Managers finding healthy gains in ETFs, LDI assets

Data from the latest Pensions & Investments money manager survey show healthy double-digit percentage gains in assets managed in sponsored exchange-traded funds and liability-driven investment strategies, and a more than 50% jump in assets managed for sovereign wealth fund assets.

Total worldwide assets managed in sponsored ETFs jumped 27.3% to $1.551 trillion as of Dec. 31, while assets in LDI strategies rose 14.3% to $1.318 trillion. Assets managed for sovereign wealth funds saw a 55.7% gain, to $1.232 trillion.

“These are big numbers,” said Zainul Ali, director and head of manager research, Americas, at Towers Watson & Co., Toronto. “Institutional investors are going into alternative ETFs, not just hedge funds but real estate, infrastructure, commodities, distressed debt.” While in the past, to invest in those classes required an external manager with separate accounts, “now you can get exposure to uncorrelated risk in an ETF with higher return and lower fees.”

Among the top 500 managers based on worldwide institutional assets under management, with at least $250 million in the individual categories, Northern Trust Global Investments had the largest percentage increase in sponsored ETF assets, up 271% to $2.4 billion, while Strategic Investment Group led in percentage gains for LDI assets, up 148.7% to $14.16 billion. Fisher Investments had the top percentage increase in sovereign wealth assets, up 616.5% to $1.471 billion.

“ETFs are a strategic initiative for the company as a whole, not just an investment initiative,” said Stephen Potter, president, Northern Trust Global Investments, Chicago. “The products we've developed are complementary to strategies we've always offered in the institutional space.”

Most of Northern Trust's asset increase came from the wealth advisory market and from three major ETF products, the Global Upstream Natural Resources Index ETF and two Treasury inflation-protected securities ETFs: the three-year duration and the five-year duration, Mr. Potter said.

“The underlying theme in the (natural resources) fund is that it's used to achieve inflation protection and portfolio diversification, through equity exposure,” Mr. Potter said. “The value proposition for our TIPS funds is their ability to target duration, creating a more precise tool for hedging inflation. The TIPS funds have also been popular in a low-rate environment, where clients are reluctant to put money into long duration. The three-year is most popular since observers see the (Federal Reserve) holding steady on rates for two to three years.”

Total sponsored ETF assets at NTGI stood at $5 billion as of May 6.

BMO Global Asset Management was second in percentage increases in sponsored ETFs, up 184.8% to $9.081 billion.

“We launched our ETF business four years ago, and it took years to build the infrastructure to market the products,” said Rajiv Silgardo, Toronto-based co-CEO and CEO of BMO Global Asset Management Inc. (Canada). “We started coming into our own” in 2012, “with strong wholesaling and new, innovative products.”

Mr. Silgardo was part of a 10-person team that joined BMO in 2009 from Barclays PLC two months prior to the sale of its iShares ETF business to BlackRock Inc. He helped create Barclays' first Canadian ETF in 1999.

Mr. Silgardo said asset growth came from institutional and retail clients. BMO Global's most successful ETF series has been its covered-call strategies, begun in late 2011, in which options are run on six Canadian banks, as well as utilities and the Dow Jones industrial average. Also, in November 2012, the firm created the S&P/TSX Preferred Share Index ETF, an equity fund built as a laddered ETF structure that's closely correlated to fixed income. As of May 16, that ETF had pulled in $800 million since its inception.

“The successes we've had are in a variety of asset classes,” Mr. Silgardo said.

Pacific Investment Management Co. LLC was third in percentage ETF gains, up 153.9% to $10.383 billion, on the strength of its PIMCO Total Return ETF, which was launched in March 2012 and grew to $3.87 billion as of Dec. 31 and $5.3 billion as of May 14. “The broad trend (in ETFs) speaks to flows into fixed income, said Douglas Hodge, managing director and chief operating officer at PIMCO, Newport Beach, Calif. “There are still extraordinary assets flowing into fixed income, both from institutional investors and from retail investors. Assets are also flowing into equities, no question, but they're not coming from fixed income.”

