Custom ETF mandates on the rise in Asia

Discretionary exchange-traded fund portfolios, commonplace in markets such as the US, are now growing in popularity in this region.
Custom ETF mandates on the rise in Asia

More Asian banks and institutions are offering discretionary exchange-traded fund portfolios to private banks and high-net-worth individual investors in the region.

Although banks have been customising ETF-based offerings for investors for some time, the practice is becoming increasingly popular in Asia, says Deborah Fuhr, managing partner at London-based consultancy ETF Global Insight.

“The driver is the fact that [investors’] ability to find active funds that consistently drive alpha is quite challenging," she says. Fuhr estimates that seven out of 10 actively managed funds do not beat their benchmarks, making a strong argument for passive investing.  

Index investment specialist Vanguard says only one-third of active Asia equity funds outperformed their benchmark over a 10-year period ending September 30, 2011 and remained open over that time. Thirty-two percent survived but underperformed and the remaining 35% closed.

Frank Henze, Asia-Pacific head of ETFs at State Street Global Advisors (SSgA), agrees with Fuhr, noting that discretionary ETFs in portfolios are being used “more and more to provide solutions” for investors, both institutional and wealthy individuals.

“Absolutely ETFs as packaged solutions are becoming more of a trend [in Asia]. We’re seeing ETFs used across virtually all segments, more so than in the past,” Henze says. “The beauty of ETFs is that they can provide access to so many asset classes.”

State Street has created customised multi-asset retail funds and wrapped ETFs for Japan's ministry of finance, distributors, private banks and insurance companies, among others.

HSBC and Barclays also offer discretionary portfolios, Fuhr notes.

In addition to having exposure to a variety of asset classes, customised ETFs also offer access to markets that “might otherwise be difficult to access” when there are quick market rallies, Henze adds, pointing to the recent stock market spike in Japan.

Despite a 13% drop in the Nikki 225 from this year’s peak of 15,627 in late May, the index is still up 27% from the start of the year, closing on June 4 at 13,533. Participants point to ‘Abenomics’, the Japanese government's programme to reflate the economy, as reasons for the sharp uptick in activity.

While many investors, such as Asian insurers, missed the recent equity rally in Japan, investors can still profit by putting money in customised Japanese-focused ETFs, which would be a great “tactical move” that gives exposure for “what’s likely a short-term event”, Henze argues.

He cites high yield as another example. High-yield bonds are in high demand, notes Henze, and it’s quicker and easier to build a position in ETFs than via active managers.

¬ Haymarket Media Limited. All rights reserved.