APAC ETF: Finding the Tipping Point · in equity and fixed income trades processed per day. $6+...

APAC ETF: Finding the Tipping Point

13 February 2018

Barbara Ferraresi, Director, Global Distribution SolutionsYoon Ng, Director, APAC Insights

1© 2017 |

billion in revenue

$4decades of experience in the financial services industry

5

trillion in equity and fixed income trades processed per day

$6+

Brokerage firms on our back-office platforms

150

countries in which securities processing is supported

70

billion investor communications processed annually

5+

98%client retention rate

30+clients for post-trade managed services

Broadridge is a global fintech leader with over $8bn

in market capitalization. It is the leading provider of

investor communications, technology-driven

solutions, and data and analytics for capital markets

firms, wealth management, asset management and

corporations.

Broadridge at a glance

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Broadridge in Asia Pacific

• 27 associates in Sydney office, including 15 local support resources covering Australia and New Zealand

• Key Clients: Pershing, Mason Steven, BAML, ANZ, NAB

• Key Solutions: Summit, Broadridge Investment Management Solutions, Reconciliations, FXL

• 35% of ASX participants are clearing via Broadridge

• 15% of ASX volume is clearing via Broadridge

Australia

• 30 associates, including 9 local support resources covering Southeast Asia (SG, Malaysia, Indonesia, Brunei and Thailand)

• Key Clients: Barclays, DBS, SCB, UOB, GIC, AIA, ING, BTMU, Mizuho, KGI, Mandiri, BCA, BNI, CIMB Niaga

• Key Solutions: Reconciliations, Broadridge Investment Management Solutions, Revport, Securities Financing & Collateral Management, FXL, Astrid, Matching, Gloss, ACS

• Market leader in PROactiveReconciliations solution in Indonesia (6 of the top 10 banks in Indonesia, using it for their various reconciliations activities).

Singapore• 39 associates in Tokyo office,

including 10 local support resources covering Japan

• Key Clients: JP Morgan, MUFJ, Nomura. Mizuho Securities, SMBC, SBI Securities, BNP Paribas, Barclays, Societe Generale, Monex, Aozora, Tokai Tokyo

• Key Solutions: Gloss, Reconciliations, Broadridge Investment Management Solutions

• Investor Communications Japan, a joint venture of Broadridge and the Tokyo Stock Exchange has over 840 participating share-issuing companies on our electronic proxy voting platform (87% of TSE-listed companies in terms of market cap; 97% of Nikkei 225 index constituents).

Japan

• 30 associates covering North Asia• Key Clients: HSBC, China Post

Global, SPARX, Myriad, BosvalenAM, Pleiad IM

• Key Solutions: Broadridge Investment Management Solutions, Gloss

Hong Kong

Broadridge has over 20 years experience in APAC with offices in Hong Kong, Singapore, Sydney, Tokyo and Hyderabad. Backed by global resources and on-the-ground presence across local markets, we’re at the forefront of helping clients engage customers, navigate risk, optimise efficiency and accelerate growth in a rapidly changing—and challenging—business environment.

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..through three datasets, on a single platform

The full range of clients…

A one stop solution for the asset management industry

Sovereign Wealth

Insurance GA

Private banks Financial Advisors

Platforms

Institutional Retail

DB Pensions

DC pensions Direct investors

…across multiple vehicles…Segregated Mandates

Mutual funds

ETFs

FundFile Money in Motion SalesWatch

Focus of the session

Offering comprehensive data and insights for both the retail and institutional segments

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Mapping the Investment Fund LandscapeTaking stock of assets and flows for global ETF and mutual funds

North America$22T$3.0T

Europe$5.6T$0.2T

Cross Border$6.2T$2.4T

APAC$3.7T$2.1T

MEA$0.3T$0.1T

Latin America$1.0T$0.5T AUM : Dec 2017

Cumulative flows : Jan 2007 – Dec 2017

Global$39T$8.3T

Source: Broadridge Global Market Intelligence

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Global ETFs grew by 6x in past 10 years ETF REGIONAL SNAPSHOT

North America• Strongest growth of the three

regions, ETF assets have a CAGR of 19% during the time frame.

