Beyond active vs passive

Transcription

1 Beyond active vs passive Barbara Vintcent For professional clients / qualified investors only

2 Why The Art of Indexing? Institutional US domiciled funds: AUM split by ETPs, index and active funds 100% Institutional European domiciled funds: AUM split by ETPs, index and active funds 100% 95% 95% 90% 90% 85% 85% 80% 80% 75% 75% 70% Mar-14 % of AUM in Active Funds % of AUM in Index Funds % of AUM in ETPs 70% Feb-14 % of AUM in Active Funds % of AUM in Index Funds % of AUM in ETPs Source: BlackRock, Bloomberg, Simfund. Please note, the data excludes AUM in Cayman Islands, British Virgin Islands and Bermuda domiciled funds For professional clients / qualified investors only

3 1 Selecting the right benchmark Example: Coverage 1. Benchmark selection 2. Instrument selection 3. Manager selection EM Equity coverage disparity: MSCI Emerging Markets Index vs FTSE Emerging Index Country and Sector mis-weights lead to differences in performances and risk Source: Bloomberg and BlackRock. All figures in USD, Total Return Net indices. As at 31 August Past performance does not guarantee future results.. For professional clients / qualified investors only

4 2 Selecting the right investment vehicle 1. Benchmark selection 2. Instrument selection 3. Manager selection There are 7 dimensions to consider: Source: BlackRock. For professional clients / qualified investors only

5 2 Selecting the right investment vehicle Cost dimension: ETFs vs index funds 1. Benchmark selection 2. Instrument selection 3. Manager selection The cost dimension is much more than a TER / MF assessment DM Equity example The index fund has a lower TER but higher entry/exit costs than the ETF. Therefore, the ETF is the cheaper instrument below an eight-month holding period; but as the investment horizon increases beyond this threshold the index fund becomes the cheapest Source: BlackRock. For illustrative purposes only. For professional clients / qualified investors only

6 Performance difference (%) 2 Selecting the right investment vehicle Cost dimension: ETFs vs futures 1. Benchmark selection 2. Instrument selection 3. Manager selection The comparison of futures and ETFs can be conducted along three angles: operational perspective holding cost perspective (performance difference) trading cost perspective Future ETF Source: BlackRock. For illustrative purposes only. For professional clients / qualified investors only

7 We believe the growth of indexing will continue Looking into the future, we see the growth of index investing continuing both in terms of AUM and available strategies. This trend will be supported by three main catalysts: 1. Increased investor adoption 2. Expansion of the product breadth 3. Increased blending of index vehicles For professional clients / qualified investors only

8 2. Expansion of the product breadth A myriad of new indices have emerged over the years across different asset classes and segments, often collectively termed by the financial press and community as smart beta. We see this trend continuing, as the beta spectrum enlarges to capture additional exposures and risk factors How to navigate this range of choices? Are non-market capitalisation strategies really smart? For professional clients / qualified investors only

9 2. Expansion of the product breadth Are non market-cap weighted strategies really smart? US Equities example S&P500 TR Index S&P 500 Equally Weighted Index S&P 500 TR Index S&P 500 Equally Weighted Index Source: BlackRock, Bloomberg. For professional clients / qualified investors only

10 3. Increased blending Blending of different types of betas will be a key trend for index investing. As investors become more acquainted with different index vehicles we see greater blending in that context, for example pension funds increasing their use of ETFs as a complement to futures Blending betas and vehicles will be driven by risk tolerance, performance objectives, forward-looking views of the markets and the time horizon of the investment. For professional clients / qualified investors only

11 Blending insights survey We interviewed: 35 Multi-asset, Advisory and Discretionary institutions across EMEA Investors with predominantly active, blended or passive portfolios Our respondents manage ~ 2.5 Trillion* 5 of the top 10 Global Private Banks** *Source: BlackRock, as of Year End 2011 **Source: Scorpio Partnership Private Banking Benchmark 2012 FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 11

12 Three identities emerge Actively Active Currently focused on using active management to generate alpha and not actively blending Indexing, where it is used, is only for cash management or as a last choice if other alternatives are unavailable. Embracing Blending Adopting indexing for tactical or short-term exposures, or Moving towards a more comprehensive approach to blending Agnostic Allocators Agnostic process for blending and the use of indexing. Primary focus on asset allocation to deliver alpha implementation choice often a secondary consideration. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 12

