With this in mind, it has been fascinating to read the comments of one of the world’s most celebrated fund managers, Pimco’s founder Bill Gross, talk now of moving away from dollar-based indices towards developing nations.
The importance investors put on observations from the likes of Gross is understandable, though lest we forget Pimco is also preparing for the launch of an ETF version of Gross’ Total Return Fund later this year.
Last week I hosted a roundtable attended by some of the most respected names, both fund pickers and providers, in the UK ETF industry. For them Gross’ ETF launch was seen as a compliment to their industry, and a sign of how essential ETFs have become within the portfolio construction process.
So could other ‘total return’ fund managers follow Gross’ example? Much could depend on whether the volatility we are seeing now continues into the latter part of this year, and indeed how successful these active managers prove in being able to preserve against capital losses.
For some the whole idea of actively-managed ETFs goes against the principle of buying cheap beta in the first place. Other heads will be turned by the promise of daily disclosure of holdings and, presumably, lower costs.
Transparency is key
Alan Miller, founder of Spencer Churchill Miller, is an investor encouraged by this transparency: “40% on average of the investments in traditional mutual funds are revealed up to two months out of date. People cannot actually see 60% of their money invested. At least in an ETF you can actually see online, normally daily, 100% of the portfolio.”
However, ETF providers must tread carefully amid an environment of much greater scrutiny of their wares, particularly with the European Securities and Markets Authority (ESMA), the Financial Stability Board, the FSA and others all having recently indicated that they will be taking a closer look at synthetic swap-based ETF structures.
Whatever or not potential regulatory intervention ends up changing the way we think about and use ETFs, the industry in the UK still has a long way to go before it reaches maturity, especially in terms of cost and complexity.
“In the US there is around $70bn to $80bn turnover a day, compared to around $1bn in the UK so there is plenty of room for volumes to rise,” adds Christopher Aldous, chief executive of Evercore Pan Asset.
“The second factor is that ETF costs are coming down and that is crucial for all of us managers that use ETFs as building blocks for portfolios. We need to drive these TERs down as the retail industry is very sensitive to costs – as costs come down there will be more trading volume. We are a long way from maturity.”
A write up of our ETF roundtable will feature in the forthcoming September edition of Portfolio Adviser.
