Nizam Hamid, head of ETF strategy at Lyxor Asset Management, talks to Emma Cusworth about the challenges of the European market and his plans to reach the top spot
A big believer in decisive action, Hamid has wasted no time since joining Lyxor Asset Management in November. With innovation top of his agenda, Lyxor has a “full launch schedule”, including commodities and fixed income products.
His ambition is clear: to be European number one by market share. With $52.4bn in assets under management at the end of 2010, Lyxor is number two with a market share just over 18% and fourth globally, according to Blackrock. However, taking on iShares with $94.4bn and a 32.4% share of the European market will not be easy.
“We are doing a lot of work to restructure our ETFs to make them more flexible for investors,” Hamid says. “The next six months will show considerable innovation.”
Lyxor’s market share declined 1.7% last year, despite a 14.9% increase in assets. With more companies like Vanguard and Pimco looking to exploit existing specialities and distribution networks, competition will only escalate.
“The big challenge in Europe is the stream of new entrants and how that is perceived by end customers,” Hamid says. “The European market is overpopulated with many local ETF providers offering similar products and solutions.”
Europe is naturally fragmented, with liquidity spread across different exchanges and currencies, but the opportunity is also huge. ETF uptake relative to other investment vehicles is still very low compared to the US.
“There is no reason why Europe couldn’t get to the same level,” says Hamid. “Firms are unwilling to forego that opportunity. In the short term that means a crowded, and potentially confusing, market.”
Investors are, however, showing a preference for providers offering funds with higher AUMs and greater trading liquidity across a broad product range, covering different asset classes, currencies and trading venues, Hamid says.
Expanding Lyxor’s offering through innovative products will therefore be crucial to its continued success. “The main added value offered by ETFs is providing easy access to asset classes that are otherwise difficult to trade.”
Gaps in the market
Leveraged and inverse fixed income indices are a key development area. Hamid is looking to expand Lyxor’s current offering, which involves a double short German government bond ETF.
Both strategies have already proved successful in equities. Lyxor has €2.3bn across its products offering short or leveraged exposure to markets including the Eurostoxx 50, Cac 40 and Dax indices, listed on various European exchanges. Trading volumes are also relatively high, totalling around €194m per day.
“Our new products will cover specific rather than broad fixed income,” Hamid says. “There is interest among clients in Italy and Scandinavia, where investors are already trading leveraged and inverse equity ETFs, but want to do so across other asset classes.”
Scandinavian institutions have been quick to adopt these products as they diversified out of the small domestic market, particularly in equities, relatively early.
“From a Ucits perspective many Scandinavian investors cannot trade futures or are not set up to use options. The ability to trade a delta-one product providing a hedging capability is important,” Hamid says. “Generally there is less of an education process as they are familiar with many of the structures and products available.”
Scandinavia therefore provides an interesting barometer for other European markets. Over time, Hamid expects European uptake of leveraged and inverse ETFs to increase.
Smaller institutions, including private banks and wealth managers across Europe, who face similar futures and options restrictions, already use leveraged and inverse ETFs to access strategies and asset classes that are otherwise unavailable.
Hedge funds are a prime example. Many such institutions see their diversification benefits, but are put off by the onerous manager selection process.
“With an index approach, small institutions can focus due diligence on the ETF structure and how well it tracks the index,” Hamid explains. “Simplifying the process is driving interest in this space along with lower costs and greater flexibility. It is unlikely we will see heavy on-exchange trading of these ETFs, but assets will increase.”
Lyxor does not currently offer hedge fund ETFs. However, Hamid says: “We will certainly be considering how we can utilise Lyxor Asset Management’s strong hedge fund managed platform and transfer it into an ETF product.
“We are also looking at replication of hedge fund indices where Lyxor AM has some very successful products,” he continues. “They use very liquid futures to create the underlying basket, which gets around the issue of whether an ETF can have daily, weekly or monthly liquidity. This is another interesting opportunity to explore in terms of extending alternative asset classes to investors.”
Hamid believes ETFs have a particular edge in hedge fund sub-sectors. During the cycle, different sub-sectors, such as long/short neutral or a particular carry trade, become more interesting. ETFs will provide access to those areas, allowing more efficient tactical investing.
Rising commodities demand
The same cost, flexibility and due diligence advantages apply to commodities, which is another focus area for Hamid. “Pension funds in particular are increasingly turning to ETFs as they look to actively manage their tactical exposure in-house,” he says.
“Many want broad commodities exposure, but finding an active manager with consistent outperformance is difficult and many don’t want to go through the selection process for short-term mandates.”
Lyxor’s new commodity products will also look to resolve issues relating to backwardation and contango.
Hamid certainly has his work cut out. “We have a way to go, but the next six months will show we have a lot of innovation to bring to market. Working together on the asset management and trading sides, Lyxor’s next five years will be very innovative as we focus on delivering value to our clients.”
Hamid joined Lyxor Asset Management in November 2010 from iShares in London, where he was head of ETF Strategy for EMEA. He has over 20 years experience in cash equities, quant research and ETFs.
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