13 What criterion would drive you to use indexing as opposed to active funds? A. Underlying market efficiency B. Availability of alpha-generating PMs C. Internal business structure D. Costs 13

14 What criterion would drive you to use indexing as opposed to active funds? A. Underlying market efficiency 35% B. Availability of alpha-generating PMs 20% C. Internal business structure 11% D. Costs 24% E. Investment horizon 10% 14

15 Which exposure would you see as being the most inefficient and therefore consider using active products for? A. Developed market equities B. Emerging markets equities C. Emerging markets debt D. Commodities 15

16 Which exposure would you see as being the most inefficient and therefore consider using active products for? A. Developed market equities 18% B. Emerging markets equities 25% C. Emerging markets debt 23% D. Commodities 16% E. Corporate debt 15% F. Government bonds 4% 16

17 Which catalyst has driven blending the most in your business/market? A. Clients B. Costs C. Investment markets and business opportunity D. Performance of active funds 17

18 Which catalyst has driven blending the most in your business/market? A. Clients 12% B. Costs 20% C. Investment markets and business opportunity 27% D. Performance of active funds 26% E. Growth in index product range 10% F. Regulation 5% 18

19 Looking ahead, which identity do you believe could resonate closest to your approach to index and active blending in future? A. Actively Active B. Embracing Blending C. Agnostic Allocators FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 19

20 Looking ahead, which identity do you believe could resonate closest to your approach to index and active blending in future? A. Actively Active 12% B. Embracing Blending C. Agnostic Allocators 40% 48% FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 20

21 Strategic beta Active strategies with some of the benefits of passive strategies Enhance risk-adjusted returns through exposure to desirable specific factors Examples include funds that systematically overweight value or small stocks, highdividend stocks, momentum stocks and low beta, low vol stocks Can also encompass bonds, currencies and commodities, and can be multi-asset strategies Available as mutual funds, institutional portfolios (separate accounts and commingled funds) and ETFs Portfolio construction is simple, rules-based and transparent, which tends to lead to low fees and costs, and high capacity relative to traditional active strategies 21

22 Passive, active and strategic beta strategies: costs, capacity and manager discretion 22

23 Strategic beta: median mutual fund management fees and turnover levels 23

24 Strategic beta: levels of responsibility 24

25 How to fit strategic beta within existing asset allocations There are three main ways to fit strategic beta into existing asset allocations: 1. Directly substituting for active products 2. Directly substituting for passive products 3. Augmenting existing combination of passive and active products, to hedge or enhance factor exposures arising through active products 25

26 Conclusion Index investing will continue to grow and play a key role in financial markets over the next 10 years and beyond The breadth of strategy and product offer will increase Blending index and active strategies will become increasingly prevalent Strategic beta strategies are active strategies with some of the benefits of passive strategies Due diligence will be key! The Art of Indexing and Who Should Buy Strategic Beta? equip you with the knowledge and framework to take advantage of the benefits offered by this evergrowing and evolving range of strategies For professional clients / qualified investors only

27 Disclaimer REGULATORY INFORMATION Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority ( FCA ), having its registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0) , has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. RESTRICTED INVESTORS This document is not, and under no circumstances is to be construed as an advertisement or any other step in furtherance of a public offering of shares in the United States or Canada. This document is not aimed at persons who are resident in the United States, Canada or any province or territory thereof, where the companies/securities are not authorised or registered for distribution and where no prospectus has been filed with any securities commission or regulatory authority. The companies/securities may not be acquired or owned by, or acquired with the assets of, an ERISA Plan. RISK WARNINGS Investment in the products mentioned in this document may not be suitable for all investors. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. The price of the investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change. BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. The data displayed provides summary information, investment should be made on the basis of the relevant Prospectus which is available from BlackRock Advisors (UK) Limited. In respect of the products mentioned this document is intended for information purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the securities described within. This document may not be distributed without authorisation from BlackRock Advisors (UK) Limited BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, ALADDIN, ishares, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, and BUILT FOR THESE TIMES are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. For professional clients / qualified investors only

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