Asset managers BlackRock, Pimco and HSBC Global Asset Management have all moved into the exchange-traded funds market in recent months, amid mounting investor frustration with the high fees and poor performance of active products. All three are predominantly active managers and their moves raise the question of whether more mainstream investment firms will follow in their footsteps.

“A lot of asset managers are looking at investor preference for ETFs and asking whether they should get into the ETF business,” said Debbie Fuhr, global head of ETF research at Barclays Global Investors. “Many asset managers are launching ETFs because people prefer them over certificates, swaps, structured products, futures and many mutual funds.”

In June, BlackRock announced that it was acquiring Barclays Global Investors and its iShares platform, the largest ETF provider in the world with US$429 billion in assets and a 48% global market share. “It’s most encouraging to see the BlackRock acquisition,” said Farley Thomas, global head of wholesale at HSBC GAM, which has also recently entered the ETF market. “If a very active asset manager decides ETFs are so important that it has to buy the market leader, it confirms that ETFs are mainstream.”

On 25 August, HSBC GAM launched its first ETF, based on the FTSE 100 index, with a listing on the London Stock Exchange. The firm plans to roll out around 30 more funds by the end of next year and to grow its ETF assets over the next three years to US$50 billion – equivalent to 10% of the European market, which is set to grow to an estimated US$500 billion by 2012.

Earlier this year, US fixed income investor Pimco confirmed the attraction of ETFs for active managers when it launched one based on US Treasuries. It has since launched four more ETFs and has another eight in registration with its regulator, the US Securities and Exchange Commission.  

Thomas believes that a number of asset management boards are debating whether to enter the ETF market. “Flows from the highest margin products have been severe. Naturally, senior management are asking ‘What are we focussing on?’”

Three players currently dominate in Europe, collectively accounting for 77% of the US$192 billion market, according to BGI data. After BGI’s iShares, the second largest firm in August was Société Générale-owned Lyxor with US$40 billion in assets and a 21% market share, followed by Deutsche Bank’s db x-trackers with US$31 billion and 16% of the market. “There will be a significantly larger number of major providers in three years’ time,” said Thomas. “We think there will be 10 to 15 strong providers in Europe with a collective 80% market share.”

He adds that launching ETFs made sense for HSBC because it already had the necessary capabilities: index fund management, market-making, fund administration and custodial services. “In launching ETFs we are effectively putting glue between these capabilities and wrapping them in a brand that’s well-known,” he explained.

“HSBC has said it is a significant user of ETFs and believes in the idea of them as a ‘beta’ building block,” remarked Debbie Fuhr of BGI. “So it will be using ETFs as well as selling them on to others. It will be both a manufacturer and a user.”

Eliza Dungworth, head of investment management at Deloitte, a business advisory firm, believes it could make sense for active asset managers to enter the ETF market. “ETFs are a low-cost alternative to traditional active managers, who have not been able to prove they can generate returns in excess of passive products, despite the fact that the fees are higher. As people get used to paying less for benchmark returns, more and more strategies will get packaged up as beta-type products.”

Sales of actively managed funds in Europe went into negative territory last year with US$515 billion in redemptions, according to data from Lipper FMI, while assets managed by the world’s largest 500 asset managers fell by 23%, according to investment consultant Watson Wyatt. In contrast, sales of ETFs remained positive in 2008 at US$76 billion, according to Lipper FMI.

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