If as we gently suggested earlier this week that active fund management is dead*, then what options are there for asset management houses looking to enter the space?
Obviously, the ETF space has been going through a reasonably prolonged period of consolidation with the big providers – the first and second tier – definitely getting bigger. Yet at the same time, there have been a fair few new providers popping up, including some very big names indeed such as JP Morgan.
While you would struggle to suggest this was a start-up, you can still point the company’s entrance into ETFs as a sign of the times. More providers are looking to enter a space where, after all, growth has been impressive to date and seems sure to continue.
“Based on our client conversations, we are seeing a lot more activity in Europe and Asia, probably due to the vast success ETFs have had in the US,” says Alexandra Levis, founder and chief executive at financial services marketing agency Arro Communications.
The desire by many to enter the space is accommodated by an infrastructure which is in place to help any provider find their way to market. The obstacles of yesteryear are no longer an issue, says Brian Higgins, partner for asset management and investment funds at Dublin-based law firm Dillon Eustace.
“There are now more authorised participants and more service providers with the requisite experience and systems in place to operate efficiently within the ETF ecosystem,” he says.
The US experience is instructive here. Being the largest and most competitive ETF market in the world, it has arguably seen more new entrants hoping to make a go of ETFs even if the market is just as concentrated as in Europe.
“The US has lots of entrepreneurs who have launched products on their own, so it will be interesting to see what kinds of career backgrounds the new European ETF issuers will be. There are lots of success stories in the US that are ‘spilling over’ into the European market and I think its infectious in a way,” she says. “At the very least, I think it will inspire non-banks to issue more product in Europe.”
However, lest any US providers believe that Europe is a slam dunk, Higgins has some words of warning.
“The preparation involved in launching an ETF in Europe should not be underestimated,” he says. “If you are a US promoter, you will need to be ready for a more fractured European market. You will need to have done your homework and have your distribution lines and resources in place when you launch your product in order that you can gain sufficient scale quickly enough to operate and be competitive in the market.”
Of course, launching is, as Levis says, only half the battle. The hard work comes after when the team has to concentrate on gathering in assets, relaying on a solid sales and distribution plan as well as a robust marketing effort. This takes budget, she adds.
“The days of ‘if you build it they will come’ are pretty much over and it’s on the issuer to find ways to stay top of mind with prospective clients. Bottom line: there is no point in launching a product if you cannot nurture it and sustain its momentum over the next one, three or five years.”
Higgins agrees that a strong marketing effort is essential, but any new market entrant will need to find a niche in which they think they can excel.
“When entering a more mature market, it is important that you are satisfied that you have a product which is sufficiently distinct to find a space within the market as the existing players would have plenty of products in areas such as low-cost pure index tracking funds.”
As he points out, two areas of interest are obvious enough right now – smart beta and ESG investing, says Higgins.
“Any entrant into the market will need to ensure that they have a product which is sufficiently distinct and which they can market effectively,” he says. “Over the last number of years we have seen the market evolve with product innovation in areas such as smart beta and themes. Given the fact that the EU is supportive of sustainable finance (last year it issued a Sustainable Finance Action Plan and a number of legislative proposals to help foster growth in this area), one of the areas that we are likely to see continued growth in is Environmental, Social and Governance (ESG) funds.”
*Caveats obviously apply.