There are high barriers to entry in terms of regulation, but Switzerland came out on top in terms of the percentage of qualified investors who are currently using ETPs. Interview with Mautone (Source) on Swiss market and about the most requested ETPs
Switzerland is arguably one of the most competitive markets for ETP providers, there are high barriers to entry in terms of regulation. An ETP provider also needs to understand the distinctions in the classification of investors, as this is different from other European markets. But Switzerland came out on top in terms of the percentage of qualified investors who are currently using ETPs, with 87%, but also in the difference in the number of investors mentioning ETPs compared to other investment products. Not surprisingly, Source has recently opened an office in Switzerland, Source Schweiz GmbH, with a dedicated team now present in the country.
Lmf International asked Marco Mautone, Swiss Country Head of Source, to explain what kind of market is Switzerland, what are the most requested ETPs in this moment and what is Source's offer.
Mr Mautone, according to your research, the biggest users of Exchange Traded Products (“ETPs”) are professional investors and advisers based in Switzerland. Why do you think this is?
Certainly out of the 11 markets that we surveyed, Switzerland came out on top in terms of the percentage of qualified investors who are currently using ETPs, with 87%, but also in the difference in the number of investors mentioning ETPs compared to other investment products. For example, only 46% mentioned currently using traditional UCITS funds.
The reason that so many more investors in Switzerland are using ETPs was not clear in the survey, but it is worth noting that usage was high with asset managers and institutional investors followed closely by wealth managers. In addition, more than eight out of every 10 Swiss investors interviewed said they have been using ETPs for more than three years, so it might be a factor of the length of their experience with them. That would certainly tie in with the fact that around 40% of the 750 investors in the overall survey said they expect to purchase more ETPs over the next 12 months. The figure was even higher in Switzerland, with half of the investors saying they planned to use them more next year. I believe the more investors use ETPs, the further they appreciate the benefits, and they end up using them more.
What kind of market is Switzerland? From your perspective, what are the main differences between the Swiss market and others?
Switzerland is arguably one of the most competitive markets for ETP providers, there are high barriers to entry in terms of regulation. An ETP provider also needs to understand the distinctions in the classification of investors, as this is different from other European markets. In terms of the investors themselves, those in Switzerland that tend to use ETPs are primarily private banks, institutions, asset managers, independent financial advisers and family offices.
What are the most requested ETPs in Switzerland in this moment and why?
Most investors that we meet have been using ETPs to gain exposure to one of the main European benchmark indices, such as MSCI Europe or the EURO STOXX 50, while we are also seeing strong demand in fixed income for low duration and short-term high yield strategies. The current – and diverging – interest rate environments in the US and in Europe are probably driving many of these investment choices. With US rates expected to rise, investors may be wanting to reduce their interest rate risk through bond portfolios with shorter duration. In contrast, European rates are very low, and yields are often negative. This makes investors look to higher yielding areas of the market, but in our view there is currently little, if any, benefit from investing in bonds with maturities in excess of five years, which explains the attraction of shorter-term high yield strategies.
More generally, we have seen many investors using ETPs to gain tactical exposures, and this includes through US sector Exchange Traded Funds, with the financials, technology and consumer discretionary sectors attracting attention of late. This is brought out in the survey, with around 80% of investors in Switzerland saying that they use ETPs most often to make tactical adjustments to their portfolios. 50% said they use them most often for sector rotation.
What are the advantages and disadvantages of ETPs?
This question is one possibly best answered by people who are using them and, luckily, we did ask this in our survey. 91% of investors in Switzerland said they “completely agree” that ETPs are liquid, 88% that they are low cost, 82% that they offer simple passive exposure, 81% that they are precise, and a tie between low tracking error and transparency, with both registering agreement rates of 78%. When asked what they considered “the most important”, low cost and liquidity were the highest.
There are potential disadvantages with ETPs as well, but these really depend on the individual products. Just like other investment products, not all ETPs are created equally. Some do not provide total transparency, for instance, and some have greater counterparty risks. The most important thing for investors, in our view, is to be able to fully understand what an ETP is aiming to achieve, how it is structured, and what the risks are.
What selling proposition will you offer to Swiss investors (retail and institutional)? How many products do you have and what is the AuM of ETPs in Switzerland? Are you planning the launch of new products in Switzerland?
We are not forecasting a massive launch of products in the coming year, but instead we will continue to look for areas of the market that are either not yet addressed or where we may be able to provide a better solution for investors than what is currently available. We currently have 37 ETPs listed on the SIX Swiss Exchange, however we do not disclose the total holdings of Swiss investors. Suffice to say that, in general, Switzerland is a very important country within Europe in term of invested assts in ETPs.
How do you structure the distribution of your products in the Swiss market?
Source has recently opened an office in Switzerland, Source Schweiz GmbH, with a dedicated team now present in the country. With people “on the ground” and having received its own distributor licence from FINMA, we are better equiped to understand exactly what investors in Switzerland need and how we can deliver solutions to meet those needs.
Which financial products do you believe will do well, and what is your goal in terms of AuM that you would like to reach in the Swiss market?
Aside from the areas of the market mentioned earlier, we also think US energy infrastruture MLPs could be interesting, especially for yield-seeking investors. More widely, we expect factor-based investment solutions to gain more traction as investors start to look for alternative ways to structure their portfolios, as opposed to just using traditional market-cap-weighted indices to gain exposure.
We do not have a hard AUM target for any of the individual countries in Europe, but suffice it to say that if we can continue to provide an attractive range of investments, which are meeting the ever-changing needs of Swiss investors, we would expect to grow our assets accordingly in the coming years.