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Citywire NMA Conference 2011
iShares Masterclass: How to access and implement ETFs
FOR PROFESSIONAL INVESTORS ONLY
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Agenda
• How can advisers access ETFs?Direct / PlatformKey Considerations
• How can advisers implement ETFs?Implementation optionsInvestment strategies
• Due DiligenceQuestions to ask
How can advisers access ETFs?
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Basic model for access
iShares ETF
On a platform
Through a broker
PrivateClient
Adviser
ETFs cannot be purchased directly from iShares - they are traded between brokers on the secondary market.
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Which method of access is best for me?
Cost - Competitive pricing but
typically for large trade sizes
Additional admin burden – Limited client reporting functionality
Cost - Can have relatively high dealing costs
Limited availability –Not currently available
through Fund Supermarkets, only
wrap platforms
Administrative ease –Consolidated
reporting and bulk trading
Flexibility – Both aggregated and intraday dealing options available on some platforms
Complete access –Entire range
of ETFs available
Broker Platform
Trading precision - Real time dealing with additional
trading options available
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Accessing ETFs through a broker
iShares Capital Markets team works alongside brokersA dedicated team that supports the entire ETF execution process
Pre/post trade analysis, optimal trading strategySupport
Brokers authorised to trade securities can also trade ETFsFull product range is available
Product Availability
Costs of trading through a brokerCommission charges
Account set-up costs
Cost
Brokers can implement different trading strategies for ETF executionHow does the broker determine best execution?
What types of trading options are available (i.e. limit order, etc.)Limit order – this means a trade will not execute until the set limit price is reached. This would avoid execution at a temporarily large discount or premium to NAV.
Trading & Execution
What should an adviser consider?
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Accessing ETFs through a wrap platform
Can the platform support staff answer my questions?
Do they offer research tools? Support
Which ETF products are offered through the platform?
Are there packaged products of ETFs available through the platform if I wish to outsource investment management?
Product availability
What is the ongoing platform fee?
What are the transaction costs for trading ETFs?
Which cost component is most important given my business model?
Cost
Does the platform offer real time or aggregated trading?
Does the platform use a broker or offer in-house trading?
How does the platform determine best execution?
Trading & execution
What should an adviser consider?
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What costs are most important given my business model?
Platform A Annual charge 0.5%
Trading costs = £10/trade
Platform B Annual charge 0.35%
Trading costs = £25/trade
Annual Platform costs
Initial Trading costs
Annual Costs –based on
annual rebalance
Rebalancing Costs
£2500
£1750 £250 £500 £2500
£100 £200 £2800
£2500
£1750 £250 £2000 £4000
£100 £800 £3400
Annual Costs –based on
quarterly rebalance
Annual Platform costs
Initial Trading costs
Rebalancing Costs
Example based on initial investment of £500k and a portfolio of 10 ETFs
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For illustrative purposes only
When investing in ETFs, ensure low platform charges are not mitigated by high trading costs
Platform A Annual charge 0.5%
Trading costs = £10/trade
Platform B Annual charge 0.35%
Trading costs = £25/trade
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Examples of wrap platforms offering ETFs
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iShares growth on wrap platforms
iShares platform annual growth rate (2009 - 2010) = 106%
Source: Global ETF Research and Implementation Strategy Team, BlackRock, Bloomberg. As at July 2010
Source: Novia, Nucleus, Ascentric, Standard Life Wrap, Raymond James, and Transact
Uptake of ETFs by fee-based advisers has grown exponentially in the past 12 months
iShares Platform Asset Growth
£0
£100
£200
£300
£400
£500
£600
Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010
Mill
ions
0%
20%
40%
60%
80%
100%
120%
Implementation
Build in-house portfolios or outsource investment management?
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Implementing ETFs: In-House Portfolio Management
For some advisors, keeping the investment decisions in-house is integral to their business:
Adviser value proposition focused on internal investment research and expertise
Create a personal investment management track record – client retention
Opportunity to construct more bespoke client portfolios
Fund manager research
Insurance
Tax PlanningInvestment Management
Retirement Planning
Mortgages
ABC Financial AdvisersSample allocation of time spent per service offering
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Implementing ETFs: strategy examples
Construct portfolio with broad-based, low-cost core holdingcombined with narrowly-focused satellite exposure. ETFs can be either core or satellite.
Use ETFs to gain instant exposure to a specific index to stay invested in the market whilst looking for a new fund manager.
Opportunity to add excess return by taking short-term bets on specific investment areas. Can be based on economic data, earnings forecasts, technical indicators, etc.
Core / Satellite
Cash Equitisation
Tactical Asset
Allocation
See the new iShares Market Perspectives for our 2011 outlook
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Implementing ETFs: Outsourcing
For other advisers, outsourcing investment decisions may be the best option for their business model. There are various reasons to outsource investment management:
Outsourcing asset allocation decisions – reduced internal compliance requirements
Ability to focus time and resources on area of expertise (i.e. tax, financial planning, etc.)
Business scalability
CBA Financial PlanningSample allocation of time spent per service offering
Investment Management
InsuranceTax
Planning
ComprehensiveFinancial Planning
RetirementPlanning Mortgages
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Model portfolios provided by discretionary managers
• Administrative ease when offered through wrap platforms
• Retain control of client relationship
• Only paying DFM for asset allocation
Implementing ETFs: Outsourcing options
Packaged product (OEIC)
• Potential tax advantage –capital gains for each ETF position realised within fund
• Can be a good solution for small accounts due to scaled transaction costs
Which outsourcing option is best for me?
Direct to discretionary manager
• Administrative ease
• Outsourcing of trading and implementation functions as well as portfolio asset allocation
ETF Due Diligence
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Due Diligence – What should I be thinking about?
