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Taste for ‘smarter’ funds kicks passives into shape

by Emma Dunkley on Dec 28, 2012 at 07:00

The index comprises some 214 stocks, representing around half of the market capitalisation of MSCI Europe. The factors used to access a stock’s value include
book value, 12-month forward earnings and dividends.

Source says the launch comes at a time when many companies in Europe are considered undervalued amid the sovereign debt crisis. Rather than pay higher active management fees, however, the ETF is a passive investment that charges 0.35% a year.

‘Value investing has been popular since the 1920s,’ says Hood. ‘This ETF allows investors to implement a European value strategy quickly and easily, while maintaining diversification and high liquidity.’

Critical mass

However, as more issuers launch niche products, some of which may struggle to gain traction, more industry consolidation is expected. This means investors need to be wary about the products they opt for and avoid seeing their fund delisted and closed.

‘If you launch funds, some are not going to succeed,’ says Lytle. ‘Part of being an ETF issuer is some will do better than others. But it doesn’t mean if some don’t amass assets that you’ll close them.

‘A lot of what we do is identify existing clients who use our products, who come to us and say, "I really like this and if you did this, then I’d buy it". We then go and find a critical mass of people who want the same thing. This critical mass is the basic building block of a successful fund.’

Only a few weeks ago it was alleged that Credit Suisse would sell its ETF arm, with reports suggesting that State Street Global Advisors or BlackRock will snap it up. Indeed, the future of the industry will be shaped, to an extent, by consolidation.

‘Consolidation is inevitable and we are proponents of it,’ says Joe Linhares, European head of iShares. ‘We have a fractured industry with more than 40 providers, which means liquidity is fragmented. We think consolidation is good for investors over time because it will lead to greater liquidity and more focus on a handful of fund groups.’

The issue with the broader ETF environment is that more than 20 providers have less than $5 billion in assets under management, says Linhares. ‘I can’t see how those operations are profitable. In a tight economic environment the question is how viable are they?

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