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From Special Report: Multi-Asset Supplement - March 2014

New multi-asset ETFs could mean better options

As Investment Adviser reported on February 10, ETF Securities is in talks with fund providers to build and launch white-labelled exchange-traded funds (ETFs) – including products tracking multi-asset indices, a new concept for the UK market.

By Nick Reeve | Published Mar 10, 2014 | comments

It is easy to see how we have arrived at this point. The prevalence of ETFs has exploded in the past 10 years. According to Lipper, the amount of assets invested in Europe-based ETFs has risen from €16.3bn (£13.5bn) in 2003 to €289.5bn (£240.6bn) at the end of 2013.

In the UK, providers such as ETF Securities, iShares, Vanguard, UBS, db x-trackers and Lyxor have listed hundreds of trackers on the London Stock Exchange, providing access to equity indices, bond indices and commodities.

Meanwhile, multi-asset investing has also been taking off: IMA statistics show the association’s Mixed Investment sectors have attracted total net inflows from retail investors of more than £11bn in the three years to the end of December.

Advisers already have access to a range of multi-asset products based on passive products. Aviva Investors, Legal & General, Standard Life Investments, BlackRock and Architas all offer vehicles investing in a portfolio of passive products.

However, the only exchange-traded product listed on the London Stock Exchange with a multi-asset mandate is currently the db x-trackers SCM Multi Asset ETF. Managed by SCM Private founder and former New Star chief investment officer Alan Miller, the product itself is an actively managed portfolio of ETFs.

So the idea of a product which itself tracks a multi-asset index is completely new – but is it needed? ETF Securities head of research and investment strategy Nicholas Brooks points out that the rise of risk-targeted products is likely to sustain demand and drive innovation.

“If the world is moving towards the provision of the most efficient products for end investors, [then] we should be moving towards multi-asset ETFs,” Mr Brooks told Investment Adviser early in February. Several fund managers are in talks with ETF Securities about launching new exchange-traded products, including multi-asset, under the provider’s ‘Canvas’ project.

The indices that multi-asset ETFs will track are likely to include Distribution Technology’s (DT) recently launched indices based on their 10 risk profiles.

Created in collaboration with iNDEXX Markets and priced by Goldman Sachs, the six indices track DT’s most-used profiles, opening the door for products which track them to hit the market.

In an adviser question and answer document DT states: “iNDEXX Markets will use the DT asset allocations to design and manage the DT indices to ensure they accurately reflect the performance of DT asset allocations, by replicating the underlying investments into market positions.”

This demonstrates the key difference in the case of the multi-asset ETF concept in relation to other multi-asset funds: where the final decision on asset allocation lies.

In passing this from a named manager to a predefined allocation set by a risk profiling company, the adviser takes another step back from the investment process. While this might be suitable for some clients, the FCA will want advisers to be confident of this in each circumstance.

Paraplanner Abraham Okusanya of FinalytiQ says he would be “quite positive” on the concept of multi-asset ETFs provided that the structure was clear.

Other advisers are more cautious. Capital Asset Management chief executive Alan Smith says open-ended offerings already make for a “crowded market” in terms of multi-asset passive funds.

In addition, Affluent Financial Planning chief executive Carl Melvin warns that “everyone wants a piece of the pie but not everyone is going to get it”.

Nick Reeve is deputy news editor at Investment Adviser

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