• Net flows collected in 2017 more than doubled that of the historical average.

Europe• Second strongest growth, with

the majority of the growth coming from Ireland, Luxembourg, France and Germany.

Asia Pacific • A laggard in this space but has

made up with a tremendous uptick in recent years. Cumulative net flows reached nearly US$200bn over the last 5 years. Japan is the leader in this space, accounting for over 60% of total ETF assets.


North America

$3.5T$1.9T

Europe$0.8T$0.5T

Asia$0.4T$0.2T

AUM : Dec 2017Cumulative flows : Jan 2007 – Dec 2017

Global$4.6T$2.8T

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B

20 B

40 B

60 B

80 B

100 B

Jan

Feb

Mar Ap

rM

ay Jun Jul

Aug

Sep

Oct

Nov De

c

2014 2015 2016 2017

Uneven Growth: Finding the Tipping Point

North America Europe Asia Pacific

2017 was a tipping point for ETF growth in U.S. as flows collected in

2017 exceeded historical average by nearly two-fold.

2017 is by far the strongest year in terms of cumulative net flows into European ETFs, supported by a combination of

favourable regulatory regimes, growing fee awareness and expansion of product

suite. Momentum looks set to build further in 2018 with implementation of

MiFID II and other regulations.

Passed Tipping Point Nearing Tipping Point Finding the Tipping Point

ETF flows have been steadily inching up but still yet to see the critical break through as in other regions. Although APAC institutions are increasing and broadening their ETF usage, bulk of the flows tend to be directed towards U.S. and European exchanges. Retail penetration remains low and requires a more favourable regulatory framework to boost uptick.

10 B

B

10 B

20 B

30 B

40 B

50 B

60 B

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2014 2015 2016 2017

100 B

B

100 B

200 B

300 B

400 B

500 B

Jan

Feb

Mar Ap

rM

ay Jun Jul

Aug

Sep

Oct

Nov De

c

2014 2015 2016 2017

APAC ETFs: Finding the Tipping Point

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We identified 5 drivers which propel ETF growth

Driver 1: Diversification of clientele

Driver 2: Growing fee awareness

Driver 3: Regulatory support

Driver 4: Broadening ETF applications

Driver 5: Expansion of product strategies

Broad adoption across institutional and retail channels

An increased focus on fee impacts on returns

Robust and supportive regulatory framework

Going beyond core and tactical allocations

Expanding beyond traditional equity strategies

Key drivers

Details

Retail distribution on the rise but strong support from both channels

Fees are very competitive and some of the lowest

Tightening standards around ETF listing and trading

Wide applications from cash to transition management, overlay strategies

Fixed income, multi-asset ETFs gaining ground, alongside factor ETFs

Institutions remain key users but front end fee bans will increase retail usage

From pensions to intermediaries, fee awareness is growing

Supportive regimes like MiFID II, RDR, MiFIR being rolled out

Improved liquidity in ETF market (MiFID II) will widen applications

Fixed income, multi-asset ETFs gaining ground, alongside factor ETFs

Development in North America

Development in Europe

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Asia’s score card shows the tipping point is someway off






ETFs are largely used by institutional investors in Asia, typically Tier 1, with retail participation accounting for less than 15% of total assets. Finding new channels of growth will be key.

The active vs. passive debate has moved on, towards one looking at high vs. low cost. As ETFs tend to charge lower fees, growing fee pressure will aid growth.

A key catalyst, favourable regulatory regimes either focused on fee bans or opening up of new markets and client segments, will drive industry growth.

Broader usage of ETFs will help broaden its reach. Asset managers and private banks will be key clients as ETFs are increasingly used in multi-asset portfolios.

