Invesco PowerShares Index Investing and Smart Beta in Europe 2014

Transcription

1 Invesco PowerShares Index Investing and Smart Beta in Europe 2014 This document is for Professional Clients only in Dubai, Jersey, Guernsey, Isle of Man and the and for Professional Clients and Financial Advisers in Continental Europe, for Qualified Investors in Switzerland and is not for consumer use. A

2 Contents 1 Indexing has increased across Europe but there are differences across market segments and commercial barriers to adoption remain 2 Smart beta demand comes from the substitution of traditional market capitalisation weighted indices and growing adoption by new users 3 Future growth in traditional indexing is dependent on regulation, while future growth in smart beta indexing is dependent on education and performance Appendix The indexing landscape in Europe Barriers to indexing adoption Reasons for using indexing strategies Segmentation analysis Smart beta adoption Substitution of traditional index strategies Smart beta perceived as complementary to active fund management Demand for various smart beta strategies Barriers to smart beta adoption and growth potential Indexing growth Impact of key wealth management trends Smart beta growth in the US and Europe Growth in traditional indexing dependent on regulation Growth in smart beta indexing dependent on education and performance Sample and methodology Welcome What are the reasons for using smart beta indexing strategies? What are the key selection factors when choosing them? How attractive are different smart beta strategies? Just a few of the questions on indexing including smart beta that we have covered in our study. Welcome to the Invesco PowerShares Index Investing and Smart Beta in Europe 2014 report. During the first quarter of 2014, we worked with independent strategy consultants NMG to deliver an objective view of the industry based on 112 predominantly face-to-face interviews with key decision makers (e.g. client-facing financial advisers, institutional asset managers and portfolio constructors). This report focuses on four European markets, with respondents from both the wholesale 1 and institutional investor channels sharing their views on indexing and smart beta. We explore some of the reasons behind the increase in index investing, the demand for smart beta products and what the future growth of smart beta is expected to be. Some key highlights include: 66% of respondents stated that indexing strategies are increasingly important to their business 41% expected to increase their usage of ETFs in % respondents gave one of the following reasons why they use or recommend smart beta strategies: Smart beta is an appealing new segment at the intersection of active or passive; they complement active management; or they complement traditional market cap weighted passive strategies. 2 For product providers, this report highlights that there is further educational work to be done with the wholesale and institutional channels, including clarifying the definition of smart beta and addressing possible misperceptions with regard to the level of complexity of smart beta products. Invesco PowerShares are committed to being the leaders in intelligent indexing. This means not only offering a wide range of innovative products, but also educating and working closely with decision makers to help them find the solutions to meet individual portfolio needs. This report is just one example of our efforts to be leaders in furthering the conversation around smart beta and ETFs. We hope that the report will help you draw a more accurate picture of the indexing and smart beta market in Europe. We look forward to further discussing the themes covered in this report with you in due course. Bryon Lake Head of Invesco PowerShares ETFs EMEA bryon.lake@invescopowershares.com +44 (0) Within this report wholesale is defined as financial advisers, client-facing private bankers, non-client facing private bankers, portfolio constructors and platforms 2 Sample size 58, smart beta users only. B 01

3 1 Indexing has increased across Europe but there are differences across market segments and commercial barriers to adoption remain 02 03

