On the face of it, IG Group is a curious company to be launching a service for investors which is predicated on offering a range of passive portfolios to retail investors. Formed way back in 1974 by Stuart Wheeler as a vehicle to take advantage of the ending of the Bretton Woods monetary agreement and trade gold prices, IG has ever since been the home of the most active of investors and traders.
The move announced in April to launch the Smart Portfolio service and effectively enter the robo-advice arena shouldn't come as a surprise given other recent moves by IG, in particular the move into offering a low-cost online share-dealing service in September 2014. As the company said in April, the introduction of a low-cost and transparent model portfolio service, using the asset allocation expertise of BlackRock, is designed for an audience which is attuned to understanding the compound effects of fees on any investment and was frustrated by what else was on offer in the market.
"We have an audience that is a very self-directed, online, sophisticated audience," says Ian Peacock, head of UK and Ireland at IG Group. "They are perhaps more aware of the fees, in a very opaque industry."
An ETF portfolio service was a natural step suggests Peacock. Here he speaks to ETF Stream about how the company is effectively incubating a new offering that can leverage the company's marketing and technological capability to offer a new service first, to its current customers and second, to a new potential audience that IG estimates could be many times larger.
"Where we go out to the broader market, we are one of the fastest-growing share-dealing products in the UK and we continually attract the most active tranche of that market," he says. "Through the clients we acquire and the clients we have, that is a unique client base and it is easy to extol the virtues of ETFs. They are early-adopters. Robo-advice resonates for that reason."
ETF Stream: You have a very sophisticated audience on the leveraged trading side - how have you gone about providing a product which is attractive to that segment?
Ian Peacock: If you look at the smart portfolios part of the business, what we have aimed to create is suite of risk-adjusted model portfolios, in conjunction with BlackRock using all their expertise. These portfolios are constructed using a mix of ETFs and we chose BlackRock because it was very important to have the best partner and also to provide physical and non-leveraged ETFs. So if a client wants to trade leverage, they can do that on our leverage platforms, but these portfolios we wanted to be core investment holdings. I think there is an equilibrium where clients have both according to their investment needs. Our clients can move between the different offerings we have.
ETF Stream: Is it like a robo-adviser but with added trading capability?
IP: We're using BlackRock's global expertise and asset allocation to design the portfolios whereas the robo-advisers just have a traditional asset manager creating traditional style portfolios but the customer journey makes it appear very tech. The difference between our offering and the others is that they have one product - the model portfolios - but we have model portfolios in a suite of products.
ETF Stream: You are outsourcing the asset allocation to BlackRock?
IP: We are the manager. Our pedigree is in innovation and technology in global markets but BlackRock has a similar reputation in innovation in iShares, it is the biggest asset manager in the world, and into it's multi-asset business it has quant feeds, fundamental feeds, political feeds, all these inputs from the resources of BlackRock, so we felt that partnering with it and getting access to all those skills would really help us. We take the responsibility for the suitability for each client, but ultimately we're using the asset allocation research of BlackRock. Ours is a truly digital online trading and investing offer. Some of the robo-advisers are a digital online journey but the asset allocation behind it is a couple of managers choosing the portfolios.
ETF Stream: What about the growing sophistication of the ETF product, which would appear to be pushing in the direction of your clients? How do you see that developing and your offering developing in response to that?
IP: For the confident investor, the robo-adviser is one piece of the picture. The average age of the robo-adviser is perhaps 40 years old. Not millennials. For many of those people, the answer is not just one product. It might be a robo-adviser, plus some stock picking, EIS investing. Robo-advisers is one part of the picture, but we think we have more angles covered.
ETF Stream: What do you think the understanding is of your clients of developments in smart beta and other aspects of ETF innovations?
IP: I think the UK and Europe is far behind the understanding of the US in ETFs, but it is starting to take off. Smart beta is still in its early stage. The awareness with the average consumer would be very lower; with our clients it would be higher for certain. But there are so many ETFs out there now, it is hard to find the ETF to suit your needs. We have built a screener on our site to help people choose ETFs, We are starting to get traction with thematic or sector-based. That is getting some awareness, but smart beta is still early stage.
ETF Stream: How do you see the potential in smart beta ETFs?
IP: Smart beta is coming from two directions. First, ETF providers coming from the asset allocation space which is a natural development for them, continuing to disrupt and take on incumbents in the traditional asset management side. And you are also getting the asset manager moving into smart beta which I think is more defensive. Mutual fund managers who are struggling with fees to outperform the index in the long term. They are looking at where he world is moving and their place in it and active beta is a legitimate extension in the value chain for them. You have two forces coming together around the same subject matter which will create momentum. Two market groups for different reasons.
ETF Stream: Is Smart Portfolios more mass market than CFDs and spread betting?
IP: Yes, the leveraged trading market in the UK is perhaps 150,000 consumers. The online share-dealing market is perhaps 10 times that. And that's people online making their own investment decisions. Then the online investing and wealth management platform business, that is significantly bigger than that. The market is much greater.
ETF Stream: But it is still a relatively revolutionary message with Smart Portfolios?