As investors look to broaden their exposure beyond equities, the key strategies which will win assets are factor investing, fixed income and leveraged/inverse ETFs.

Key drivers

Details of drivers

Outlook(1=Very Pessimistic, 5 = Very Optimistic)

3 4 2 4 3

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9%

13%

14%

14%

20%

27%

44%

Private Bank

Trust Co

Bank

Independent

Wirehouse

RIA

Online

Driver 1: Diversification of clienteleOutlook:

U.S. ETF YOY GROWTH BY CHANNEL, 2012- 2017

Diversification of clientele

30%

50%

Equity Fixed income

Source: Greenwich Associates 2016 ETF Study

ASIAN INVESTORS USING ETFS FOR LESS THAN A YEAR - %

1. New institutional users 2. Growing retirement adoption 3. Increase retail penetration

EXAMPLES OF INCREASING ADOPTION AMONGST ASIA DC PENSION FUNDS

1. India – Employee Provident Fund Organisation started investing in ETFs from Aug 2015.

2. Australia – Self-managed super funds have driven an increase in ETF holdings.

3. Smart beta ETFs introduced on Hong Kong’s Mandatory Provident Fund platform.

Very Pessimistic 3 Very Optimistic

Key Milestones to Watch: Retail penetration will remain low without a shift towards fee-based distribution models. For institutions, an expansion of the investor base beyond Tier 1 will be key. Growing use amongst pensions will aid growth.

Strong growth in the retail channels was a key reason behind U.S. ETF boom.


11© 2017 |


Key Milestones to Watch: The use of passive instruments is on the rise, especially among institutional investors, while private banks have also revealed an increase in ETF demand from HNWIs. Retail awareness will take time to gain traction but the first step will come in the form of fee caps imposed by retirement savings plans. Australia, Hong Kong and Singapore are a few markets that have actively taken steps to curb fees.

Outlook:

Organic Growth CAGR (2007-17)

NorthAmerica

Europe Asia

ETFs

IndexMFs

Active MFs

Total 3% 4% 7%

17%

9%

5%

17%

10%

0%

19%

9%

3%

Active vs. Passive

Shifting the focus of the mutual fund vs. ETF debate


90%74%

Asia AUM$1.6T $2.3T

2007 2017

Source: Broadridge Global Market Intelligence, Note: Exclude MMFs and FoFs

Active and Passive

What are the fees?

What is the value on

investment?

12© 2017 |

Driver 3: Regulatory support for ETF development

Key Milestones to Watch: In order for Asia ETFs to hit a new level of growth, retail participation will have to increase. Since commission fee bans have been put on the backburner, the impetus of growth will come from either new markets (access to China via ETF connect) or new channels (retirement savings).

Outlook: Very Pessimistic 2 Very Optimistic

EUROPEAN ETFS – CUMULATIVE NET FLOWS – US$BN - 2012-2017

Favourable regulatory impact (MiFID II and RDR) on European ETFs

1. Ban commission payments to intermediaries

2. Compulsory reporting of ETF trades

Evens playing field for ETFs which do not pay commissions.

Provides a more accurate picture of liquidity in European ETFs, facilitates securities lending and other investments.

Assessment of APAC regulatory impact on ETFs

Banning of front-end commission fees

Opening of new markets and channels

India and Australia are still the only two markets to ban sales commissions. Results have been mixed as India has seen weak retail ETF take-up without a proper advisory framework. In Australia, the number of accounts investing in ETFs via self managed super funds, whilst still low, has been steadily increasing.

China will be the one to watch as ETF Connect is slated to be introduced in the second half of 2018. The devil will be in the details as the number of eligible ETF products is still on the cards. The retirement market will be a key channel to target as fee erosion concerns help drive the adoption of low-cost products.