4 The indexing landscape in Europe Indexing strategies usage growth has been one of the most significant asset management trends of the past decade. Usage growth has taken place in the wholesale and institutional channels and across multiple markets, including Europe and the US. Within our study solely covering decision makers in Europe, 32% of total assets were placed into indexing products in This figure overstates the size of the index product market because of our sample structure. However, we believe the role of indexing and future growth potential should not be underestimated. The stated future usage by respondents shows a positive momentum for indexing. Across our study, 20% of respondents expected to increase their usage of index tracking mutual funds during 2014, compared to 41% of respondents for ETFs and 61% of respondents for smart beta products (figure 1). 72% and 87% respectively reported no change in their future usage of actively managed mutual funds and direct investment in securities, which suggests that the market share for index products will continue to grow. These views are in line with current 2014 market trends. The growing use of indexing appears to be part of a structural shift in business models, be it the increased adoption of an open architecture model in private banking, the switch from retrocession to commission-based operating models in the advisory space, or simply the recognition of the benefits of index products as building blocks of asset allocation. Across our study, 66% of respondents believe that indexing strategies are increasingly important to their business. The growing importance is evident at both country and segment level, as shown in figure 2. We also noted a positive correlation between the use of index products and fee-based advisory business models. Furthermore, advisers who use indexing strategies suggest they earn most of their revenues from advisory fees and, interestingly, they expect their overall revenues to grow faster than advisers who do not currently use indexing strategies. Fig 1. Respondents view of usage of different product types in 2014 (%) Actively managed mutual funds Securities Index products Index tracking mutual funds ETFs Figure excludes respondents who anticipated no change in usage. Smart beta products Increase Decrease Fig 2. Respondents view on the statement: Indexing strategies are increasingly important to my business (%) Overall 112 Country split Fund buyers 50 Germany Fund sellers 45 Italy Institutional asset managers Switzerland 12 6 Agree Neutral Disagree The country split represents the wholesale market and excludes institutional asset managers. Fund sellers represent financial advisers and client-facing private bankers. Fund buyers represent portfolio constructors, non-client facing private bankers and platforms

5 Barriers to indexing adoption Despite rapid structural growth, we must acknowledge the barriers to adoption and the realities of financial advice in many wholesale distribution markets. Many advisers in Continental Europe take upfront commission from actively managed mutual fund platforms or life insurance investment products. Indexing products typically do not pay commission of any significance to advisers, therefore this is an important barrier to those that rely on such models. Even in markets where commission for advice on retail investment products no longer exists (such as the ), some commercial barriers to adoption still remain. Indeed, some of the largest platforms do not currently offer indexing products and many platforms and intermediaries prioritise active management because it is perceived as being critical to their commercial proposition. To highlight that point, figure 3 shows that on average respondents rated actively managed mutual funds at 8.7 out of 10 (where 10 is most important) for commercial attractiveness. This rating for active management was significantly higher than for all other investment types covered by the study, notably smart beta products (6.2). Reasons for using indexing strategies Our study confirms that cost effectiveness is the main reason why respondents use index products (figure 4). Few respondents cited core and satellite investing or a fundamental dislike of active management as key drivers to favouring index products. Furthermore, price was also the key selection factor between indexing product providers (figure 5). This was particularly the case for traditional market cap weighted index strategies, even after considering other factors such as index methodology and track record. The growing use of indexing appears to be part of a structural shift in business models Fig 3. Respondents average rating on the importance of each product to their commercial proposition Actively managed mutual funds 95 ETF 91 Index tracking mutual funds 59 Importance rating on a score from 1 to 10 where 10 = most important. Fig 4. Reasons for using indexing strategies (%) Securities 54 Smart beta products 65 Cost effective Core and satellite approach Transparency Dislike active Indexing users only. Fig 5. Most important factor when choosing an indexing product provider (%) Pricing 26 Index methodology 16 Asset manager brand Indexing asset manager brand Track record Indexing users only

