BlackRock leaders predict use of indexed products in the UK set to double
BlackRock’s leadership and strategists have recently commented that indexed products are likely to see a period of accelerated growth across wealth portfolios.
The firm writes that current levels of 10-20 per cent within the portfolios of financial advisers, traditional and digital wealth managers and private banks are expected to double in the next four years, half the time it took to get where the industry is today, post the RDR.
The development will be driven by greater confidence in ETFs as they proved their worth in periods of market stress; growing choice for efficient portfolio construction; and widespread appetite for embedding sustainability into asset allocation decisions, the firm says.
Nick Hutton (pictured), Head of UK iShares & Wealth at BlackRock says: “What we’re seeing as the UK wealth management industry evolves, is a fundamental and irreversible shift towards a ‘whole portfolio’ approach that aims to identify true sources of portfolio returns that is putting a spotlight on the role of index funds and ETFs.
“Faced with fee compression, regulation, and the centralisation of business models, indexing can help clients build more efficient, more nimble portfolios than ever before.”
BlackRock highlights three key market trends, many of which it believes will be accelerated post-COVID, that are behind the increased adoption of index funds and ETFs in UK wealth portfolios. Firstly, ETF performance turning first time users into long-term adopters, writing that there is growing recognition of the role ETFs in particular are playing in building more resilient markets.
“The pandemic-related market turmoil of early 2020 provided the most significant stress test of the resiliency of bond ETFs. Past experience shows us that each time ETFs demonstrate their robustness and utility through periods of market volatility, more investors learn about and become open to the role they can play in portfolios and become first time users.
“Furthermore, when investors start using ETFs, they tend to increase usage over time and become long term adopters.”
Secondly, BlackRock writes that greater choice and granularity is empowering investors to express preferences. Brett Pybus, Head of iShares Investment and Product Strategy EMEA, says: “In the 21 years since the launch of ETFs in the UK, ETFs and index funds have evolved from principally replicating simple market cap weighted indices such as the FTSE 100 or S&P 500, to identifying and capturing sources of return such as factors, themes, countries or sectors in a repeatable way that was previously only available via alpha strategies.
“These milestones reflect the ability of ETFs and index funds to efficiently standardise data and technological advancement to the benefit of the investor.”
Thirdly, the firm writes that a re-think in sustainability, from products to asset allocation decisions, will have its effect. “Historically the asset class return expectations that form the basis of asset allocation decisions have not incorporated sustainability-related considerations. This has meant that these considerations could only be reflected at the product choice level, often resulting in a mismatch between actual portfolio exposures and the underlying strategic asset allocation.
“This is changing and the launch of the BlackRock Investment Institute’s climate-aware return expectations, for example, means that investors can achieve greater alignment between their intended exposures and the sustainable products used in the implementation stage.”
Ursula Marchioni, Head of Portfolio Analysis and Solutions EMEA, says: “We are seeing many more institutional investors view sustainability not only in terms of product selection but as a central consideration in their core investment process. We believe wealth portfolios will follow suit, leading to a material increase in the use of sustainable products, including ETFs, in the coming years.
“The performance of sustainable indices over the past year – with 81 per cent of indices outperforming their traditional peers – will further support their adoption. BlackRock believes global sustainable ETFs and index mutual funds’ assets will grow six-fold to USD1.2 trillion within the next decade.”