$23

$137

2012 2013 2014 2015 2016 2017

2013: RDR introduced

2018: MiFID II introduced

2014-2016: Fee bans gradually implemented across Germany, Sweden, Netherlands and Switzerland

13© 2017 |

Driver 4: Broadening of ETF applications

Top 5 Uses of ETFs in Asian Portfolios

1. Tactical adjustments

2. Core allocation

3. International diversification

4. Interim beta

5. Portfolio completion

Outlook:

Sources: Greenwich Associates 2016 ETF Study, Broadridge Insights

Increasingly used by core institutional investors such as sovereign wealth funds and pension funds as well as assets managers and wealth managers

GLOBAL PASSIVE FUND OF FUNDS – AUM - US$B – 2012-2017

Key Milestones to Watch: This trend is set to continue, bolstered by a stronger body of academic research and favorable peer experiences. One of the most important drivers of growth will come from the use of ETFs in multi-asset portfolios, both on the retail and institutional fronts.


$19$67

$470

Asia-Pacific Europe North America2012 2017

15%

CAGR

26%

26%

ETFs are increasingly used as passive building blocks within multi-

asset portfolios. More details can be found on the next slide

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Illustrative example: Use of ETFs in multi-asset portfolios

Source: Broadridge Insights

ETF usage in multi-asset portfolios Illustrative examples Current and Expected Future Shifts

Fund of Fund (selective use of ETFs)

Discretionary portfolio

Fund of Fund (100% use of ETFs)

ETF Fund of fund

Currently the most popular way of incorporating ETFs into multi-asset portfolios. Growing concerns on fee pressure will see a further uptick in ETF use.

The rise of wealth managers and robo-advisory channels will contribute to the segment's growth.

Still more of a niche strategy and largely used in the alternatives space.

ETFs have become more popular as HNWIs grow more fee conscious. Regulations similar to MiFID II and RDR will eventually be introduced in Asia, leading to the next wave of growth.

ETF

ETF

Fund

Fund

Fund

ETF ETF

ETF ETF

Fund

ETF ETF

ETF ETF

ETF

ETF

Stocks Bonds

Wrapper/ Platform

Fund

Primary growth driver

Primary growth driver

Niche growth driver

Secondary growth driver

15© 2017 |

Driver 5: Expansion of product strategiesOutlook: Very Pessimistic 3 Very Optimistic

Expansion of product strategies

Smart beta/factor investing Fixed income ETFs Inverse & leveraged ETFs

GLOBAL SMART BETA ETF – AUM –US$B

ASIA INVERSE & LEVERAGED ETFS –AUM- US$B

Key Milestones to Watch: Product development will expand beyond pure equities into factor investing, fixed income and the inverse/leveraged space. ETF growth in APAC will be contingent upon access to exposure not readily available in U.S. and Europe.

GLOBAL FIXED INCOME ETF – AUM –US$B

2012 2017Asia-Pacific Europe North America

28%

$143

$494

15

180

577

0 200 400 600

Asia-Pacific

Europe

North America

2017 2012

$2

$12

$0

$2

$4

$6

$8

$10

$12

$14

2012 2017

44%

APAC ETFs: Taking Advantage of the Tipping Point

17© 2017 |

$136

$430

$1,858

2012 2017 2018 2019 2020 2021 2022 2023 2024 2025

APAC ETF estimated to reach US$1.9T by 2025APAC ETF – AUM – US$B – 2012-2025

20%

AUM BREAKDOWN BY DOMICILE

Key Implications: Japan will remain as the biggest ETF market in APAC but its marketshare will be impaired by reduced support from Bank of Japan as well as the increased in interest in other parts of APAC. We expect China (and Hong Kong due to ETF connect) to be the two fastest-growing markets.

62%40%

9%

19%

9%18%

2017 2025

Japan China Hong Kong Rest of APACSource: Broadridge Insights

18© 2017 |

$430

$993

$435

$1,858

2017 NNF Market Growth 2025

70% of the growth is expected to come from net new flowsAPAC ETF AUM GROWTH BREAKDOWN – US$B – 2017-2025

AUM 2017 AUM 2025

Close to 75% of the net new flows is expected to come

from three markets, namely Japan, China and Hong Kong.