6 Fig 6. Respondents view on the statement: Non-market capitalisation weighted indices constitute a more intelligent way of index investing than traditional market capitalisation weighted indices (%) Agree Neutral Disagree 38 Germany Italy 28 Segmentation analysis Segmentation analysis is important because variations appear country by country. For example, the, Germany and Italy are at different stages of development in terms of product adoption and business models. Feedback from our study suggests that the has the highest penetration of traditional market cap weighted index strategies and the highest penetration of index mutual funds compared to Germany, Switzerland and Italy. Meanwhile, the German retail market would seem to have the lowest level of adoption of indexing strategies, with commission most often cited as a major barrier. According to our findings, indexing penetration in Italy was lower than in the, but its openness to and the adoption of smart beta strategies and in particular ETFs is the highest in Europe. Figure 6 shows an interesting observation for Italy, with 86% responding positively to the statement that non-market capitalisation weighted indices constitute a more intelligent way of index investing than traditional market capitalisation weighted indices. Differences across Europe in the adoption of index products are driven by regulation, supply and demand. As we have previously noted, regulation of financial advisers in the has reduced the commission barriers to selling index products more than in Continental Europe. However, within the advisory market in Continental Europe, we noted that some of the intermediaries servicing high-net worth individuals (HNWI) do operate explicit customer fee-based models without fund retrocessions. In the, respondents cited their long standing preference for investing via index mutual funds because of their operational advantages for platforms and the fact that this type of indexing pre-dates the rise of ETFs. In Italy, the appetite for smart beta strategies was linked to cultural preferences for innovation and a strong interest for them amongst HNWI. Respondents based in Italy also explained that a preference for global products rather than local also linked to the demand for these strategies. The financial advice model is also important. Respondents feedback suggested that client-facing financial advisers could be split into two sub-segments: investment advisers and financial planners. Investment advisers focus on outperformance for their clients and strongly support active mutual funds, so indexing typically occupied a niche part of the portfolio. However financial There was a strong preference for ETFs due to liquidity benefits planners focus on clients goals and lifetime cashflow planning and less on outperformance. These reasons most likely explain why financial planners have greater affinity towards indexing and are willing to adopt indexing strategies as a core part of their clients portfolios. We also observed that the more vertical integrated intermediaries are (defined as greater alignment in terms of ownership and incentives between advice, administration and asset management) the less likely they are to adopt indexing products. Some respondents explained that advice and administration margins were low and participation in active asset management (manufacturing and portfolio construction) was critical to their business. These investment propositions were dependent on active management, so participants were less likely to recommend indexing strategies. Finally, the structure of the institutional asset managers segment differs from the retail channel and can be split into two categories. Firstly, there is a small segment of asset managers who exclusively use index strategies, having built their whole commercial proposition around them. Secondly, there is a segment of asset managers who focus mainly on active management, where indexing strategies are used to gain exposure to specific markets or asset classes. Within this segment, there was a strong preference for ETFs due to liquidity benefits. In summary Indexing strategies have gained traction in Europe and current momentum is positive. To fully understand indexing adoption, it is important to consider a range of segmentation parameters, including country, financial advice model, the level of vertical integration and industry segment. Furthermore, it is worth acknowledging the commission and commercial barriers to indexing and the role that regulation will have to play in breaking down these barriers

7 2 Smart beta demand comes from the substitution of traditional market capitalisation weighted indices and growing adoption by new users 10 11

8 Smart beta adoption In theme 1, we have recognised the potential for growth in the adoption of indexing strategies. In theme 2, we look at the accelerated growth of smart beta strategies, an increasingly important sub-set of the index products suite. Current allocation to smart beta strategies are low relative to allocation to traditional market cap weighted products in Europe. Despite explicitly including a significant proportion of smart beta users in our study, smart beta products only represent 5% of a portfolio s allocation on average. However, respondents explained growth had been fast from a very low base. Figure 7 shows that adoption is greatest within the financial adviser and platform segments, and in Italy followed by the. To understand smart beta products growth potential, it is important to acknowledge the products that smart beta strategies are substituting. Given how smart beta is often described as being at the intersection between passive and active styles, one view is that smart beta substitutes existing traditional market cap index strategies. Another is that smart beta is attracting users of actively managed mutual funds and direct investment in securities. Feedback from our study indicates that results were shared between these two views, but on average more respondents are substituting traditional market cap weighted index products rather than creating new demand by substituting actively managed mutual funds. This suggests that the main route to adopting smart beta strategies is familiarity with and previous usage of first generation index products. Substitution of traditional index strategies In support of traditional index products substitution, particularly market cap weighted index products, we note that most smart beta users in our study had previously invested in traditional index products. We also observe in figure 8 that a surprisingly high number of respondents felt that smart beta strategies were more complementary to active investment strategies than to passive, indicating substitution from passive traditional market cap-weighted products. Only 9% of respondents cited price as the primary driver (based on cheaper than active responses). An analysis of product providers selection factors confirms that respondents focus on strategy and methodology, track record and total assets and asset manager brand, rather than price for smart beta indexing. Price is ranked joint fourth at 6.9 out of 10 on average, behind strategy and methodology (ranked first at 8.3 out of 10), track record and total assets (ranked second at 7.3 out of 10) and asset manager brand (ranked third at 7.2 out of 10) (figure 9). In contrast, price (cost) was ranked first for selection factors for index products, as stated in figure 4 of the previous theme. An analysis of product providers selection factors confirms that respondents focus strategy and methodology, track record and total assets and asset manager brand, rather than price for smart beta indexing Fig 7. Smart beta allocation by segment and country (%) Total Financial advisers 32 7 Private bankers 19 4 Portfolio Platforms constructors Institutional asset managers RHS excludes institutional asset managers segment. Fig 8. Reasons for respondents using smart beta indexing strategies (%) Fig 9. Key selection factors when choosing a smart beta indexing product provider Germany 1 Italy 28 9 Switzerland 12 Appealing new space at the intersection of passive/active 8.3 Smart beta allocation by segment Smart beta allocation by country 1 Complementary to active Complementary to passive Outperforms passive Cheaper than active Strategy and methodology Track record and total assets Asset manager brand Pricing Indexing asset manager brand Smart beta asset manager brand Importance rating on a score from 1 to 10 where 10 = most important

