Fulfilling the demand for innovation
By Michael John Lytle, managing director at Source – We are very pleased that investors chose to vote Source three awards: Best North American Equity ETF Manager, Best Europe Equity ETF Manager and Best Commodity ETF Manager. Source seems to be distinguishing itself by being unique and growing quickly ñ innovation is definitely a focus for us.
Our approach to creating and delivering products to the market involves a group of strategic partners (BofA Merrill Lynch, Goldman Sachs, JP Morgan, Man GLG, Morgan Stanley, Nomura and PIMCO). As a result, we have created an industry solution that has allowed us to tackle comprehensively the issues of counterparty risk and trading liquidity.
In our equity, commodity and alternative products, we have combined owning real assets with the use of derivatives to ensure accurate delivery of performance. We believe that the discussion of structure has moved on from physical versus synthetic to single versus diversified counterparty exposure. We have managed to employ derivatives in a transparent approach that gives very limited exposure to any one counterparty.
In Europe, Source has some of the most liquid ETFs. We have worked with our 25 trading counterparts to focus significant levels of trading capital, provide an active shorting capability and increase sizes available on exchange. Europe has languished far behind the US in trading activity, and we believe that these are the first signs that Europe can close the gap.
The opportunity in Europe is based on the potential for the market to grow rapidly, an opportunity that is highlighted by the relatively low penetration of ETFs into the overall fund industry. In our European sector ETFs, we have tended to capture over 50% of new assets and across the board we have seen 5% to 10% of new assets in areas where we have a product to offer.
New growth will inevitably arrive in line with investment trends. Over the past year, EM, European equity sectors and commodities have all benefited from swelling investor demand. We think that active beta plus products may also be a surprise success in Europe. Common wisdom has been that active management does not work in the form of an ETF. However, we see evidence that index outperformance products can gain traction as long as they are delivered with the transparency and liquidity that successful ETFs require.
Source is one of the only issuers to offer products with exposure to equity, commodities, fixed income and alternative assets in a range of structures both in the form of a fund and a security. We have spent significant time and energy educating investors about the way that our structures work and highlighting that the ETF label gets overused and not all products referred to as ETFs are actually UCITS III funds. We have focused on innovating in order to tackle the existing inefficiencies in the market, particularly improvements in management of counterparty risk and delivery of true trading liquidity.
Source will continue to create new products where there are gaps in the offering available to investors. Through our dialogue with thousands of European investors, we strive to launch products that have significant untapped investor demand.
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