WisdomTree Investments, the US-based passive asset manager and sponsor of exchange-traded funds (ETFs) and other exchange-traded products (ETPs) with $48.4 billion of funds under management, is seeking regulatory approvals for the agreed acquisition of ETF Securities’ European exchange-traded commodity, currency and short-and-leveraged business, which has $17.6 billion of assets under management.
largest independent global
World’s largest providers by AuM ($bn)
If the deal is approved before the end of the year, WisdomTree, which only launched into ETF management in 2006, will become the world’s ninth-largest sponsor of ETPs and the world’s biggest independent specialist.
Jonathan Steinberg, chief executive of WisdomTree, says: “The acquisition will immediately add scale, diversification and profitability to our business in Europe, the second-largest ETF market in the world and a growing and strategically important region for us and the entire industry.”
He draws particular attention to the fact that ETF Securities started from scratch, like WisdomTree itself, just 14 years ago and has thrived in a competitive business thanks to the entrepreneurial spirit of its founder Graham Tuckwell.
“Graham is one of the true pioneers of the ETF industry as the first to establish an exchange-traded gold exposure on a global basis as well as in Europe,” Steinberg says.
That $611 million deal, to be financed partly in stock, as well as with $253 million in cash including the proceeds of a $200 million debt deal, illustrates a new wave of consolidation in this fast-growing part of the asset management business focused on so-called smart beta.
This is now drawing in some of the biggest names in asset management. At the end of September, Invesco, which has $930 billion in assets under management, announced it would pay $1.2 billion in cash for Guggenheim Investments’ ETF business, which includes $36.7 billion of assets under management.
Martin Flanagan, chief executive of Invesco, says that adding Guggenheim Investments’ ETF business will enable Invesco “to provide one of the industry’s most comprehensive and innovative ranges of smart-beta ETFs, including fixed income, equal-weight and self-indexed product offerings”.
The growth of passive investing has been particularly pronounced in US equity.
continues to rise|
|Passive funds as a %
of total US mutual funds|
|Source: Société Générale cross asset research|
This summer, researchers at Société Générale calculated that of the $21.5 trillion managed in mutual funds, after excluding money market funds, almost one third is now passive, compared with just over one fifth as recently as five years ago. Since the global financial crisis, the analysts note a $1.7 trillion outflow of funds from actively managed US equity mutual funds of which $1.3 trillion flowed into passive funds.
The move to supposedly low-cost passive funds that track major indices is one of the big trends in market structure, but now voices are starting to question whether investors are really benefiting.
TrackInsight, the analysis platform for exchange traded funds, has raised questions over the assumed capacity of ETFs to track broad index benchmarks.
At the end of October it published data from the last three years of tracking ETFs that showed, for example, that while the S&P 500 had gone up 33.15% in that time, the worst ETF tracking the index had gone up just 28.72%. MSCI Emerging Markets has grown 14.97% in that time, with the worst tracker producing just 12.17%.
Investors who put their money into those error-prone trackers might console themselves that at least they paid modest fees for their underperformance, measured in just basis points rather than percentage points. After all, most active managers underperform their benchmarks after fees, don’t they?
That’s the received wisdom on which the shift from active to passive is based: that the index allocation decision is key and that investors should choose the cheapest and most efficient exposure rather than paying high fees to the latest so-called genius asset manager being touted by his employers who might have outperformed their benchmark index last year, but will probably underperform for the next three.
UBS suggests, however, that it is a myth that passive outperforms active, especially in European equities, most particularly in domestic funds that exclude allocation to US and global markets.
Of course, investors could be forgiven for doubting any such analysis from a bank with a big asset management business of its own, but UBS’s researchers mined data going back 20 years on 27,000 European mutual funds.
They found that, from 2000 to 2016, active managers have been able to outperform their benchmarks by 42bp per annum after fees, so beating passively managed strategies because tracking error and administration fees push them to underperform their benchmarks by 36bp per annum.
UBS suggests that, even after a poor year for European active managers in 2016 – their worst in the past 20 years – recent outperformance is clearly observable in marked contrast to US managers. UBS finds that since 2009 actively managed funds in Europe generated a total 30bp of cumulative excess returns over benchmark performance, after fees. Meanwhile, in the US, active managers have generated 260bp of underperformance over the same timeframe.
This is not the received wisdom.
If investors can verify UBS’s conclusions, therefore, that could have important implications for the asset management business.
“We believe that retail flow dynamics will be more favourable in Europe than the US for actively managed funds and less favourable for index funds,” say the UBS analysts. “As a result, we expect actively managed equity AuM growth to remain stronger in Europe than the US. Similarly, we don’t expect passive funds to gain as much market share in Europe as in the US.”
It’s not just UBS raising doubts about passive investment vehicles. TrackInsight raises more questions for investors seeking to aggregate into so-called smart-beta portfolios, various cheap index tracking ETFs constructed for specific risk/return characteristics and focused on particular countries, industry sectors or investing factors such as value or growth.
It finds that in the past 12 months $25 billion has flowed into such smart-beta strategies investing in large cap stocks.
TrackInsight analysts suggest: “With a one-year performance of 18.8% (compared with 20.1% for the broader large cap segment) and a volatility of 8.97% (compared with 9.89% for large cap stocks), the newly invented asset class does not really differentiate from traditional index weighting schemes in its risk/return profile.”
Its conclusion is that there is no such thing as a smart-beta asset class.