9 Smart beta perceived as complementary to active fund management Some respondents have indicated that they see the smart beta proposition as an attractive complement to or sometimes a substitute, for actively managed funds. This was noted in the financial adviser segment (typically investment advisers) and some institutional asset managers, who are using smart beta as their first entry product into indexing strategies. However, most of these respondents were still strong supporters of active management, and expected to use smart beta products with their most cost-conscious clients or as an effective way to access specific market exposures. Despite interest, respondents also cited scale challenges for product providers who are offering specific (niche) exposures via smart beta products. Demand for various smart beta strategies Among the group of respondents who are already familiar with or using smart beta products, we aimed to assess the demand and usage of different smart beta strategies. Figure 10 explores existing usage of six different smart beta strategies within portfolios. Fundamentally weighted strategies were most common within portfolios, followed by factor-based strategies such as low volatility or high dividend. Furthermore, qualitative feedback from financial advisers indicated that fundamentally weighted strategies were most common where indexing was a core part of the overall portfolio. This is supported by the statement in figure 11 showing that 57% of respondents agree that fundamentally weighted indices give a more accurate picture of the market than other broad non-market cap weighted indices. In contrast to the usage of different smart beta strategies as shown in figure 10, factor-based strategies other than fundamentally weighted ones were seen as most attractive for new investments. Figure 12 shows that low volatility and high dividend both scored 7.5 out of 10 for attractiveness, compared to 7.1 for fundamentally weighted strategies. Respondents often justified high scores for high dividend and low volatility by saying they represented the popular theme of outcome-based investing. These findings suggest that the proportion of assets placed into such factor-based smart beta strategies will increase over time. Other alternative strategies, such as momentum or equally-weighted, had lower usage and attractiveness. Many respondents did not view equally-weighted indices as smart and cited an imbalance of the overall portfolio when included in a broad market index strategy, where for example buying 1% of the smallest stock may not be practical. Fundamentally weighted strategies were most common where indexing was a core part of the overall portfolio Fig 10. Current usage of different smart beta indexing strategies within portfolios (%) Fig 11. Respondents view on the statement: Fundamentally weighted indices give a more accurate picture of the market than other non-market capitalisation weighted indices (%) Fundamentally weighted 55 Fig 12. Current attractiveness of different smart beta indexing strategies Low volatility 46 High dividend 39 Equal weighted 32 Momentum 33 High beta 32 Agree Neutral Disagree Fundamentally weighted 55 Low volatility 46 High dividend 39 Equal weighted 32 Momentum 33 High beta 32 Importance rating on a score from 1 to 10 where 10 = most attractive

