Danièle Tohmé-Adet of BNP Paribas Asset Management, the parent company of EasyETF, talks to Nick Sudbury about factors spurring market growth and differences in index management
December marked a milestone in the development of the exchange-traded products (ETP) market with combined assets under management (AUM) in the US and Europe passing the trillion dollar level for the first time. This was a remarkable achievement given the volatility and uncertainty in all the underlying asset classes.
Danièle Tohmé-Adet, head of ETFs and indexed funds development at BNP Paribas Asset Management, believes the European ETF market will continue to develop as a result of increased institutional demand and other distribution networks.
“ETFs have proved extremely appropriate during the financial crisis and development is continuing across a wide range of different underlying markets. Specialist forecasts indicate that the number of European ETFs is set to double in the next couple of years,” she says.
One factor that will help spur this growth is the new Undertakings for Collective Investments in Transferable Securities (Ucits) IV legislation that is due to come into operation in 2011. This will deal with some of the remaining structural barriers in Europe and in particular will make the registration and referencing of funds much easier.
The ETP market has experienced tremendous growth in the last five years with AUM in Europe increasing six-fold, while in the States assets have almost trebled. It is likely that growth in Europe will continue to outpace the US although the latter remains the larger of the two ETP markets.
One significant difference is that in Europe there are around 700 different types of ETFs with combined AUM of $250bn, while in the US there are 650 with a collective value of $700bn, according to Tohmé-Adet. She says this is because the main users in Europe are the asset managers, which make up 80% of the market, whereas in the States, retail forms a large part of the investor base.
“There are lots of newcomers who have started their own ETF businesses and many more asset managers are likely to follow suit in the coming months. These firms need specific and accurate allocation tools, hence the large number of different funds. This also means a real demand is emerging for consultancy and advisory services.”
One reason to be optimistic is that institutional global portfolios currently only have around five percent to 10% invested in ETFs, so there is plenty of room for this allocation to increase.
According to Tohmé-Adet, product development is very much in line with market trends and any new customer requirements that follow on from them. This explains the increase in demand for corporate bond ETFs when the stock market was underperforming at the start of last year. She believes the main trend at the moment is likely to be the creation of ETFs tracking relatively uncorrelated asset classes.
This became evident last year with the launch of the first European ETF targeting hedge-fund like returns. There were also considerable inflows into commodity linked products.
EasyETF has a number of Ucits III compliant ETFs in this area tracking the S&P Goldman Sachs Commodity indices. These allow investors to gain exposure to specific segments such as energy, agriculture and livestock, as well as precious and industrial metals.
Yet not all ETFs are managed in the same way and some can be a lot more complex than they appear. This can result in a lack of transparency with two products tracking the same index potentially having markedly different performances. Tohmé-Adet sees this as a real challenge that the industry needs to overcome.
The main measure of the success or failure of index management is the tracking error, which represents the gap between the performance of the ETF and its benchmark. As far as investors are concerned, the lower the tracking error, the more efficient the management method.
“The tracking error shows the main differences between the replication management of ETFs on the same underlying benchmark. EasyETF ranks very highly in this respect because of the transparency of its business model, which relies on replication management embedded in the asset management arm BNPPAM,” she says.
In order to maintain a low tracking error while maximising the index replication performance, the company has implemented a rigorous risk monitoring and management policy with respect to the Markets in Financial Instruments Directive (Mifid) rules, along with specific techniques such as securities lending, dividend optimisation and open architecture-based synthetic replication.
In terms of the firm’s development plans, EasyETF undertook a major expansion programme last year that saw it increase its range of products from 24 to 64 with the new additions being designed to fill the geographic and thematic gaps.
One interesting area is its range of global trackers aimed at targeting ‘tomorrow’s challenges’. These themes of the future are based upon key global trends like population growth, increased demand for energy and environmental issues. The idea is to offer funds that anticipate the opportunities emerging from these changing conditions. Examples include the Global Renewable Energy, Global Water and Global Waste ETFs.
“In 2009 we became the first provider to launch an ETF on the Middle East and the first to offer a low carbon ETF. This year we plan to extend our range to cover all the different asset classes,” explains Tohmé-Adet.
The EasyETF Low Carbon 100 Europe fund offers investors exposure to a basket of 100 European large cap companies that are leaders in terms of controlling the carbon dioxide emissions in their respective sectors. This is part of a new generation of financial instruments that focuses on the direct impact of carbon constraints on a company’s financial performance. The ETF has risen 26% since launch and now has more than €50m.
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