Mutual fund executives dismiss ETFs as a threat

Senior Asian asset managers locked horns at a conference yesterday on the question of whether exchange-traded funds (ETFs) will eventually supersede mutual funds in investors’ portfolio allocation.

David Jiang, executive vice-president for BNY Mellon’s passive ETF, beta and transition management businesses globally, raised the issue, suggesting that Asia’s mutual funds industry in particular ought to view the rapid growth of ETFs as a serious challenge.

ETFs offer a number of things that Asians like, he said, including easier access to different asset classes and intraday trading, which mutual funds cannot provide, as well as greater transparency.

He pointed to market estimates that ETF usage is growing at a rate of 35-50% in the US and is tipped to reach nearly $2 trillion by the end of 2012, while the growth rate is even higher in Europe and Asia, admittedly from a low base.

“There are some serious people in the US who say that ETFs will eventually replace mutual funds, period,” he stated at the Asia Fund Forum 2011 conference in Hong Kong. “We as an industry need to keep an eye on that.”

But his opinion was not shared by fellow panellists at the forum, who suggested that such brash claims were emanating only from ETF manufacturers themselves.

“We disagree,” declared Lieven Debruyne, Hong Kong CEO of Schroder Investment Management. “Banks will continue to dominate the distribution of mutual funds, together with insurance companies.

“[Banks’] models are set up in such a way that it will not change so that all of a sudden it makes sense for them to sell ETFs. Obviously we have a job to make sure we sell the right product. But I do not see [ETFs] as a direct threat [to mutual funds], rather I see opportunities [for ETFs] within asset allocation.”

Graham Mason, chief executive of funds management at Prudential Corporation Asia, noted his house offers multi-asset products with ETFs as underlyings and also active mutual funds.

“We find that when the Asian end-investor looks at one product, they see a bunch of ETFs, whereas when they look at the other with actual names, they prefer that,” he adds. “ETFs within asset allocation sold to retail investors has not been a winning strategy for us.”

Conference participants agreed this was as much a debate about the short-term trading mentality of Asian investors as it was an argument about active versus passive investing.

Arne Lindman, Asia-Pacific CEO of Fidelity International, suggested that anyone who wants to take a punt on the market for a day or a week would be better served using ETFs rather than mutual funds. “For the long-term investor, mutual funds are much better.”

But the fund executives at the forum did express concern that Asia’s mutual fund industry had been especially slow to recover from the global financial crisis which erupted in 2008.

Debruyne noted that pre-crisis, mutual funds were increasing as a part of people’s long-term savings, even if still in single-digit percentages, but that the industry had since regressed to where it was five or 10 years ago.

“In some markets the growth in sales is quite healthy, but it is not consistent and as an industry we are not making enough progress in making mutual funds a consistent part of people’s savings portfolios, and this is where we face some challenges,” he said.

In a recent survey of Asian middle-class investors carried out by Fidelity and the Economist Intelligence Unit, 73% of respondents said they felt comfortable investing in stocks, compared with 32% for mutual funds, noted Lindman.

“In Europe or the US, it would be the opposite,” he said. “The general public [in Asia] does not yet see the full benefits of risk diversification, or the fact that your money is being managed by professionals, or the possibility of getting an active return in excess of the benchmark. So there is a lot [of education] to do here.”

He said the flows he is seeing are into risky fixed-income investments as they are easier to sell than equity in the current environment. “That is something as an industry that we need to solve because it is hindering our growth and growth in the interest of our clients.”

Debruyne suggested mutual fund managers need to target middle-class investors more effectively, because that is where the industry’s growth and its recovery post-financial crisis will come from.

“We should not lose sight of where our mutual funds are being sold,” he stated. “They are being sold to the more wealthy part of a bank’s clientele. Our aim is to broaden the number of people who buy mutual funds and to take it away from just the higher-wealth clients in the banks to the middle segment, where people are looking to make an investment for their children’s education, or to buy a property.

“When they [change to that mindset], what they want and expect from a mutual fund will completely change. That would encourage investors to hold for the longer term, which would seriously start helping the industry to develop.

“My view is that it is not mutual funds as a vehicle that is the issue here. It is who do we sell it to and what kind of products [do we offer] for this segment of the market? Once we broaden that, we are off to a much more sustainable growth in this business.”