10 Fig 13. Respondents view on the statement: Smart beta indexing strategies can become mainstream and replace traditional market cap indexing (%) 30 Overall 112 Country split Fund buyers Fund sellers Institutional asset managers 8 8 Agree Neutral Disagree 84 The fact that 30% of respondents believe that smart beta indexing strategies can become mainstream and replace traditional market cap indexing suggests potential for growth from the current participation level Barriers to smart beta adoption and growth potential Smart beta strategies overall, and fundamentally weighted strategies in particular, faced negative feedback with regard to complexity. This feedback came from client-facing financial advisers and more specialist industry participants from private banks and platforms. Many of these responses came from the 38% of respondents that disagreed with the statement in figure 13 that smart beta indexing strategies can become mainstream and replace traditional market cap indexing. However, the fact that 30% of respondents believe that smart beta indexing strategies can become mainstream and replace traditional market cap indexing suggests potential for growth from the current participation level. Furthermore, more than 30% agreed with the statement in the, Italy and the institutional asset manager segments. In summary Overall, this theme found some strong signs supporting the view that smart beta products could substitute traditional market cap weighted index products to some extent. However, the rate of substitution from traditional market cap weighted index products in favour of smart beta products, and the rate of substitution from active management styles to smart beta, is hard to forecast. In the final theme, we will explore the growth expectations of both traditional and smart beta indexing Germany 41 Italy Switzerland 12 The country split represents the wholesale market and excludes institutional asset managers. Fund sellers represent financial advisers and client-facing private bankers. Fund buyers represent portfolio constructors, non-client facing private bankers and platforms. 16

11 3 Future growth in traditional indexing is dependent on regulation, while future growth in smart beta indexing is dependent on education and performance 18 19

12 Indexing growth This theme uses respondents feedback to consider the future evolution of indexing and implications for the fund management industry. Based on our study, we expect historic growth and positive momentum for indexing up to 2014 to continue into the future. In terms of the distribution landscape, we expect to see higher allocation into indexing strategies from the financial planner sub-segment of financial advisers (defined in theme 2). From a portfolio construction perspective, we expect to see more participants using indexing strategies as a core part of clients portfolio. And from an institutional asset manager perspective, our research indicates greater adoption of indexing and in particular ETFs, especially from the younger generation of asset managers who are more familiar with these types of investments. Investment proposition specialists typically have a more positive view of index products than clientfacing advisers Impact of key wealth management trends Respondents cited broader wealth management industry trends that may have some positive and negative impacts on the adoption of indexing investments: 1 Intermediary consolidation (positive trend): defined as growth in larger adviser firms (via mergers, acquisition and organic growth of the largest firms) with more standardised investment propositions. Overall this trend was viewed as positive for indexing investment on the basis that investment proposition specialists typically have a more positive view of index products than client-facing advisers. 2 Outsourcing the investment proposition (positive trend): in addition to consolidation, respondents said that more intermediaries were using specialist third parties to support their investment proposition design. Again, third party investment buyers, who are seen as more sophisticated, have a more positive view towards index products. 3 Direct to consumer (positive trend): defined as the emergence and growth of the direct channel for regulated investment products. This trend was seen as positive because private investors can find that the selection of a product provider is a difficult and complex task, whereas indexing is perceived as a simpler and more cost effective solution. 4 Vertical integration (negative trend): defined as greater alignment (in terms of ownership and incentives) between advice, administration and asset management. Overall respondents felt this trend would have a negative impact on indexing, as vertical integration typically seeks to increase in-house allocation to actively managed mutual funds rather than indexing. This trend was cited to service less affluent investors more economically in the future

13 Fig 14. Respondents view on the statement: I will consider investing/investing more in smart beta strategies (%) Agree Neutral Disagree Fig 15. Current and future smart beta asset allocation (smart beta users only) Smart beta allocation by segment Smart beta allocation by country Current SB product allocation (% of AUM) 3 year forecast SB product allocation (% of AUM) Total 58 Fund sellers Germany Overall 112 Country split 56 Fund buyers Fund sellers Institutional asset managers Fund buyers Institutional asset managers Switzerland Italy Germany 59 Italy Switzerland 12 The country split represents the wholesale market and excludes institutional asset managers. Fund sellers represent financial advisers and client-facing private bankers. Fund buyers represent portfolio constructors, non-client facing private bankers and platforms. The country split represents the wholesale market and excludes institutional asset managers. Fund sellers represent financial advisers and client-facing private bankers. Fund buyers represent portfolio constructors, non-client facing private bankers and platforms. SB = smart beta Among existing smart beta users, the total percentage of assets invested into smart beta products is expected to double from 9% to 18% Smart beta growth in the US and Europe In recent years, the US has experienced strong growth in the smart beta ETF category. Smart beta ETFs captured nearly a third of industry inflows in 2013 and contributed a record $65.1bn of inflows 1, which more than doubled the figure for the previous year. Comparatively, the trends observed in the US market are consistent with recent data in Europe. The European smart beta ETF market has more than doubled in 2014, expanding from 2.1bn to 4.6bn 2 between January and September Both these trends are in line with our latest findings in Europe. As shown in figure 14, 56% of respondents confirmed that they would consider investing (or investing more) in smart beta strategies in the future. It is worth noting that future intentions to invest were relatively consistent across countries and segments. In figure 15, we report the expected growth in smart beta assets in three year s time. Among existing smart beta users, the total percentage of assets invested into smart beta products is expected to double from 9% to 18%. At a country level, Germany, Italy and Switzerland also expect at least a 100% increase in allocation. 1 Source: ETP Landscape, BlackRock 2 Source: Deutsche Bank, Europe Monthly ETF Market Review. Growth in traditional indexing dependent on regulation Our research suggests that the regulation of advice is the key parameter that would reduce commercial barriers and accelerate growth in the overall indexing market. The removal of commission on regulated investment products across all European markets would accelerate adoption, but there are also more incremental regulatory moves that should support indexing. These regulatory initiatives include the requirement for the increased disclosure and transparency of the cost of advice and of the value chain components. They also comprise a higher standard of advisers professional qualifications, capital regulation supporting unit-linked products over traditional guarantees and, finally, the introduction of compulsory defined contribution savings