Market appreciation is expected to contribute roughly 30% to overall

growth.


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Future winners in APAC will come from 3 categories

Curr

ent A

UM

Growth Potential

APAC ETF – AUM BY PROVIDER – US$B – 2012-2017

$369

(Number of ETF providers)

Large

High

ETF specialists

Local Kingpins

Global Giants

Laggards (rest of the industry)

Top 3 players in each local markets, typically hold over 75% of marketshare. Will be the key beneficiaries of market growth.

Defined as the Top 10 ETF providers globally. They will leverage on global capabilities and selectively create local products.

The bulk of the ETF providers will find themselves lagging behind the other three types as they are not able to create differentiated products to build scale.

Defined as providers whose ETF business is their key focus and ETF forms the majority of their asset base. Creating niche exposure for selected client bases holds the key to their success.

Future winners will come from these three types of ETF providers


$1

$19

$24

$92

$6

$11

$44

ETF Specialists(10)

Rest of industry(82)

Global Giants(10)

Local Kingpins(19)

2017 2012

The only category to see an absolute fall in AUM. It will be increasingly tough for players without scale or dedicated resources to compete in the ETF space.

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Leveraging on tipping point: Drivers and action plans





Take a three-pronged approach to diversify clientele: a. Expand existing institutional client base, b. Tap into retirement assets, c. Increase retail penetration. The last will be a long-term game but also the most rewarding.

Drivers of demand Action plans by asset managers

Target markets and client segments that are fee sensitive. Institutional investors and private banks will be priorities. Retirement markets with existing or pending fee caps will offer opportunities.

Since commission fee bans have been put on the backburner, the impetus of growth will come from either new markets (e.g. access to China via ETF connect) or new channels (retirement savings).

Look to create products that are specifically tailored to address client needs (e.g. currency hedging, liabilities matching). Growth of multi-asset portfolios will also drive ETF usage.

The top three areas for product development will be factor investing, fixed income and the inverse/leveraged space. ETF growth in APAC will be contingent upon access to exposure not readily available in U.S. and Europe.


For more information

22© 2017 |

(

MEASURE

Global institutional assets, flows, and revenues by detailed regional, client and product segments

Assets, flows and performance globally, by region, country, competitors and varied sector definitions

Gross sales, net sales and assets by country across the opaque cross border market

IDENTIFY Named consultants and their role in allocating institutional flows

Who is winning and launching funds across geographies and asset classes

Where demand is coming from and in what form across the cross border market

ANALYSE Institutional fee levels and ranges

Market dynamics globally with many augmented analytical dimensions

Growth dynamics of the combined domestic and cross border markets

BENCHMARK Institutional market share, share

of flows and rankings against your competitive peer group

Your fund sales and market share in any dimension against your competitive peer group

• Your Cross border market positioning and progress against your peer group in each market

Money in MotionInstitutional

The leading dataset for analysing the global institutional market, tracking over $15T in global institutional flow through our global consortium and data partnerships

FundFileGlobal Funds

The most comprehensive dataset for analysing the global funds market, tracking over 80,000 funds sold globally each month

SalesWatchCross Border Funds

The leading dataset for analysing the global Cross-border fund market, covering over 75% of the market with a unique consortium model

Global Market Intelligence

Global Market Intelligence platform covering retail and institutionalAn integrated analytics solution for the asset management market

23© 2017 |

Contact details

Yoon NgDirector, APAC Insights

[email protected]

Barbara FerraresiDirector, Global Distribution Solutions

[email protected]

No part of this document may be distributed, reproduced or posted without the express written permission of Broadridge Financial Solutions, Inc.©2017 Broadridge Financial Solutions, Inc. All rights reserved. Broadridge and the Broadridge logo are registered trademarks of Broadridge Financial Solutions, Inc.

APAC ETF: Finding the Tipping Point · in equity and fixed income trades processed per day. $6+...

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