Source and the great success for gold ETFs

Caleffi: “In 2016, our gold product attracted more than €900 million, making it the second largest asset gatherer of any product in Europe”. In the 2015, half of the inflow was into equity ETFs

The rapid increase in the number of exchange traded funds (ETFs) in recent years has made the task of navigating the investment landscape more challenging. In this context, there was also an expansion in the types of investors using this products. If in the 2015, half of the inflow was into equity ETFs, in 2016, gold products are highly in demand, as historically it has demonstrated a low correlation with equity markets. Stefano Caleffi, executive director, head of Italy for Source, explained to Lmf International which factors are behind the success of these products and how could be the scenario developing in the coming years.

The number of investors in ETFs has been growing over the past few years. What factors are behind the success of these products? Are there differences among countries in Europe?
The number has been increasing, but we have also witnessed an expansion in the types of investors using ETFs and also their reasons for using them. The majority of investors are still of the institutional variety, but we have seen growing interest from others such as independent financial advisers and wealth managers. Many of these investors are looking for low cost exposure to primary benchmark indices, which would naturally lead them to ETFs. Some of this has been funded from reductions in high cost actively managed mutual funds, and also more traditional index trackers, and switching into ETFs may have helped them reduce the overall cost of their portfolios. We find this is usually an investor’s first experience with ETFs, before they start using them for other purposes.
Last year, we commissioned a survey of professional investors across Europe, and a sample of the many people who currently use ETFs told us why. They confirmed that cost was one of the main factors, and they also highlighted that ETFs provide access to main benchmarks as well as hard-to-reach areas of the market. Liquidity and transparency were also stated as influencing their decision to invest in ETFs over other investment vehicles. Interestingly, while there were some subtle differences from country to country, the main themes were quite consistent. Even the minority of respondents who said they have never used ETFs still identified the same characteristics that make ETFs attractive to those who are already using them.

Could you give us a picture of Source from 2015?
While the industry has been expanding, and new entrants have come into the market, Source has also been expanding. This includes gathering € 3.2 billion of net new assets in 2015, taking our total assets under management to around € 18 billion today. Half of the inflow last year was into equity ETFs, with a further 45% going into fixed income and 5% into commodities, primarily gold. So far, 2016 has been quite a different story, with our gold product attracting more than € 900 million, making it the second largest asset gatherer of any product in Europe.
Our investor base has also been expanding. We have seen growing interest from independent financial advisers and wealth managers, who were the focus of a large advertising campaign in the latter half of 2015. Overall, we are seeing more demand from a growing list of countries, including Italy and many in the Nordic region, in addition to continued demand from the UK, Germany, Switzerland and France, which were early adopters of ETFs.
We now have around 75 products, including low cost index trackers that investors can use as basic portfolio building blocks and more value added funds, such as smart beta ETFs that use characteristics other than just market capitalisation and geography to select and weight the constituents. In 2015, we launched several smart beta ETFs, including one that gives access to a successful multi-factor approach run by Goldman Sachs and a risk-parity-based strategy by Rothschilds. This year, we have launched a range of equity income ETFs with Research Affiliates, a global leader in smart beta and asset allocation strategies.

What are your goals for this year? Are you planning the launch of new ETFs?
Our product launches are always driven by a combination of investor demand and market opportunities. For example, the range of equity income ETFs that we launched with Research Affiliates were in response to investor demand for higher income in the current low yield environment. We listened to what investors were telling us, and we felt there must be a better way to deliver income than what was available in the market at that time. We worked together to find a solution with the aim of delivering high and sustainable income from quality companies, i.e. avoiding companies without the financial strength necessary to maintain dividends.
We will continue to listen to investors for future launches. This does not just involve launching ETFs; we also try to understand what else is important to investors. This includes a variety of factors such as how the ETF achieves its objective. On the back of this, we created a new platform that will enable us to launch more physically replicated ETFs, where we have seen the majority of demand in the past couple years.

In a context of high market volatility and low interest rates, which strategies do you think investors should be considering? Which are the ETFs most requested by investors and why?
First of all, no matter what the market conditions are, investors should focus on their individual objectives and select ETFs, or indeed any investment, in terms of their own risk profile and what makes sense to them.
Looking at the market as a whole, we have seen several shifts in sentiment over the last six months or so. The general environment has gone from “risk-on” last year to “risk-off” in the first couple of months of 2016. It now seems to be switching back again. This is where the liquidity and choice of ETFs becomes more attractive.
Investors who focus on the higher risk that is inherent in a high volatility environment may look to diversify their portfolio, possibly with investments that could provide a cushion from equity market volatility. As we saw vividly in the first couple of months this year, gold was highly in demand, as historically it has demonstrated a low correlation with equity markets. Traditionally, fixed income is another asset class that is often viewed as being lowly correlated with equities, and with current yields – especially in Europe – so low, it would seem an obvious place to turn. The question-mark is the outlook for US interest rates. Investors who are concerned about rising rates may wish to consider the shorter end of the US high yield market, which is usually less sensitive to rate hikes.
Looking at the other end are the investors who focus on the potential for higher returns in a high volatility environment. They may use the volatility to adjust their portfolio to try to gain exposure to areas of the market that have been possibly oversold. This could involve investing in certain sectors of the equity market or in some smart beta ETFs. We have seen demand in all of these areas.

Looking to the future, how do you imagine the scenario developing in the coming years, also considering the growing interest in smart beta strategies?
The future looks promising for the ETF market, especially given that despite seeing strong growth rates over the past several years, ETFs still make up a small percentage of most investors’ portfolios. We expect this percentage to increase in the coming years as investors in Europe become more aware of what ETFs offer and the roles that they may play in diversifying portfolios.