14 Fig 16. Smart beta attractiveness (pre- and post-explanation) for smart beta non-users SB attractiveness prior to explanation SB attractiveness post-explanation Fig. Ways product issuers can support smart beta indexing growth 57 Smart beta attractiveness by segment Total 54 Fund sellers 22 Smart beta attractiveness by country 23 Germany Strategy and methodology communication Fund buyers 21 Institutional asset managers Product performance communication Switzerland Product availability Adviser training The country split represents the wholesale market and excludes institutional asset managers. Fund sellers represent financial advisers and client-facing private bankers. Fund buyers represent portfolio constructors, non-client facing private bankers and platforms. SB = smart beta. Attractiveness rating scale on a score from 1 to 10 where 10 = most attractive. Italy Product provider brand awareness 6.6 Thought leadership Growth in smart beta indexing dependent on education and performance To enhance the rate of adoption of smart beta strategies, participants of this study felt that product providers should put together educational programmes to improve advisers and clients awareness of smart beta products. These educational initiatives are likely to contribute to the reduction of the perceived product complexity within these audiences. This need for additional education is further supported by the non-users perception of the attractiveness of smart beta indexing, before and after a full explanation. The results in figure 16 show that explanations improved product attractiveness and that the biggest improvement was seen in segments with the least awareness. This enhanced perceived attractiveness is notably visible for fund sellers and client-facing retail advisers based in Switzerland. Figure sets out respondents feedback on the ways that product providers can support the adoption of smart beta indices. Communication initiatives on the underlying index strategy and its methodology was the standout factor scoring an average of 8.2 out of 10, while communication on product performance was ranked second. In contrast, investment into the brand awareness of the product provider was seen as less important. Communication on the index strategy and methodology directly links to the points on awareness and complexity, while performance was a key issue due to the limited track record of some products in Europe. Respondents were also weary of back-testing and its objectivity. Ultimately, they confirmed that actual performance of different smart beta strategies over the mediumterm would be a key driver of uptake. The support required varies by country and segment, and depends on current levels of awareness. Investing to create industry demand for indexing strategies was seen as most important in markets with low awareness. As smart beta products gain traction and awareness increases respondents stated that product providers should focus their efforts more in acquiring a competitive position for their product offering and less in building awareness. In summary This report supports our view on the continuing growth potential for indexing strategies in Europe. While the findings suggest that the appetite for traditional index products will continue to grow at the expense of other investment products, our report also demonstrates that smart beta products have the potential to carve out a niche of their own as a complement to existing investments. However, to exploit this market opportunity, the industry needs to consider providing all market segments with additional support and specific education on smart beta. Eventually, the usage growth rate of traditional market capitalisation indexing products will depend on regulation that reduces commission, commercial barriers and vertical integration. For the smart beta propositions, the growth rate will depend on dedicated support from its sponsors, and ultimately, the performance of the products

