A comprehensive paper published by PwC last month entitled ‘ETFs in 2020’ paints a very detailed picture of how the Exchange Traded Fund business is likely to evolve globally over the next five years. According to the analysis, the market will double to $5tn by 2020, and its impact has the potential will be felt much more widely within our industry than previously imagined.
A few takeaways from the report we found particularly interesting:
- Despite fragile economic growth in developed markets, the global AM industry is predicted to grow at a healthy pace. Having doubled over the past decade (to $70tr), PwC predicts professionally managed financial investments will grow by 6% per year , due to both asset inflows and value appreciation. The US & Europe will dominate asset flows in absolute terms, but the highest rates of growth are likely to come from developing markets. Passive funds currently account for around 35 per cent of all mutual fund assets in the US.
- New types of indexing (also referred to as ‘smart beta’) are perhaps the most important area of innovation within theproduct class. As they continue to evolve, a growing number of investors are likely to opt for index weightings based on factors other than market capitalisation, which by itself can lead to overly concentrated exposure to certain markets, sectors, or securities. The size and scope of actively managed ETFs are also set to grow (there are currently 55 actively managed ETFs listed in the US with AUM of $9.6 billion).
- The regulatory environment in the US and Europe is expected to have a significant impact on the evolution of ETFs. New regulations could spark further growth if they permit further product innovation or lower distribution barriers, but they could also dampen demand, particularly if new tax rules make ETFs less attractive or convenient. For instance, MiFID II could be a game changer in Europe, where the adoption of ETFs by retail investors significantly lags behind the US.
- Firms offering ETF products to investors will need to consider rapid changes to the way asset management services are created and consumed, with the most dramatic changes enabled by technology.
If the predictions do come true, they will no doubt have an impact on a future shareholder register structure and consequently on corporate IR strategy.
A few questions for companies to consider:
- Do I monitor my shareholder register on a fund level, for the activity of the largest three ETF fund providers: Vanguard, Blackrock (iShares), and State Street (SPDRs)?
- Am I familiar with which are the largest and most active ETFs in my asset class? I am aware of key trends and drivers of their growth?
- Do I know which indices is my security a constituent of?
- Am I staying on top of developments in the active ETF space?
Top 10 Emerging Market ETFs
|Name of Fund
|Vanguard FTSE Emerging Markets ETF
|iShares MSCI Emerging Markets Index Fund
|iShares Core MSCI Emerging Markets ETF
|iShares MSCI India ETF
|WisdomTree India Earnings Fund
|WisdomTree Emerging Markets High-Yielding Equity Fund
|iShares MSCI Emerging Markets Minimum Volatility Index Fund
|Market Vectors Russia ETF
|WisdomTree Emerging Markets SmallCap Dividend Fund
|Schwab Emerging Markets Equity ETF
Sources: PwC, ETF Database. To download a copy of the PwC paper visit: www.pwc.com/etf2020
Some of America’s largest asset managers are looking to launch their own trading venue, allowing them to buy and sell large blocks of shares without the involvement of exchanges or high speed traders. The new venture is majority owned by Fidelity and includes some of the largest money managers including JP Morgan AM, BNY Mellon, Blackrock, Capital Group, MFS, T Rowe Price, Invesco and State Street. The platform is looking to formally launch later this year. Recent articles in WSJ and FT provide some additional context to this development.
Equity crowdfunding, a name given to a process where retail investors use online platforms to make investments primarily in start-ups, had a record year in the UK, a trend driven by various tax breaks (including SEIS) and light touch regulation. In percentage terms, equity crowdfunding is today the fastest growing component of UK’s alternative investment scene, growing (albeit from a small base, see figure below) by 410 per cent between 2012 and 2013, according a report published by Cambridge university, Berkeley and Nesta.
In March this year, UK’s Financial Regulator, the FCA, has made its first attempt to oversee the sector, stipulating that only experienced investors can invest largest sums and that backers can only invest up to 10 per cent of their investable assets. It did so acknowledging the fact that crowdfunding is industry well positioned for growth, and it will be a space we should expect further regulatory developments.
