Fund Firms Anxious Over ETFs (And Rightfully So)

by on June 23, 2009

ETFs have made their share of headlines in the last year, with countless new fund launches, record cash inflows, and blockbuster acquisitions. Not surprisingly, it appears the traditional asset management industry is starting to take notice. ETFs dominated early discussions at the annual Fund Forum asset management conference in Monaco this week, with active managers harping on the severity of the threat and industry insiders indicating the onslaught isn’t likely to let up any timeĀ in the near future.

As disillusionment with active management has increased in recent years, no doubt aided by several high-profile scandals and record equity market declines, an increasing number of investors are ditching mutual funds and asset managers in favor of a simplified, low-cost approach focused around ETFs. Commentary from the Fund Forum indicates that the active management industry is reeling from these developments, and unsure of exactly how to stop the bleeding. A few interesting sound bites from the event so far, as well as some insight beyond the fluff:

  • “We take this threat very seriously – we won’t necessarily buy or build our own ETFs business but we will have to adapt to this reality and build our solutions around this,” said Cristobal Mendez de Vigo, head of distribution and business development at F&C Investments. I’m not sure what “solutions” Mendez de Vigo has in mind, but I’m almost positive they’ll fall into the “easier said than done” category. Active management opened the door to the ETF boom by consistently failing to prove its worth by beating the market. That’s not exactly a problem that can be solved with the flip of a switch.
  • “If you have no alpha generating engine you shoupd be worried,” warned Richard Royds, managing director of global strategic clients at BlackRock. Mr. Royds must be breathing much easier knowing that BlackRock, which recently announced a deal to acquire the market-leading iShares ETF family, now has significant interests in both active and passive management. His words no doubt stung his former active management allies who have watched the passive management boom from the sidelines.
  • “The banks have suffered from the loss of investor confidence and they need a new story to sell,” noted Diana Mackay, CEO of Lipper FMI, in predicting that many banks and institutional managers in Europe will begin switching from traditional actively-managed mutual funds in an effort to retain upset clients. Such a development, which seems increasingly likely, would represent a significant blow to active managers, who have been largely successful in preventing the spread of ETFs to retirement portfolios and other institutional funds.

What would have likely been a rather gloomy event anyways (given the cratering global equity markets over the last 12 months) has been made even more depressing by the continuing reach of ETFs into market share historically held by mutual funds and other traditional investment vehicles. It could be a long week for many of the attendees at this year’s Fund Forum – at least they’ve got the sights and sounds of Monaco to distract them from the challenging realities of their business.