Reshaping the investment industry
The growth of passives appears unstoppable and is reshaping the fund management industry in ways few participants predicted a couple of years ago.
Take ETFs, for example. Once seen primarily as a cheap and quick way to invest passively in stock markets, ETFs now provide access to a dizzying array of both passive and active strategies. They are even driving the move to more transparent and efficient markets, while intensifying the focus on market infrastructures.
Stephan Pouyat, Global Head of Funds at Euroclear says: “Regulators of the investment industry are focused on cost and transparency. Investors want thes efactors as well as returns. This focus, together with the shift in investment needs will determine a new shape for the market and how it is supported.”
The ETF Age
Investors are increasingly seeking investments that can be traded at short notice, with high levels of transparency, at cheap prices. They want to manage these investments on a single platform and via a single dashboard. For millennials, among others, the ability to trade funds and communicate with fund providers via the smartphone is essential. Structures like ETFs perfectly support this mindset.
For anyone doubting that this is the era of the ETF, consider this: more than USD 4.83 trillion of new money flowed into ETFs in 2017, taking the value of all outstanding ETFs close to USD 4.8 trillion. E&Y believes ETFs will amount to USD 7.6 trillion by 2020, partly driven by new strategies that are attractive to millennials, such as Environmental, Social and Governance (ESG) investment themes.
Another driver will be the growth of emerging market ETFs. “When we discuss with Hong Kong, China, India representatives about how they might further open their markets, the listed story is essential. It gives investors confidence to invest by connecting them to local issuers in the most efficient manner possible. And, it promotes their stock exchanges,” notes Pouyat.
Focus intensifies on scalable infrastructure
As the ETF marketplace becomes internationalised, so the distribution model is globalising, with investors demanding multiple listings in multiple currencies combined with an efficient and centralised post-trade infrastructure.
The infrastructure across Europe is still fragmented, but it is starting to coalesce around a few service providers. In Europe, for instance, over 40% of Europe’s ETF market has moved into Euroclear’s international structure, which went live in 2014.
“It’s becoming very clear that the industry needs a model that is sufficiently scalable to meet the needs and future growth of the industry. This will work to meet the evolving risk, transparency, control and regulatory requirements,” says Pouyat.
Transparency is a helpful friend of distribution, especially since the regulators are increasing their transparency requirements. It even allows fund managers to identify underlying investors and improve how firms market their funds to investors.
One eye on the future
Euroclear is leading a French industry working group to explore new ways to help make the fund distribution model even more efficient and responsive to international investor expectations.
“This means collaborating with the entire funds ecosystem to build solutions that offer more transparency to everyone. For some investors, this probably cannot come soon enough,” continues Pouyat.
“Whether these solutions deploy new technologies or deliver new business models, they are vital to the future success of the industry. This is why we at Euroclear FundsPlace, a neutral funds infrastructure, are working to deliver open solutions that connect the entire funds value chain.”
Tech is not the only answer
The buzz around blockchain has naturally led industry participants to wonder if it, or other fintech solutions, will dislodge existing providers.
On paper, blockchain appears to answer the industry’s quest for more transparency. Yet, incremental modernisation may be the most pragtmatic and cost effective way for a number of issues.
For the ETF market, the creation of an international structure helped to improve transparency. Perhaps, as international structures in other areas evolve, so the industry and its investors will reap the benefits.
Euroclear FundsPlace – Sweden
We are digitising the administration of funds trades in Sweden to bring our clients more transparency, a wider range of funds and improved service.
As part of Euroclear FundsPlace, our business, which provides the settlement infrastructure for the Swedish financial market, offers an automated solution for the management of funds based on the Euroclear FundSettle technology.
This means fewer manual processes, a reduction in operational risk and a faster, more efficient funds trading environment.