Source Aims to Grow ETF Assets to $50bn

Terry Flanagan

Source, the European exchange-traded fund provider, aims to triple assets following its sale of a majority stake last month to Warburg Pincus, the private equity firm.

As a result of the deal Lee Kranefuss, an executive-in-residence at Warburg Pincus, has joined Source as executive chairman to work with the management team led by chief executive Ted Hood. Kranefuss was previously global chief executive of iShares but left after the ETF provider was sold by Barclays Global Investors to BlackRock.

Michael John Lytle, chief development officer at Source, told Markets Media: “The goal of the investment from Warburg Pincus was to eliminate questions about our independence from our bank shareholders and to obtain more capital for long-term strategic initiatives to take our assets from $15bn to $50bn.”

Five investment banks – BofA Merrill Lynch, Goldman Sachs, JP Morgan, Morgan Stanley and Nomura – who owned stakes in Source will continue as minority shareholders.

Lytle said it is possible that the European ETF market could grow from $400bn to $1 trillion. He said: “In the US between 9% and 10% of fund assets are in ETFs while in Europe this is only between 3% and 4%.”

There are about 500 large institutional investors in Europe who use ETFs and between 60% and 70% already use Source according to Lytle. “There is an opportunity to grow our footprint with these investors and to grow in retail as this sector expands in Europe,” he added.

Source was launched in April 2009 to to allow investors to choose from a variety of ETF providers while benefitting from Source’s distribution and trading capabilities and its products have traded more than $510bn.

“We spend a lot of time on performance analysis and using securities lending and derivatives to achieve more consistency,” added Lytle. “Entry and exit points are very important so slippage in execution can have a huge impact while the tracking error is very low in our equity funds.”

Source offers more than 70 products across asset classes from partners including Pimco, Man GLG and Legal and General Investment Management.

In January Source and CSOP, the first offshore asset manager set up by a regulated asset management company in China, listed the first ETF in Europe to offer direct access to Chinese A shares on the London Stock Exchange.

“This year we have had inflows of $250m into our China A shares ETF and the Goldman Sachs Equity Factor ETF,” said Lytle.

The Goldman Sachs Equity Factor Index World UCITS ETF tracks an index created by the bank which maximises exposure to five factors – size, value, momentum, quality and low beta.

Lytle expects more demand for smart beta ETFs which are based on desirable factors such as those in the Goldman product rather than the market cap approach in traditional indices. This week JP Morgan filed with the US Securities and Exchange Commission to launch an ETF business with three smart beta products.

He also expects more interest in active ETFs. In January Source and Pimco listed the first actively managed bond ETF for covered bonds on Deutsche Börse.

“Three years ago the received wisdom was that ETFs are passive while we have wrapped five active funds with $3bn in assets,” said Lytle. “Last year we had $2bn of inflows into fixed income ETFs, 25% of the total in Europe, and we have had $500m this year into short-term high-yield ETFs.”

A report this week by consultancy Greenwich Associates sponsored by iShares, Blackrock’s ETF business, said institutional investors are turning to fixed income ETFs as new regulations have led to lower liquidity due to dealers holding smaller bond inventories as they shrink their balance sheets.

Greenwich found that nearly half of institutional managers and 38% of institutional funds plan to increase their fixed income ETF investments in the next 12 months. Out of non-users who plan to use ETFs in the coming year, 67% plan to allocate 6% to 10% of their fixed income portfolio to ETFs.

Daniel Gamba, head of iShares Americas Institutional Business at BlackRock, said in a statement: “Perhaps because of changes to the underlying market, we see that once institutions use fixed income ETFs, they quickly embrace them as important strategic tools.”

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