The Big Interview: Adrian Mulryan from marketßeta

by , 4th May 2018

Active for the past six months, marketßeta was formed about a year ago. The company was set up by Graeme Dewar and it says it has seen a significant increase in client demand over the last few months. ETF Stream spoke to Adrian Mulryan, formerly a founding employee and general counsel at Source ETF and helped set up Market Access, ABN Amro’s ETF business, about the company’s plans and what marketßeta sees as the market opportunity

Could you explain how marketßeta came about?

Everyone involved has been heavily involved in the ETF industry. We have all worked for multiple, very successful, ETF providers. We all came together with a view about providing independent ETF expertise, from business strategy assistance to build to operational models to everything you might need as an asset manager to either expand the geography, or range of activities, of an existing ETF business or build a new business. We have all independently seen the growth in the ETF space AUM-wise. We have all seen the change in distribution – post-RDR in the UK, aggregation of IFAs, MiFID in Europe – and what that means in terms of platforms, the regulatory moves with regard to more transparent, better structured products for end clients. Our view is that ETFs have now reached a critical mass and broad investor acceptance. As such, we believe, that most asset managers will need at least some components of an ETF business in their model.  We are seeing significant demand for not only so called Smart Beta (factor or quant) but also from active managers looking to participate in the ever-increasing net new asset flows. When clients approach us, we appreciate that they need governance and control, they want to keep control of their own IP and second, the operational set up is so different across all asset managers that there really isn’t a one-size-fits-all solution. We go to people with a menu of options – starting with an understanding of their specific needs. Then we analyse their business and discuss the optimal mix of in house versus outsource choices for their specific needs and existing model.

So how do you advise how people can compete against the very biggest ETF operators?

So, first, you define competitor. No one would argue that the likes of State Street and Vanguard have not won out when it comes to core product. If you launched an S&P 500 ETF you are going to seriously struggle to gain ground. You can’t get the economies of scale to compete with their products. But an ETF is simply a UCITS. If you have a profitable UCITS today – and if it can be done in an ETF format – why not transfer it over. You are already selling it across certain channels at a certain price point, so why not do it in another channel at that price point. There is no rule that ETFs have to be cheap or cheapest. Launching a cheaper ETF product doesn’t necessarily win the war and most of the groups we are talking to have legacy institutional businesses, a lot of active businesses, and they are looking at taking their IP and wrapping it in an ETF format to build a more sustainable business going forward. It shouldn’t be taken as read that managers will sit back and have their pockets picked by the likes of iShares and Vanguard over the years.

What examples would you give of a legacy business here?

Take a very large German or UK asset manager that is selling primarily into the legacy pension industry. That is a B2B business, that is institutional in the way that pensions are institutional but the aggregation of IFAs into platforms and the education of sales channels by the likes of Blackrock is putting ETFs more in focus. The way the annuity and pensions world works, if you are a £40bn manager today you will be a £45bn manager in two years’ time, that’s just the way that the AUM gathers pace. But what is the share of new assets you are losing out on. What is the opportunity to re-focus the business? And is it a case that the leaner and hungrier ETF guys will start picking your pocket in other areas of your business line. For most the case isn’t necessarily compelling. But when you look at where technology is going, you look at where AUM has gone in the past five years, and ETFs are just a wrapper. People often ask, what happened to unit trusts? Well, they just weren’t in flavour as much and people moved on and perhaps the same is happening with ETFs. People are starting to ask questions; there is a flow happening here, should I be trying to capture that flow, is it relevant to me and if it is, how do I build a business with a higher delta of success. This has been going on for three or four years now. The headline. There is noise. The noise five years ago was synthetic v physical. Whether ETFs provided a systemic risk. But those issue are not referenced now. Now it is whether I should or should not be in the space.

Is there a technology leap that has made your business possible?

It’s not a technology leap. It’s the Harry Potter effect. Five years’ ago ETFs were Harry Potter with some mystique there. But now people realise there is no secret sauce. There’s just a language people don’t speak. The building of a unitised product doesn’t change. It’s the conversion piece. This looks challenging and more expensive. This is the classic conundrum with ETFs. An ETF is more expensive to build. But ETF operators have built a much leaner box. So, they have ring-fenced their margins. What we are trying to do is bring our collective experience in complex organisations and understanding how to demystify this. Some things we will outsource; others we will just help people rethink their product and where the risks are.

And there is some competition in this area – but is this a different approach?

Competitors in this space, locally or globally are offering great solutions for some people. We are probably helping each other by bringing to the attention of clients the choices that the different model offer. We are a cohort of top tier asset management leaders with track records of helping to build the world’s most successful ETF businesses.  We are keen to take on only a limited number of managers with a very bespoke approach, getting under the hood and understanding how they build a business within their current business. Some will need a much more integrated solution, others require more standalone approaches. We are fixing a problem for people, demystifying the space – but we do this with our clients and their end investors long term needs in mind. In terms of potential clients, there are some people coming into the space in the next year or so, others still holding off. What is most interesting is the number of managers who get the fact the ETFs managers have built a better mousetrap – from product design to management – and that is how they are growing their businesses so successfully.  We need to think of ETFs not only as a wrapper but an opportunity for distribution optionality and potentially operating model changes. That is the greatest challenge but also the greatest opportunity.

And is this now a global opportunity?

Yes, we have taken the lead from the US. But what is interesting is what is going on in the regulatory space. There are clear cross-jurisdictional conversations going on. The Americans are talking to the Canadians, the Canadians are talking to the Europeans, the Europeans are talking to the Japanese and so on. We are starting to get a consensus globally on what a good product looks like. It is just a wrapper. What we are trying to do is demystify it and allow people build to build at a cost that works for them, that insulates their margin and gives them the opportunity to sell a different product set. A long term partnership approach.

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