IP: We've got a current client base of 180,000 active clients. This suite of products is to cater to the needs of the current client base. They are fairly sophisticated. Where we go out to the broader market, we are one of the fastest-growing share-dealing products in the UK and we continually attract the most active tranche of that market. So, through the clients we acquire and the clients we have, that is a unique client base and it is easy to extol the virtues of ETFs. They are early-adopters. Robo-advice resonates for that reason.
ETF Stream: IG as a company has had a consistent message about low fees, so is it an extension of that idea? Are you doing more of a job explaining the underlying product than maybe the other robo-advisers are?
IP: Yes, because we are doing ETFs as a single product, and promoting them as a building block in our portfolios, we do a lot to explain about ETFs, the different types, smart beta, leveraged etc. Because we think we have a duty to help educate consumer about the strength of the product. Now, in the passive/active debate, in our smart portfolios we are using passive products with active asset allocation. And as the industry develops and the disruptors start to get more headlines and recent acquisitions into the robo-advice sector generates a momentum that accelerates over time and we want to be at the forefront of that.
ETF Stream: Are you incubating here?
IP: Yes, we are, It's an interesting question. Because IG is a large financial tech firm, we have all of the resources to launch this business in-house. So for us to extend our product offering from trading to share dealing to investments was a very modest leap for us in terms of resources required. Very different to a startup. So, we have different economics. Plus we have a customer base. We didn't launch this blind. We talked to our customers, what they were doing, why, would they like a product like this. And their awareness and their propensity for this product was high. We are pretty efficient at marketing and targeting our acquisition; and we are targeting the acquisition for the robo-offering as the share-dealing client base. Multiple products for the same client.
ETF Stream: Who are you directly competing with in terms of the smart portfolio service?
IP: For the type of client we are strong with, the self-directed wealthy professional, and early adopter of technology. Our clients would be using direct platforms, such as Hargreaves Lansdown and Fidelity, and they would certainly be using IFAs.
ETF Stream: Is the Smart Portfolios offering more attuned to the flow towards ETFs on the part of retail investors?
IP: Yes, I'm very respectful of Hargreaves and when you look at the platform and the choice on offer, it is very comprehensive. But perhaps there is too much choice for many people. If the active fund is not outperforming, then you would naturally look at the index funds as an alternative. So, the most efficient way to buy an index fund is via an ETF and we are then taking that logic and saying let us help you build a balanced portfolio. It is aimed, then, at a subset of their customer base but I'm not going to say it is better. If you look at the IFA market, do you need an IFA? There are times, yes, but for much of the time it is surplus to requirements. Certainly when fees are compounded. This is a superior product for less complex life scenarios for many investors.
ETF Stream: You have said you are not limited to BlackRock as a provider?
IP: What I would say is that when we launched we chose to partner with BlackRock for their asset allocation expertise. And we are very happy with that partnership for our suite of model portfolios. Equally, with our product range we have access to all ETFs from all providers and we are agnostic as to which ETFs people choose for share dealing. We have an ETF screener, allowing people to get the right ETF for them.
ETF Stream: And what is it you think they will be asking for from this product in three to five years' time?
IP: As the industry grows and there is more focus on fees, I think it will drive home the impact of fees and costs in the investment process and that is a consumer outcome our clients will enjoy. From a development point of view, it's easy to talk to our clients and build things that are too leading edge. But I believe this product moves towards the path of custom portfolios that clients can tweak or overlay with their own investment ideas. And then how do those portfolios integrate to my single stock positons enabling providers to give analysis of the overall picture for risk in ones investments. So the big theme beyond costs and fees is risk management.
Oliver Smith, portfolio manager at IG, talks about the risks and opportunities for the ETF sector:
ETF Stream: What are the risks for the ETF world for the next few years?
Oliver Smith: Overall I think they are a real force for good, unless passive gets to too large a size and starts dominating equity flows. It's hard to know where we are right now. Fixed income is very small, and equity ownership is maybe 7% or even 10%. Turnover in ETFs is high, but of course the redemption and creation of units is really at the margin. You have seen inflows come in, but as a percentage of daily company turnover, they are not that big, so it's a slow steady accrual of stock. Potentially of more concern is some of the more niche, high-yield areas of fixed income. We know it's not a super-liquid asset class and some of the index providers don't offer that much diversification. Some of the emerging market indices, for instance, have big positions in individual Russian bonds which do appear to be trading at quite expensive levels. But in a big crash situation, it's the stocks that are not held in the indices that will be hurt. Because there will be no bids. Small caps fall by much larger amounts than large caps.
ETF Stream: Fixed income is a huge opportunity for ETFs isn't it?
OS: It's a huge opportunity. Simply because if you are a private client and you want exposure to corporate bonds you are typically buying in lot sizes of ¬£100,000 and so didn't get any diversification. You take on a lot of company risk for what you want, which is a safe return. Corporate bond indices can spread the risk and they also manage your maturities. An index with a five- or seven-year maturity automatically rolls, and at a far cheaper cost than you could do it yourself.