investing: views on index investing from the UK wealth management market

28 Pages·2017·1.45 MB·English

Index
Investing
Views on Index Investing
from the UK Wealth Market
October 2017
kpmg.com/uk
Table of
contents
1. Foreword: Background to this report 2
2. E xecutive Summary 3
3. U se of index products set to increase as key drivers
of usage will persist 4
4. C entralised and decentralised frms value different
product and provider attributes 7
5. H ow investors deploy index investing:
Strategic and tactical approaches are common 9
6. W ealth managers are increasingly comfortable looking
beyond equities in their use of index investments 10
7. C ost is important when selecting a product,
but not as important as value for money 12
TCO: The devil is in the detail 15
8. I nvestment performance is a key driver of index product use.
Wider availability of index mutual funds could support future growth 16
9. Smart Beta and factor investing: More data needed 18
10. I nvestors value providers who engage them in education
and new product development 20
11. O ther industry trends: Robo advice is likely to complement
rather than replace traditional methods 22
Glossary 24
Index Investing – An analysis of key trends in the UK wealth market 1
1. Foreword
Background to this report
The market for index products index products. We screened out 47 We are thankful to BlackRock who
has exploded in recent years, but investors, suggesting 1 in 3 investors contributed to the funding of this
there is little information on how may not make use of index products. research. For the avoidance of doubt,
the UK wealth market use index the views contained herein are those
The qualitative component involved
products and why. We aim to fll of KPMG and BlackRock did not have
30 face-to-face interviews with
this gap by sharing insights gleaned editorial oversight.
fnancial advisers, wealth managers
from investors themselves. Our
and private bankers (referred to
research consisted of two interview
as “interviewees” in this report)
programmes, one quantitative
which allowed for a richer discussion
and one qualitative. The people
about their views on index products
with whom we spoke work for
and other market trends. The
organisations who together advise or
perspectives they shared provide
manage over £4.5 trillion on behalf of
colour to the statistics and give
retail clients.
examples of how and why investors
The quantitative component involved are using index products and reacting
phone interviews with 105 fnancial to changes in the industry. This is
advisers, wealth managers and KPMG’s inaugural report on the use
private bankers who make use of of index products by these investor
index investments within portfolios groups – we would welcome your
on behalf of retail clients (referred thoughts and feedback on our
to as study participants in this fndings.
report). We show their answers in
the statistics throughout this report.
We screened study participants
in order to ensure all make use of
Tim West
Partner
Head of Asset Management Consulting
KPMG
2. Executive
Summary
Firms’ use of index products varies a great deal - A sizeable minority of investors use Smart Beta products,
- The use of index products varies greatly. Investors report and are enthusiastic about the benefts it can bring.
that index products can account for anywhere from 1-2% The remainder need to see more real world track record,
to 70-80% of portfolio value with many comfortable with the academic theory but
sceptical about the proliferation of new product
- Financial advisers are the most likely investor type to
invest more than 20% of a typical portfolio in index Index product use is likely to increase
products. Wealth managers were the least likely to - I nvestors with a heritage in active management tend to
have this high a proportion of a portfolio invested in make limited use of index products. This looks likely to
index products persist in the short term. Amongst investors who invest
- 30-40% of a multi asset portfolio held in index products less than 10% of their AuM in index products, almost
appears to be a natural limit for many investors three-quarters said they do not expect their usage to
change in the next two years
Investment performance is a key driver of use
- E xisting index product proponents will drive increased
- Index products are seen as a cheap, liquid and fast way usage. Of those who invest more than 10% of AuM in
to achieve a desired exposure to an asset class index products, 50% plan to increase their allocation in
- The majority of investors reported investment the next two years
performance as being a key factor in their use of index - F ee pressure is a signifcant factor supporting increased
products. This is particularly true in equities, with US use, as well as a relentless focus on investment
equities being a widely discussed example performance. Private bankers, wealth managers and
- Investors are increasingly looking beyond equities and fnancial advisers all cited fees as the most common
are using index products to gain exposure to other asset reason they planned to increase index product
classes. A majority of investors use index products for allocations
some fxed income exposure; a sizeable minority do so
Investors have strong, if varied preferences on what
for commodities
they value from providers
- Total cost of ownership is an important consideration - S cale and product breadth are important considerations
when picking an index product, but investors appear in the choice of index product providers, particularly for
to place greater focus on performance and effcient larger investors, who may value providers who can act
index tracking as ‘one stop shops’ for all their index product needs
- Investors focus on understanding index construction to - G enerally, interviewees in research teams felt they
make sure a product is the best way to gain a desired were well served with little desire for much contact, but
exposure. Cost then becomes a key consideration in would value being engaged earlier in the product design
the sense that investors look to maximise net returns process
Many investors share similar product preferences and - W illingness to participate in education initiatives,
scepticism about factor investing particularly for relationship managers, was also seen
- ETFs are the most commonly used index products, as very valuable, and something providers should do
with a signifcant number of investors also using more of
index mutual funds. For many this is driven by what
their investment platform allows access to; more
sophisticated investors make rigorous cost comparisons
between index product types
Index Investing – An analysis of key trends in the UK wealth market 3
3.
Use of index products set to increase
as key drivers of usage will persist
Our research shows that the extent to which investors use What proportion of a typical client portfolio is in
index products varies greatly. Some interviewees have as index products?
little as 1-2% of an investment portfolio in index products.
