This publication spoke to iShares, the world's largest exchange traded funds provider, about its Asia-Pacific business and the trends it sees.

The rapidly-evolving Asian wealth management market is witnessing trends such as more demand for discretionary players, a continued hunger for yield and cost-efficient ways to put ideas to work. All of which is positive for the market in exchange traded funds, says iShares.

Across the whole of the market for exchange traded funds and exchange traded products, Asia has seen a rise in assets invested: AuM in Asia-Pacific ex-Japan rose 4.3 per cent in the first half of this year, at $123 billion, and there were 682 ETFs/ETPs at 30 June (source: ETFGI). It is important to be aware of the differences between ETFs and ETPs. Exchange traded funds are typically open-ended, index-based funds, with active ETFs accounting for less than 1 per cent market share. They can be bought and sold like ordinary shares on a stock exchange and offer broad exposure across developed, emerging and frontier markets, equities, fixed income and commodities. Exchange traded products, meanwhile, are similar to ETFs in the way they trade and settle but do not use an open-end fund structure. 

iShares – part of US-listed investment titan BlackRock – has been a part of the broad uplift in the interest in these market-tracking funds and products. In the three months to 30 June, across all of its regions, the iShares business took in $10.8 billion of net inflows, taking its total AuM to $1.075 trillion. Among private bank clients of iShares in Asia-Pacific, meanwhile, the assets under management held via these routes stands currently around $5.8 billion, up from $3.1 billion as recently as 2013. These figures are relatively small compared with the overall market size, but the direction of travel has been unambiguously upwards.

Advisory clients want to put a variety of ideas to work effectively and quickly, while discretionary wealth managers, a growing force in Asia, understand ETFs/ETPs as part of an investment toolbox, Geir Espeskog, head of distribution of iShares for Asia-Pacific, told this publication recently. 

Asked what different clients seek, he said that among advisory-channel clients, the requirements are driven by what banks and advisors want to put in to managed portfolios. For example, despite some of the problems, there are still clients seeking exposure to mainland China’s A-shares market; another example is exposure to India’s stock market.

“We see demand for yield, such as high-dividend stocks in an ETF format, or on the fixed income side, from Asian high yield,” he said. Another trend is demand for emerging market bonds where they are denominated in dollars, so as to get protection from forex movements from a stronger dollar-emerging market set of rates, he said.

As for discretionary portfolios, Espeskog said: “ETFs have a natural place in discretionary portfolios because private banks will charge a fee to manage the portfolio which means there is not so much need for retrocessions, which ETFs don’t pay, so they fit naturally in there.”

He explained that discretionary managers offer ready-made portfolios to clients and charge a fee for managing them. ETFs are, in his view, “obvious fits” in these structures because of their cost and ease of use. The point on retrocessions is that as the private banks are charging their own management fee on these products, they do not need to be remunerated for selling a single product made by someone else as they would in a commission sales model. 

Discretionary wealth management in Asia is growing: “One client told me that their discretionary business in Asia had grown seven times in the last three years.”

Business growth
Espeskog says that the business logic of using ETFs is making itself felt across Asia’s traditional wealth hubs of Singapore and Hong Kong, as well as other investment audiences. iShares distributes into the markets of Tokyo, Singapore, Hong Kong and Sydney, and the business focuses on three broad financial segments: institutional, asset management, and wealth.

Picking up on a point made to this publication a year ago (see here), Espeskog said firms continued to be interested in iShares’ UCITS structures for ETFs, because of the disclosure, liquidity and robust nature of these structures. Holding an ETF, for example, as part of a European-domiciled UCITS structure has specific tax advantages. An investor from Hong Kong or Singapore - these jurisdictions have no tax treaty with the US – is subject to the 30 per cent withholding tax on distributions from a US-listed fund holding US exposures. However, if the same investor holds a UCITS fund, such as one domiciled in Dublin, with the same exposure, he or she will not be forced to pay such taxes, although the fund itself will have paid a 15 per cent withholding tax. In short, the tax rate is half of what a US fund involves.

There is still a lot of education taking place in Asia around ETFs, he said, noting that there is also growing interest from “independents” and family offices in the region. iShares has a capital markets desk giving clients advice on best execution of their strategies; the desk is agnostic about its advice and not beholden to advising on iShares’ products, Espeskog said. This is an important way of building awareness of the firm and its brand. “Clients are coming to us to ask about how to execute their ideas,” he said.

People can learn that use of ETFs will reduce costs, he said, giving the case of an investor who can buy an ETF that tracks emerging market bonds, where the market as a whole has a bid/offer spread of say, 80 basis points but where the spread on the ETF price is just 6bps. Even if the total expense ratio of the ETF is 45bps, for example, the cost saving to the client from getting exposure to such assets in this way will represent a sizeable saving.

A few years ago, there was some controversy in the industry about the use and risks of "synthetic" ETFs, which use derivatives such as swaps to track the underlying index. The ETF provider enters into a deal with a counterparty (usually a bank) and the counterparty promises that the swap will return the value of the respective benchmark the ETF is tracking. Given concerns post-2008 about the robustness of banks and other relevant counterparties, a certain amount of nervousness might be understandable. However, when asked about this issue, Espeskog told this publication that about 90 per cent of iShares' ETFs are physically-based.