund managers are using ETFs for exposure at a lower cost, rendering the whole ‘active vs passive debate’ (more on that later) secondary to the wins made in cost and exposure. Nutmeg’s James McManus, however, stressed the ‘choice element’ as important, describing ETFs as ‘an asset allocator's toolbox’.
He told invited Spear’s audience: ‘There are now 1,800 ETFs listed in London alone - you can buy almost any asset class that you like - it gives you huge flexibility as an asset allocator to decide exactly what type of exposure you want.’
For panellists, ETFs also offer huge cost and transparency benefits. Amphlett Lewis highlighted the transparency advantage relative to other ways of accessing asset class exposure on the London Stock Exchange, such as through Investment Trusts.
For McManus, ETFs also offer huge cost and transparency benefits. He presents an alternative scenario whereby when you buy an active fund you're handing a fund manager cash; the manager still has to invest that cash on the other side, ‘but do you really understand what the cost of investing that cash is?’. He argues that with an ETF - even before you trade - you understand exactly what it's going to cost for you to get into the market.
With the various characteristics and positives of ETFs discussed, Spear’s editor wasted little time in asking the panel where they see real value.
Amphlett-Lewis stressed that the growing consensus among wealth managers is that we’re still in a large part through the broad-based economic recovery from 2008-9. He adds: ‘The phrase - late cycle - always scares me as that infers that we're closer to the end, and nearer to the point where slowing economic growth could make it difficult to justify valuations in some markets’. However, while the sun still shines, Amphlett-Lewis says growth in the US remains very positive, and technology is enjoying a second run as it did in the late 90s – though the earnings are better. His firm, Smith & Williamson Investment Management still favours US investments and Japanese stocks remain attractive, too.
There was a unanimous consensus of caution from the panel over emerging markets investments as the dollar tightening cycle nears its end. Amphlett-Lewis added: 'There seems to be a lot of value there - but it's probably time to mind one's powder.’ He noted that in the fixed income market, spreads remained relatively tight but inflation-indexed ETFs seemed relatively inexpensive as a potential source of return.
The discussion moved on to the emergence of discretionary management and ETFs with Verona Kenny from 7IM noting a - somewhat unexpected - post-MIFiD II move towards DFMs as a more cost-effective and efficient way to manage assets.
Once the preserve of HNW clients, Kenny told the room that the hands-on approach is gaining popularity. A growing trend, she says, is for advisory firms to get their own discretionary permissions, giving them more control and direction in how their clients are being invested. Importantly, she adds, discretionary managers have actually made their services a lot more relevant and price conscious and lot more easy to obtain for the end investor.
However despite being easier and cheaper, McManus warned that there are still people taking unnecessary risk. He added: ‘You wouldn't do your own dentistry, you wouldn’t build your own house extension - yet in the UK a large number of people are managing their own retirement on platforms without any financial services experience. If you had an issue with your tooth you'd go to an expert. ‘Why make one of the biggest financial decisions you would ever make in your lifetime yourself?'
In the active vs passive debate - that being the difference between a focus on outperforming the market (active) versus, following the investment holdings of a particular index (passive) - Nutmeg’s McManus says that although his firm is not ‘anti active managers,’ actually identifying active managers that can outperform the market over the long-term is very difficult. ‘Active asset allocation,’ he adds, is a better use of time and a bigger ‘driver of ETFs’.
Following a meteoric rise over the last ten years, the final question asked the panellists to make a prediction for the next ten years. The answer was growth; more growth and heightened risk. Amphlett-Lewis warned that although growth is something of a given, the larger players bear a significant responsibility to ensure that their systems and processes can handle the amount of liquidity in the marketplace for which they have responsibility.
McManus offered cautious optimism. ‘A lot depends on what happens during the next big crisis’, he told the audience. Addressing recent headlines, ‘it's clear that there are some big misunderstandings of the ETF market out there. Our hope is that the infrastructure remains strong throughout the next crisis and that the wider investment community can really recognise the benefits of ETFs.’
Reporting by David Dawkins, senior researcher, Spear's