In his first interview since the Canvas initiative at ETF Securities was snapped up by Legal & General Investment Management just last week, chief executive Howie Li talks to ETF Stream about the reasons behind the move and the challenges ahead of the business under new ownership.
Can you explain your current role?
Howie Li: I'm currently responsible for the growth and strategic positioning of the Canvas UCITS ETF business and its product range. As per ETF Stream's coverage of the industry news last week, Legal & General Investment Management (LGIM) is indeed acquiring the Canvas business. The Canvas initiative was put in place around four years ago when Jason Kennard, the Canvas COO, and I shared a vision to reposition the UCITS ETF business at ETF Securities. Having started at ETF Securities in 2009 in the legal and product development function, we have learnt a lot from our clients as ETF Securities evolved from a strong commodities base to providing a wider set of solutions across different asset classes. We knew early on in the Canvas initiative that we needed to develop the equities range further and that we needed to make our first step into fixed income. When the Canvas initiative started in earnest at the end of 2013, the AUM was around $450m and we are now currently at over $2.8bn. It's still relatively small but we are making meaningful steps in our growth. It's been a great experience working with knowledgeable colleagues across the firm to help bring the UCITS platform and the Canvas vision to life and we're proud to have established a base in thematic investing, fixed income and commodities in which to continue to grow the Canvas business from.
From those figures, the initiative was clearly welcomed by your clients?
HL: Yes, it would seem that way from the engagement with clients and the hard work that the ETFS distribution team have put in. It takes time for clients to view us for covering other areas of expertise but we have always been proud of our ability to give access to something that isn't readily available. Over the last couple of years, we've witnessed the investment community increasingly look at different fixed income strategies in the ETF space as well as dedicate a proportion of their portfolio towards thematic investing. We plan to continue to build on these foundations to provide additional investment opportunities.
So your client base has come along with you on a journey of specialisation then?
HL: A lot of our clients are asset allocators from many segments, including multi-asset funds, wealth managers, private banks and IFAs. Commodities tend to fit within a portion of the portfolio but is unlikely to be an investor's entire investment holding. Our thought was that we could resonate with them in other asset classes based on what we are known for - access and innovation. There were areas we knew we wanted to build the Canvas business and will admit where we don't have sufficient internal expertise. To ensure that our clients have access to the best solution, we think that it's important to recognise how our key strengths in the ETF business can tie in with a partner's expertise which would result in a better offering to clients.
Tell us about what the sale to LGIM means for Canvas?
HL: In effect, the sale means entering into the next phase of growth for Canvas. We've been in discussion with the team at LGIM for some time about building out an ETF range that captures its extensive investment expertise. What resonated well with the Canvas team was an aligned vision of what the ETF platform could look like with some serious scale behind it. This led to positive discussions between ETF Securities and LGIM which consequently resulted in the announcement last week. Specifically, the sale represents a change in ownership of the existing entities that power up the UCITS ETF platform together with the assets under management. As part of the transaction, which is expected to complete in Q1 2018, the entire team that has been dedicated to the UCITS business will be transferring to LGIM. The staff moving across covers the operations, portfolio management, product development and maintenance as well as strategy and governance of the Canvas business. Because all products will continue to operate under the same structure, managed by the same team, using the same service providers and leveraging the expertise of the partners that we have across the range today, we're positioned for a smooth transition with minimal impact for investors. It's important for us that our day-to-day remains business as usual to continue to provide the level of service which investors expect.
What do you think the sale says about the future for Canvas and the platform?
HL: Again, it's very much about entering into its next phase of growth. All existing products and partner relationships will continue to grow under LGIM and this expands on a similar vision that we had originally set out. What's very exciting is that we will soon be part of the UK's largest asset manager and benefit from a wealth of investment expertise that already exists and continues to be built out at LGIM. We're confident that this will allow us to offer an extensive range of ETF solutions to service a wider spectrum of investor needs beyond our current footprint. From the discussions that we've had so far with the LGIM team, there are exciting things happening there at the moment and we look forward to contributing to that.
To what degree is L&G enthused about the prospects for the Canvas proposition?
HL: It's clear that LGIM's commitment to entering the ETF market via the Canvas acquisition is a strategic one. LGIM is well-positioned to leverage the scale of its index and wider business to develop ETF solutions that complements its existing funds. The acquisition probably came as little surprise to the asset management community given it's such a natural step for LGIM to service a wider audience. The distribution plans for the Canvas business under LGIM will allow us to connect with LGIM's growing base of clients in Europe. Already, as we enter the transitional stages of Canvas becoming a part of LGIM, it's clear that we share a similar culture in how we want to do business with clients.
There are strong innovation themes in Canvas- is it a job to convince the customers they are worth investing in?
HL: Yes. Using a relatively recent example, when the robotics ETF first launched three years ago, thematic investing wasn't as well covered as it is today. At that point, people just thought it was a tech product that was perhaps too niche. But the theme of robotics and automation has now become a lot more mainstream as general awareness of what's happening across many industries continues to rise. The same understanding of the ever-increasing use of data to power the future world can be said with the cybersecurity theme. Investors have created a place for thematic investing within their traditional portfolios - investing based on long-term conviction that the world is experiencing a foundational shift in the way we live, work and interact in the future. The demand for themes has really evolved over time and we have a pipeline of themes we want to share with our investors. It's quite encouraging that investors now know what to do with it in their portfolios.
