Since 1992, ACI Monaco has aimed to develop and establish links between all Monaco financial centre players. By offering courses on different financial instruments it aims to contribute to the development of the banking profession. Its presence is enriched by an annual Symposium, for which this year’s theme was “Intelligent ETFs? How to get more from passive management with Smart Beta ETFs”. Olivier Paquier, SPDR Exchange Traded Funds (ETFs) Manager for France, Monaco, Spain & Portugal at State Street Global Advisors, gave a noteworthy speech on this subject which we have taken the liberty of reproducing in full.
An ETF (Exchange Traded Fund) is an index fund which replicates the performance of an index and is traded on the stock exchange. Thus it combines advantages such as simplicity, transparency, liquidity and low cost. The concept has enjoyed great success since its creation in the US in 1993, then its launch in Europe in 2000, and finally with its extension to smart beta in 2005. The stock of ETFs in Europe has now reached 442 billion euro.
The ETF markets in the US and Europe evidence major structural differences, however. Indeed, in the US the market is broader with larger ETFs which primarily use physical replication. Investors are mainly private banks and brokers. In Europe the market is more fragmented, ETFs are more numerous, smaller, and mainly use synthetic replication. Investors are mainly institutional.
For private managers the main challenge is to control customers’ risk aversion, resulting in particular from the 2008 financial crisis, the disappearance of risk-free rates caused by the sovereign debt crisis in Europe, and the low growth environment combined with low interest rates.
For this, they resort to increased diversification in asset allocation terms. A portfolio previously invested in government bonds and shares is now diversified into credit bonds, high yield and emerging debt on one hand, as well as emerging countries’ shares, commodities and real estate on the other. The allocation itself is more dynamic, through flexible management, increased use of funds and greater use of ETFs.
The smart beta concept has thus established itself, between passive and active management. From the latter it takes the idea of improving performance or risk through an investment linked to clearly identified factors such as low valuation, low volatility, strong momentum or high quality. It also has the benefits of traditional passive management, such as transparency, low costs and liquidity.
So investors consider smart beta an evolution of both passive and active management. A large proportion of them (42%) have already used this approach and a significant proportion (24%) intend to start using it. Today the most popular smart beta strategies are low valuation and low volatility.
The growth of smart beta in UCITS form in Europe has thus exploded in recent years, rising from 2 billion dollars managed assets in 2004 to 73 billion dollars in 2014. State Street Global Advisors, which launched the first ETF in the US in 1993, now manages 229 ETFs worldwide representing 439 billion dollars in assets, and 65 ETFs in Europe for 13 billion dollars in assets, including in particular smart beta ETFs through low volatility or dividend aristocrat strategies.
Sources: State Street Global Advisors, Longitude, Indefi at end March 2015