ETF Provider
Structure
Cost
Knowledge of the market
Expertise /Track Record Support Transparency
Data Publication
Portfolio ManagementIncomeLiquidityPerformanceRisk
Securities LendingRevenue
RebalancingCosts /
Revenues
Average Spread
Trading CostTER
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How can we help?
Index Guides• Equities, Fixed Income, Emerging Markets
Educational brochures• E.g. “Overview of ETF Structures”, “Trading European Exchange Traded Products”
Tax information• E.g. “Tax Implications of iShares”, “Tax Update – UK Reporting Funds Regime”
Implementing asset class themes using ETFs• E.g. “Equity Income – investment and strategies with iShares ETFs”, “Investing in Clean Energy
through iShares ETFs”
Facilitating due diligence• Holdings, Fund fact sheets, Trading data
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Contact details
Pollyanna Rhodes Kelly FarderVice President Vice PresidentIFA Sales IFA SalesTel: +44 020 7668 8585 Tel: +44 020 7668 8113Email: [email protected] Email: [email protected]
Appendix IQuick refresher: Introduction to ETFs
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What are ETFs?
Exchange Traded Fund / iShares
+Fund Stock/Share
Type of index tracking fund
Managed to mirror the performance of an index (e.g. FTSE 100)
Aim to provide investors with the same return as the underlying market
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Product structures
Exchange Traded
Funds
(ETFs)
Cash / Physical
/ Direct
Swap / Synthetic
/ Indirect
Exchange Traded
Products
(ETPs)
Exchange Traded
Notes
(ETNs)
Exchange Traded
Commodities
(ETCs)
Are they:
•UCITS Compliant
•Tracking Futures / Physical
•Collateralised
• What is the risk
• What is the structure
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iShares - Each physical based iShares ETF represents a partial ownership in the relevant sub-fund
HSBC
BP
GlaxoSmithKline
Rio Tinto
Tesco
BT Group
British Airways
Vodafone
ETC
Exchange Traded Fund
iShares Portfolio Managers
purchase stocks to represent the
index
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ETF benefits
The main reasons for the success of ETFs
ETFs offer a cost-effective route to diversified market exposure
The average Total Expense Ratio (TER) for Equity ETFs in Europe is 40 bps versus 91 bps (per annum) for the average index tracking fund and 180 bps (per annum) for the average active fund¹
Cost effectiveness
• ETFs are listed on exchanges and can be traded at any time the market is open
• Pricing is continuous throughout the dayFlexibility
• ETFs provide immediate exposure to a basket or group of securities for instant diversification
• Broad range of asset classes including equities, bonds, commodities, investment themes, etc
Diversification
• ETFs offer two sources of liquidity:
• Traditional liquidity measured by secondary market trading volume
• Multi dealer model boosts the liquidity of iShares ETFs
Liquidity
• Investors know the ETF holdings, price and costsTransparency
Source: Morningstar, Global ETF Research and Implementation Strategy Team, BlackRock. As at end February 2010.Note: the TER numbers are calculated as simple averages
ETF benefits_Overview of ETF benefits_SNUIA_1208_EN_730148
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Disclaimer
Regulatory InformationBlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Services Authority ('FSA'), has issued this document for access by Professional Clients in the UK only and no other person should rely upon the information contained within it. iShares plc, iShares II plc, iShares III plc, iShares IV plc and iShares V plc (together 'the Companies') are open-ended investment companies with variable capital having segregated liability between their funds organised under the laws of Ireland and authorised by the Financial Regulator. The German domiciled funds are "undertakings for collective investment in conformity with the directives" within the meaning of the German Law on the investments. These funds are managed by BlackRock Asset Management Deutschland AG which is authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht.For investors in the UKThis document is directed at 'Professional Clients' only within the meaning of the rules of the FSA. Certain of the funds mentioned in this document are not registered for public distribution in the UK. In respect of these funds, this document is intended for information purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the funds described within and no steps may be taken which would constitute or result in a public offering of the funds in the UK. This document is strictly confidential and may not be distributed without authorisation from BlackRock Advisors (UK) Limited. With respect to the funds that are registered for public distribution in the UK, most of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme on its default. The Companies are recognised schemes for the purposes of the Financial Services and Markets Act 2000. Important information is contained in the relevant prospectus, the simplified prospectus and other documents, copies ofwhich can be obtained by calling 0845 357 7000, from your broker or financial adviser, by writing to BlackRock Advisors (UK) Limited, iShares Business Development, Murray House, 1 Royal Mint Court, London EC3N 4HH.Restricted InvestorsThis document is not, and under no circumstances is to be construed as, an advertisement, or any other step in furtherance of a public offering of shares in the United States or Canada. This document is not aimed at persons who are resident in the United States, Canada or any province or territory thereof, where the Companies are not authorised or registered for distribution and where no prospectus for the Companies has been filed with any securities commission or regulatory authority. The Companies may not be acquired or owned by, or acquired with the assets of, an ERISA Plan.Risk WarningsiShares may not be suitable for all investors. BlackRock Advisors (UK) Limited does not guarantee the performance of the shares or funds. The price of the investments (which may trade in limited markets) may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. Past performance is not a reliable indicator of future results. The value of the investment involving exposure to foreign currencies can be affected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change. Affiliated companies of BlackRock Advisors (UK) Limited may make markets in the securities mentioned in this document. Further, BlackRock Advisors (UK) Limited and/or its affiliated companies and/or their employees from time to time may hold shares or holdings in the underlying shares of, or options on, any security included in this document and may as principal or agent buy or sell securities. In addition, investing in emerging markets involves certain risks and special considerations not typically associated with investing in other markets.