It is also interesting to observe how crowdfunding is slowly and selectively entering the public markets using specialised niche platforms to raise more capital. There are just a few sparse examples today, however it is something worth keeping an eye on as the industry grows.
In October, Chapel Down winery listed on smaller companies market in London raising £3.95m through crowdfunding. Triodos Renewables, a green energy company, is seeking to raise £5m in its second crowdfunding share issue. As of this morning, they have raised just over £2 million from 53 backers, and they are doing so via a technology based platform Trillion Fund which prides itself as being a crowd financing platform for renewable energy projects.
Yesterday marked the launch of Innovate Finance, a London based industry body promising to be the ‘voice of UK fintech’, with more than 50 founding members onboard and the backing of the government.
Innovate Finance aims to make the UK the centre of this rapidly growing market, bringing together diverse FinTech scene; startups and big banks under one umbrella to promote the industry’s interests and foster collaboration.
Closir is proud to be a founding member of Innovate Finance and we wanted share a few thoughts on what we think this initiative means for us as well as for companies and investors globally.
What is the role of the technology sector in today’s economy and what relevance does Investor Relations (IR) have?
While many think of technology as a niche industry in itself, we would argue that innovation stemming from the tech world is increasingly the foundation for competitiveness for most industries today. Therefore, we have a lot to gain by making our own companies more competitive in global markets by supporting young entrepreneurs and their ideas very early in the product cycle. We are seeing the evidence of this by watching the significant rise of “strategic investment” teams at most large financial institutions today. Bringing us all closer to each other, through initiatives such as Innovate Finance, can only be positive.
In terms of Investor Relations, we believe that investors, whether those invested in private or public companies will continue embarking on the current trend of researching and investing in companies outside their home market and on a global basis. This means hugely increased opportunity pool for both. For instance, for a company listed on the Moscow Stock Exchange, the the number of potential institutional investors with ‘Emerging Market’ mandates are now in tens of thousands, rather than in thousands five years ago or hundreds ten years ago. With limited resources, how will companies be able to capitalise on this opportunity? How will London’s Venture Capital investors research and engage with interesting opportunities in, foe example, south of Turkey? We feel strongly that Investor Relations tools based on technology will be part of the answer.
Engagement aside, rapidly moving developments in trading, fund raising, distribution landscapes will surely provide interesting perspectives and opportunities relevant to mainstream Investor Relations.
In terms of IR, is there anything private companies and startups can learn from the their counterparts listed on global stock exchanges ?
Absolutely. We would argue that the increasingly strategic role that IR plays within our world of public companies is already paramount in the world of start- ups… perhaps without it being immediately apparent. Many of the elements that make up a sound IR strategy for public companies, such as formulating an appealing investment proposition, creating an honest and consistent two-way channel of communication, and managing expectations, require skills that we in the IR profession have been perfecting for the last 15 years or so. This is also where we believe we have a lot to offer our more junior counterparts who deal not with institutional investors or sell-side analysts, but with angel, venture capital or private equity investors – all of whom demand the very same level of excellence in IR. In addition to that, there is a great deal to be learnt by public companies too. When was the last time an IR Officer of a FTSE 100 company had to do a 90 second ‘elevator pitch’ for a prospective investor?
Where do you see London fitting in global tech scene?
With many of the team having lived and travelled extensively in the Middle East, Asia, Europe and the US, we believe that London possesses many of the characteristics required for success as a start-up hub: with some of the top universities, it has been successful in attracting talent from across Europe and beyond; from an infrastructure perspective, it is well connected to other major cities across the world and operates in a convenient time zone. It also has a clear competitive advantage in certain sectors, notably in banking in finance, which I believe can go a long way to benefit the young and growing community of FinTech entrepreneurs. To put it into context, within the five miles that span the west edges of the City and Canary Wharf, we have the largest concentration of banks, investors, and brokers anywhere in the world. This has to be positive for small companies with innovative ideas to bring into the marketplace, especially during the time of profound change for the industry. The development of entrepreneurial communities around relatively new initiatives such as Innovate Finance can only accelerate London’s ambitions to become a global technology hub. This also backs the UK and EU economies and helps existing companies become more competitive globally.
We look forward to playing our part in supporting the movement.