One fnancial adviser we spoke to said he invests as much 41%
as 70-80% of a portfolio in index products. Up to 10% 20% 64%
40%
Study participants most commonly report investing
Tlehsis tvhaarine s1 0s%om oefw a htaytp biceatl wpeoertnfo ilniov eins tionrd teyxp perso. dWucetaslt. h 11%-20% 14% 23% 37%
19%
managers appear to use index products least. Private
obaf nckoenrcse anntrda tfionnasn coiaf li nadevxis peros dreupctosr.t Oa umr oinrete ervieenw sp wreiathd Over 20% 14% 273%0%
32%
market participants indicate that 30-40% of a portfolio
mhealdn yin in invedsetxo prsr.o ducts appears to be a natural ceiling for Not Dapopnl'itc kanbolew / 7%10%13%
9%
We found a sizeable minority of frms which offered 0
Total10 Pr2iv0ate 30 Weal4th0 5F0in7an0cia6l 0 80
portfolios featuring 100% index products, most of whom Banks Managers Advisers
are private banks or fnancial advisers. These portfolios
account for a minority of these organisations’ AuM (two
thirds said fewer than 10% AuM are invested in index-
only portfolios), but interviews suggest this share will Do you have any portfolios that are made up of only
increase. Interviewees said they target less wealthy index products?
clients with these portfolios. Some interviewees also
said they like index-only portfolios because clients fnd
them easy to understand. One fnancial adviser told
us “the advantage is that when they watch the news
on television and see the performance of the FTSE100
index, they will know what their investment has done.”
And what proportion of client AuM are in
80
index-only portfolios? 66%
64%
34%
22% yes no
8% 6%
Up to 10% 11-20% Over 20% Not applicable /
Don't know
How do you expect your use of index investing to
evolve over the next 2 years?
Index
Investments
5%
56% Decrease
39%
Remain
the same Increase
Which of the following would you say are the main
reasons for this change?
Fee pressure
67%
Use in markets where difficult to generate alpha
24%
Flexibility in portfolios / liquidity
17%
Cost
15%
Client demand
13%
0
10 20 30 40 50 60 70 80
Investors with a heritage in active investments planned to increase their
management or stock-picking tend to allocation over the next two years.
make limited use of index products.
Fee pressure and cost are two key
This looks likely to persist in the short
and intertwined drivers of increased
We used to see term as investors back themselves
use. Cost pressure arises from
some markets as to continue identifying alpha investors’ focus on controlling spend
more effcient than opportunities. One wealth manager on investment solutions. This is a
“others, so used said he feels that “there are pockets particularly noticeable factor amongst
of opportunity to exploit; we think
active managers in it is relatively easy to identify good fnancial advisers. Many report aiming
emerging markets active managers, and our performance to keep total costs below 2%. Use of
low cost index products helps fnancial
for example. Now has refected that.” Amongst study
advisers achieve this while maintaining
we think that participants who invest fewer than margins in other parts of the value
index investing is 10% of their AuM in index products, chain. This helps explain why 44%
only 20% said their use will increase.
better for all equity of fnancial advisers who use them
Almost three-quarters said they do not
markets. expect their use of index products to report that over 20% of their Assets
under Administration is in index-only
change in the next two years.
portfolios.
Consensus across our Pressure on the fees clients pay for
research showed that zero investment management or advice can
use of index products is come from either investors or their
Director of Advisory not a good idea. Even clients. Our research suggests that
Financial Adviser ardent supporters of active fee pressure from clients is not driving
index product usage. As we note in
” investment recognise the chapter 7, few investors cite client
benefts tactical allocations preference as a key driver of their use
to index products can of index products.
bring, even if proportion
of AuM is small.
Many investors are, however, using
index products in place of active
management in a greater number of
markets, which will support future
growth. Current proponents of index
investing will play a key role. 50%
of study participants who invested
more than 10% of their AuM in index
4.
Centralised and decentralised frms value
different product and provider attributes
Investment processes range from Decentralised frms might have an approved product or provider panel, and
very centrally-led, to ones which give give RMs more fexibility in selecting investments. These frms want to see
portfolio managers a great deal of more educational outreach from providers. They want providers to help their
fexibility. Firms appear to be quite RMs understand the benefts of using different products. This is particularly
evenly split along this spectrum. true of frms with regional presences outside of London. They value providers
Where they fall on that spectrum has who go out to the regions to engage with and educate their RMs.
implications for how they use index
Within panels, many frms approve an index investing provider’s whole fund
products and what they want from
range, meaning RMs have to choose between several similar instruments
providers.
to gain index exposure to e.g. the S&P 500. It is not always clear how they
At one extreme, frms centrally make these choices, or that clients get consistent and best outcomes
specify model portfolios at holding from this.
level and give Relationship Managers
(RMs) no fexibility. At the other T oo much choice is not a good thing: having fve different
extreme, RMs are left to build their S&P 500 trackers is redundant. Investors are better-served
own portfolios to a target risk profle. by having a defnitive view on which product is best
Those occupying the middle ground
offer RMs a panel of instruments and
an asset allocation. How much flexibility does your firm’s relationship managers
have regarding individual discretion over portfolios?
Centralised frms tend to have an
Investment Strategy team who Little to no flexibility
decide on asset allocation and 26%
security selection. A Portfolio
Implementation team might then
A bit of flexibility
execute against the Strategy 34%
team’s allocations. Investment
Strategy teams expect to have good
A fair amount to full flexibility
relationships with product providers. 39%
If large enough, they expect
providers to be responsive to their
new product development needs.
Large, centralised investors often
have very large individual order sizes.
This means they tend to focus more
on index fund size and liquidity, and
value primary market access.
Index Investing – An analysis of key trends in the UK wealth market 7