15 Appendix 26 27

16 Sample by indexing usage 7 Sample by country Sample by value chain segment Terminology used to describe smart beta Germany Italy Switzerland Financial advisers 1 Client-facing private bankers 2 Non-client facing private bankers 61 Smart beta users Indexing users (excluding smart beta users) Non-indexing users Portfolio constructors 3 Platforms 4 Institutional asset managers 5 Smart beta Alternative indexing Intelligent indexing Strategic beta Important information This document is for Professional Clients only in Dubai, Jersey, Guernsey, Isle of Man and the and for Professional Clients and Financial Advisers in Continental Europe, for Qualified Investors in Switzerland and is not for consumer use. Where Invesco PowerShares has expressed views and opinions, these may change without notice. This report is for information purposes only and is not an offering. It is not intended for and should not be distributed to, or relied upon by, members of the public. Circulation, disclosure, or dissemination of all or any part of this material to any unauthorised persons is prohibited. This document is issued in: Austria by Invesco Asset Management Österreich GmbH, Rotenturmstraße 16 18, A 1010 Wien. Belgium by Invesco Asset Management S.A. Belgian Branch (France) Avenue Louise Bruxelles, Belgique. Denmark, Finland, Greece, Luxembourg, Norway and Portugal by Invesco Asset Management SA, 18, rue de Londres, F 75009, Paris, authorised and regulated by the Authorité des Marchés Financiers in France. Dubai by Invesco Asset Management Limited, PO Box , DIFC Precinct Building No.4, Level 3, The Gate Precinct, Dubai, United Arab Emirates. Regulated by the Dubai Financial Services Authority. France by Invesco Asset Management SA, 18, rue de Londres, F 75009, Paris, authorised and regulated by the Authorité des Marchés Financiers in France. Germany by Invesco Asset Management Deutschland GmbH, An der Welle 5, 1st Floor, D Frankfurt am Main, which is authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht in Germany. the Isle of Man by Invesco Global Asset Management Limited, George s Quay House, 43 Townsend Street, Dublin 2, Ireland. Regulated in Ireland by the Central Bank of Ireland. Italy by Invesco Asset Management S.A. Sede secondaria, Piazza del Duomo, 22 Galleria Pattari, 2, Milano. Jersey and Guernsey by Invesco International Limited, 2nd Floor, Orviss House, a Queen Street, St Helier, Jersey, JE2 4WD. Regulated by the Jersey Financial Services Commission. the Netherlands by Invesco Asset Management S.A., Dutch Branch, J.C. Geesinkweg 999, 1096 AZ Amsterdam. Spain by Invesco Asset Management S.A, Sucursal en España, Calle Recoletos 15 Piso 1, Madrid, España. Sweden by Invesco Asset Management S.A, Swedish Filial, Regus Stockholm Stureplan 568 Stureplan 4C, 4th Floor, Stockholm, Sweden. Switzerland by Invesco Asset Management (Schweiz) AG, Stockerstrasse 14, CH 8002 Zürich, Switzerland. the by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH. Authorised and regulated by the Financial Conduct Authority. Sample and methodology In our study, we targeted traditional market cap weighted index and smart beta index users. We selected a variety of value chain participants from four of the largest wealth management markets in Europe; Germany, Italy, Switzerland and the. Throughout the report, we reference value chain segments such as client-facing financial advisers, platforms or institutional asset managers. The fieldwork for this report was conducted by NMG s consulting practice between 27 January and 21 March Key components of the methodology include: a focus on the key decision makers offering market insights rather than financial incentives typically an hour long face-to-face interviews using a structured questionnaire to collect both quantitative and qualitative analytics. Glossary 1 Financial adviser: Client-facing financial advisers including IFAs, broker pools, FA networks with affluent clients 2 Client-facing private bankers, family offices, discretionary asset managers and advisers with HNW clients 3 Portfolio constructor: Non-client facing executives responsible for fund selection, screening or model portfolio construction for intermediaries 4 Platform: Non-client facing executives responsible for fund selection, screening or model portfolio construction for platforms or life insurers 5 Institutional asset manager: Asset managers targeting retail and institutional investors via single or multi-manager strategies

17 For further information please contact Invesco PowerShares +44 (0) France +33 (0) Germany & Austria +49 (0) Switzerland +44 (0) Continental Europe +33 (0) Telephone calls may be recorded