What infrastructure is needed for these type of products?
HL: When you start looking at potential investment strategies for a theme, this is when the asset management space and ETFs specifically get very interesting. There are traditional sectors that are well covered by sell-side analysts and the investment community. However, there are only a few houses that dedicate their resources towards building products based on themes. Not many have internal teams that have a focus on specific long-term themes, so leveraging off dedicated experts often makes sense. For example, we work with dedicated experts in robotics and automation and we've been working with the team at Robo Global for over three years. They are defining the robotics industry from the top down but also tracking the technologies being developed from the bottom up along with the companies that are creating these technologies. This has led to a unique classification that defines sub-sectors in the robotics industry that covers companies that develop the technologies but also those that are positioning for long-term growth by applying these technologies.
What is the process from there?
HL: The partners help us understand the space and define the investment universe through their proprietary research and data. It then goes into a rules-based methodology that is transparently applied. As long-term growth themes are generally at an early state of transformation, diversity in the portfolio is key. Picking the future winners in an early industry is difficult as there is a lot of research and development that makes predicting the next breakthrough company an unknown task. So far, we believe that such early stage themes respond best to a modified equal weighting process so that investors have exposure to the broad industry and can benefit from the growth of the trend itself.
What can a thematic fund deliver that a generic tech fund can't?
HL: Tech is a wide area but tech indices generally are market-cap weighted. They tend to be dominated by the large well-known companies such as Facebook, Amazon, Netflix, Microsoft, etc. If you look at the performance attribution, these companies drive the bulk of market cap index performance. Whereas in our robotics product for example, they don't rely on such companies for performance. Instead, they give access to high growth opportunities often found in small and mid-cap companies that are developing automation technologies or where their businesses are being driven by the strategic use of automation and artificial intelligence.
Are you relying on experts? Are they feeding back to you ideas on new thematics?
HL: Not so much that. It takes a while to find an expert in a particular early stage theme. It often requires researching and understanding where the high-growth areas are in any business or sector. What's really helpful is academic debate and reading about entrepreneurial innovation. A lot comes down to the same principles- data, efficiency, sustainability. When you start looking at those overarching principles, you start picking up which businesses are undergoing disruption or have the capacity to undergo transformation. From there, it then takes a while to find a credible expert that can provide innovative research and data to construct an investment fund.
What is the angle with your fixed income range?
HL: Bearing in mind that, three years ago, we didn't have a footprint at all. We know we needed to be in that space and there was capacity to do something different because there are potential flaws in the way that the market cap indices are built. If you don't understand what drives them, there could be unintended consequences for investors. In fixed income, the largest bond issuers get the largest investment allocation in a market cap index. That doesn't make sense when you take a look at what some of the active managers do. They are identifying risks in bond issues and precisely picking those based on their quality, risk profile or fundamentals. So it's taking some of that thought process and applying it in a transparent and rules-based manner. We teamed up with Lombard Odier over two years ago to launch the first range of fundamentals-based bond ETFs as they had been running this type of strategy for a number of years with a good track record. It's about managing risk and holding good quality debt. It aims to protect on the downside whilst still giving investors the expected exposure to the asset class.
With both the thematic and fixed income funds, is this all a sub-set of smart beta?
HL: Smart beta is a rules-based framework and it isn't defined by asset class. Sometimes, it's called factor investing or alternative beta. What it tries to do is provide a transparent investment approach governed by a set of rules which systematically applies techniques often used in managing investments on a discretionary basis. In general, it brings cost levels down when compared to more resource intensive discretionary investing and that is a key reason why smart beta is increasingly appealing to investors. There's no doubt that investors want to lower the overall cost of an investment portfolio but will often be happy to pay more for something that delivers performance. It would seem that, at the moment, smart beta fixed income is underplayed.
Would it be a mistake to believe the growth in ETFs is just beta and that what you are seeing is a lot of growth in active and smart beta?
HL: Yes, I think so. More choice is being provided to investors and it's increasingly coming in the form of smart beta. Also, as the industry becomes more familiar with the versatility of the ETF vehicle, we'll probably see more active strategies enter the market.
How much of the debate is about price?
HL: For me, the focus on pricing is there across the entire funds industry and is rightfully driven by the end investor. That being said, investors are also generally willing to pay for performance. It's about what investors are looking for in terms of value. The meaning of value is different for each investor and price may not be the only or predominant consideration. It's important for the asset management community to educate investors on what their offering is designed to do.
Lastly, what do you think are the big catalysts for the ETF industry?
HL: The regulatory changes as well as the infrastructure supporting the ETF ecosystem. There are a lot of participants that are developing technologies that will provide easier access to ETFs. At the moment, some platforms don't even offer ETFs. So if that connection to the investors isn't fixed, then they will unfortunately miss out from opportunities structured as ETFs. Another point of potential development is to address the transparency of actual traded volumes in ETFs. In Europe, a lot of trading occurs over the counter and not on exchange and there are no requirements for OTC trades to be reported. When all the information is reported for all to see, that should be a major catalyst as well. Finally, the wider adoption of ETFs by institutional investors in Europe will also be a big driver.