Percentage increases in worldwide LDI assets paralleled those of ETFs, which speaks to the importance of both investments. LDI, for one, “is in every discussion, said Deborah Boedicker, managing director, Strategic Investment Group, Arlington, Va. “(Clients) are at different places right now, but it's still a huge discussion. The C-suite is engaged in this all the way up the line.”

Before the Pension Protection Act of 2006, “LDI was not as big of a focus,” Ms. Boedicker said. “It's been more front and center since then. That has been a trend that continues today. We've had many, many conversations with clients to see where they are on their horizons, whether their plans are frozen, closed, lump sum, whatever. We've been knee deep — neck deep — in these conversations.”

Towers Watson's Mr. Ali said the overall LDI gains speak to “a greater awareness, especially in the U.S., that there are two sides to every balance sheet. ... The focus used to be all about assets; now it's liabilities.”

At Strategic Investment Group, the asset gains came both from new clients and existing clients that increased their LDI allocations. “Assets have grown at a measured pace, not all of it from new client business,” Ms. Boedicker said.

Another big LDI gainer was Russell Investments, with a 133.2% jump to $8.5 billion. Russell's outsourced CIO business provided a “significant” source of assets into LDI, but more assets came from the March 2012 introduction with Barclays PLC of the Barclays-Russell LDI index series, said Martin Jaugietis, managing director, LDI solutions, at Russell in Seattle. Those indexes provide benchmarks that match the interest rate, credit and yield curve risks of their liabilities. “Our results are very encouraging for our LDI capability,” Mr. Jaugietis said. “Most of the asset increase is from new clients, not increases in allocation from existing clients.”

The increase in sovereign wealth fund assets “goes hand in hand” with the increases in sponsored ETF assets, Mr. Ali said. However, much of the wealth fund gain is market-driven. “The market alone is enough to raise those assets.”

Wealth funds were responsible for a sizable gain in assets, most notably at Fisher Investments, which had a 616.5% increase. “I wish there was a sexy story I could tell you about this,” said Kenneth Fisher, founder, chairman and CEO of Fisher Investments, Woodside, Calif. “We got more money from a sovereign wealth client, and we got a new sovereign wealth client. We got lucky.” He wouldn't name the clients.

The previous client put additional money into a total return equity account, while the new client invested in an emerging markets equity account, Mr. Fisher said.

He quoted the late Illinois senator, Everett Dirksen: “A billion here, a billion there, and pretty soon you're talking real money.”

Mr. Fisher said his firm's top-down investing approach makes it attractive to institutional investors who already have bottom-up managers in the same strategy. “We tend to be a process diversifier for an investor looking for its third of fourth manager and is now looking for top-down. And there are not many firms that do that.”

BMO Global Asset Management, which was second in sponsored ETF percentage gains, was also second with gains in wealth fund assets, up 302.4% to $1.018 billion. Phillip Enochs, Chicago-based managing director and head of relationship management, said much of those gains were tied to the opening of a BMO Global office in Abu Dhabi in May 2012.

“There are two things we're seeing, more the latter than the former. We've made a true commitment to growing globally, and we've had a focus on growing strategically our sovereign wealth fund efforts, for example with our new office in Abu Dhabi.” The assets gains did not come from mandates from the Abu Dhabi Investment Authority, but other wealth funds have assigned assets to BMO Global.

Mr. Enochs said part of the gain in assets also comes from the capabilities of BMO Global Asset Management's wholly owned subsidiaries — emerging and frontier markets manager Lloyd George Management, high-yield credit manager Monegy and absolute-return manager Pyrford International Ltd. Sovereign wealth funds invest directly through those subsidiaries and BMO Global Asset Management.

While Fisher and BMO Global saw increases in wealth fund assets, Rogge Global Partners in London had a hefty 425% gain, to $2.496 billion, in assets managed for central banks — while among all managers surveyed, total worldwide client assets managed for central banks rose 6.6% to $560 billion.

“We've had a very successful business with central banks and sovereign wealth funds,” Mr. Rogge said. “Our investment style, relative value, has consistent performance. ... What also helps is our reputation with other central banks, even those we don't have assets from.”