June 22, 2009 / 2:56 PM / 10 years ago

Funds fear ETF threat to active business

* Delegates at Fund Forum concerned as investors switch

* Firms without genuine ‘alpha’ face backlash

* Lipper says banks will embrace ETFs to win back customers

By Claire Milhench

MONACO, June 22 (Reuters) - Fund firms have been spooked by the rise of exchange traded funds (ETFs) in the wake of the market meltdown, delegates at the annual Fund Forum asset management industry conference said on Monday.

ETFs — low-cost passive investing tools that mirror an index — have profited as investors vote with their feet after actively managed products failed to perform as markets tanked.

“We take this threat very seriously - we won’t necessarily buy or build our own ETFs business but we will have to adapt to this reality and build our solutions around this,” said Cristobal Mendez de Vigo, group head of distribution and business development at F&C Investments FCAM.L.

Richard Royds, managing director of global strategic clients at BlackRock (BLK.N) said on Monday that firms unable to show genuine benchmark-busting returns would suffer.

“If you have no alpha generating engine you should be worried,” he said.

Earlier this month, BlackRock announced a deal to buy Barclays Global Investors (BGI), including its iShares ETF business, from British bank Barclays (BARC.L). [ID:nLC391915]

In its latest ETF industry review, BGI said global assets in the sector had fallen over the 12 months to end-April, but only by 0.5 percent — a sharp contrast to a decline of more than 10 percent in the broader asset management industry, according to figures from Thomson Reuters fund research firm Lipper FMI.

HIGH MARGINS

Investors have been particularly disappointed by the failure of absolute return-type products which commanded high fees but did not deliver the returns touted by product literature in tough times.

Mauro Barratta, managing director of Lipper FMI, highlighted so-called enhanced money market funds — which were invested in toxic debt — and absolute return mixed asset products as being among the most disappointing for investors.

Funds’ concerns over a switch to passive investing and ETFs is real enough. The Unicredit pension fund has moved its equity and fixed income holdings to index strategies, and Dutch scheme PGGM switched 10 billion euros ($14 billion) from active to passive managers.

This is creating a revenue hole for asset managers, as many had banked on higher margins that accompany active management to keep growing as managers proved their worth. The move away from this trend is only likely to accelerate, according to industry participants.

Diana Mackay, CEO of Lipper FMI, predicted a lot of the big banks who distribute funds in Europe will increasingly switch to ETFs in an effort to retain disillusioned clients.

“The banks have suffered from the loss of investor confidence and they need a new story to sell. They are looking at ways to wrap ETFs and exchange traded notes (ETNs) so that they can layer in fees at different levels,” she said. (Editing by Dan Lalor) ($1 = 0.7216 euro)

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