* Stock, currency, commodity outflows jump in early 2014
* ETF market share grab to pick up as volatility ebbs
* PwC sees 'passive' funds doubling market share by 2020
* BlackRock, Vanguard, Deutsche Bank, Lyxor lead the way
By Simon Jessop
LONDON, Feb 17 Sharp withdrawals from equity,
currency and commodity tracking funds as emerging markets sold
off in early 2014 looks no more than a bump in the road for such
vehicles as they expand their share of assets under management.
Long used by banks and other institutions, exchange-traded
products (ETPs) - which let investors track a range of
underlying markets for a small fraction of the fees charged by
managed funds - are increasingly being sold to cost-conscious
retail savers in a move helped along by regulatory change.
They are part of the toolkit of cheaper "passive" investment
strategies which consultants PwC expect to double their
share of an asset management industry expected to be worth $100
trillion by 2020. More expensive, "active" funds, relying on
managers' skills to outperform markets, would see their share
shrink, a recent PwC report found.
Some $19 billion was withdrawn globally from ETPs linked to
the three asset classes - equities, forex and commodities -
between Jan. 1 and Feb. 12, on concern that tighter U.S.
monetary policy would undermine emerging markets, Markit data
showed. But ETP managers expect even more to flow back in time.
"The overall trend in the market is to use more passive
products," said Manooj Mistry, head of exchange-traded products
in Europe, the Middle East and Africa for Deutsche Asset &
Wealth Management. "ETFs (exchange-traded funds) benefit from
that and the bulk of the growth is in the main market indices."
Deutsche Bank and Societe Generale unit
Lyxor are the top Europe-based issuers of ETPs. U.S. leaders
include BlackRock and Vanguard, which alone took in $75
billion in new money last year.
In general, actively managed funds do not trade on
Despite forecasts of growth in coming years, several ETFs
have seen massive outflows in recent weeks including the world's
biggest platinum fund, South Africa-listed NewPlat,
which posted its largest ever outflow earlier this month.
Collectively, PwC said, passive strategies would account for
22 percent of the market in 2020 up from 11 percent now, while
active managers would drop to 65 percent from 79 percent.
Alternative investments, like hedge funds and private equity,
would see their share rise to 13 percent from 10 percent.
Many investors will continue to be attracted to managers who
can secure them returns whatever the broader market does,
however, especially if the relentless rise in passive products
can pressure active managers to lower their rates.
In spite of the emerging market-led fall of more than 3
percent in ETF assets under management in January, Markit data
showed the industry took in a net $3 billion of new money
globally, thanks to demand for fixed income funds.
That followed a 6.5-percent rise in global net new money in
2013 that helped take total assets to more than $2.6 trillion,
Markit added. Over 10 years, the industry has grown at a
compound annual rate of 23 percent, data from independent
research firm ETFGI showed.
There was some regional disparity in 2013, with Europe and
the Americas both seeing money leave ETPs while Asia took money
in, Markit data showed. But Deutsche Bank said U.S. ETFs took in
more money than actively managed mutual funds and that total
global assets could well hit $3 trillion in 2014.
That measure of assets takes account of both the money that
has been invested in or withdrawn from a fund, as well as the
increase or decrease in the value that it is tracking.
The move to passive investing will increasingly be aided by
regulators, PwC said, citing the example of Britain's Retail
Distribution Review. This made fund costs more transparent and
removed advisers' incentive to push business to managed funds.
"The new regulations will mean there are more individuals
investing in ETFs. They are going to be a bigger feature for
more people," said Adam Laird, Passive Investment Manager at
British fund "supermarket" Hargreaves Lansdown.
As demand for access to ETPs has increased, the number of
products has ballooned, Markit data showed, from 3,364 separate
products in 2010 to 5,347 in 2013. The year-on-year jump last
year was close to 12 percent.
With investors' focus on cost set to continue - last week,
Deutsche Bank announced it was cutting commissions on four of
its biggest ETFs - Vanguard's European head Thomas Rampulla said
that while an active strategy can work well, investors should
typically have at least some money in passive.
"There are times when active strategies outperform passive
and vice versa, in terms of fund performance," he said. "But
passive tends to return more overall in the long run because of
its low cost."