ANALYSIS

SWFs surprise as they debut in ETFs

The institutional usage of exchange-traded funds is booming around the world, putting paid to any lingering doubt that the vehicles are meant for retail investors. Michael Bailey reports.

Deborah Fuhr

Deborah Fuhr, the global head of ETF research for the world’s largest ETF provider, BlackRock, says there is evidence that more institutional investors now preferred ETFs over futures for such purposes as cash equitisation, transition management, rebalancing and the achievement of hard-to-obtain exposures, particularly in emerging markets.

“It’s true that you need the full cash amount to fund an ETF purchase, whereas a futures contract might only require a 10 per cent down payment on the face value, but there is an admin margin there and you don’t get any of the benefit of dividends,” Fuhr says.

She cites a recent Greenwich Associates survey of ETF use among US institutional investors, which found 14 per cent of the 70 respondents (including 43 pension funds) had used ETFs, most commonly for tactical tasks related to portfolio management.

However, one-fifth of those institutional ETF users reported using the vehicles to implement strategic or long-term investment decisions.

Even though a large segregated mandate with an index manager tends to be much cheaper than an ETF, the exchange-traded option saves investors the hassle of setting up a custodian account in a new investee country, says Susan Darroch, an SSgA structured products executive in the Asia-Pacific.

The institutional popularity of ETFs is not limited to the US. Recent disclosures by the $300 billion Chinese sovereign wealth fund, the China Investment Corporation (CIC), revealed that it held about $9.6 billion in US-listed securities, $2.4 billion or about 25 per cent of which was invested in ETFs.

The CIC also revealed extensive ETF holdings in gold, commodities and energy-related indexes.

On the flipside, Blackrock’s Fuhr says a growing source of demand for ETFs came from investors wanting to access mainland China shares, but being unable to do so because they either did not have a Qualified Foreign Institutional Investor licence, or had exceeded the quota assigned them under their licence.

“Institutions are realising that by using a [Hong Kong-listed] “H Share” ETF, they don’t need to worry about the quote,” Fuhr says.

Globally, Fuhr says MSCI remained the most popular index provider on which to base an ETF, because its “consistent methodology” supported the ETF base-case of transparency and tight tracking of their underlying indices.

She says the ETF market is unlikely to see a proliferation of players, because brokers “only become excited about being market makers in these things when they know the volumes are going to be big”.

The global ETF industry will face a big challenge if the European Parliament passes the Alternative Funds Directive, because it will force all European institutional investors to invest in pooled funds with UCITS licensing only.

However, Fuhr points out that European funds are major investors in US-domiciled ETFs, which spurn UCITS in favour of “1940 Act licencing.

“You could see European pension funds forced to liquidate their US ETF holdings,” Fuhr says, predicting that US-based ETF providers will have to establish UCITS-compliant versions of their products.

© Copyright: Whole articles from this website and newsletter cannot be reproduced without permission from the editor. If you wish to publish introductions to any article please ensure that it links to original content site www.top1000funds.com.au, and that it shows clear attribution to Top1000funds.com, plus author name and date. Failure to abide by this request will be considered a breach of copyright and legal action will be taken.

 
  • Filter:
  • News

    Intelligence on up to the minute items from around the globe

  • Investor Profile

    Behind the scenes summary of large institutional investors’ investment strategy and future plans

  • In Conversation

    Candid conversation with the leading investment experts

  • Analysis

    An in-depth examination of the latest investment trends and ideas

  • Insider

    An editorial perspective on what affects the people and processes in this industry

  • Research

    Cutting edge academic and practitioner insight

What, really, are your pension liabilities?

  • by
  • October 25, 2014

Liabilities in UK pension schemes are grossly under-estimated with the current valuation system not recognising ... [more]

Behind the long-horizon equities mandate at The Pensions Trust

How to implement long-term ideology is one of the enduring questions for investors. Unilever UK ... [more]

Future Fund focuses on finding the best people

Australia’s sovereign wealth fund, the A$101 billion Future Fund, has just upped the stakes in ... [more]

The cost of bad asset allocation

A study of 300 US pension funds by CEM Benchmarking reinforces the importance of asset ... [more]

Towards a new generation of pension funds in Australia

  • by
  • October 10, 2014

Numerous surveys suggest that Australians are not completely satisfied with superannuation as it exists today. ... [more]

The OECD’s plan for long-term investment

G20 financial ministers and central bank governors welcomed the findings of the G20/OECD roundtable on ... [more]

Why long-horizon investors should adopt factor-based asset allocation

Long-horizon investors can withstand macro-economic volatility and so should tilt towards strategies that are exposed ... [more]

The case for long-termism

Keith Ambachtsheer’s lead article in the Fall 2014 edition of the Rotman International Journal of ... [more]

Are your managers as active as you think they are?

Measuring how active managers actually are is a useful tool for investors. A metric called ... [more]