Global ETF assets break through $1 trillion milestone at the end of 2009

Global ETF assets break through $1 trillion milestone at the end of 2009

Below is a preview from our monthly ETF Landscape Industry Review

Global ETF and ETP Industry 2009

• Global ETF assets have hit an all time high of US$1,032 Bn at year end 2009; 4.3% above the previous all time high of US$982 Bn set in November 2009.
  
  
• At the end of December 2009 the global ETF industry had 1,939 ETFs with 3,775 listings and assets of $1,032.3 Bn, from 109 providers on 40 exchanges around the world.
  
  
• Globally, net sales of mutual funds (excluding ETFs) were US$13.3 Bn, while net sales of ETFs were US$93.8 Bn during the first nine months of 2009 according to Strategic Insight.
  
  
• Additionally, there were 619 other Exchange Traded Products (ETPs) with assets of US$154.52 Bn from 40 providers on 19 exchanges.
  
  
• Combined, there were 2,558 products with 4,687 listings and assets of US$1,186.5 Bn from 132 providers on 43 exchanges around the world.
  

US ETF and ETP Industry 2009

• ETF assets have hit an all time high of US$705 Bn at year end 2009 which tops the previous all time high of US$665 Bn set in November 2009.
  
  
• At the end of December 2009 the US ETF industry had 772 ETFs and assets of $705.5 Bn, from 28 providers on two exchanges.
  
  
• In the US, net sales of mutual funds (excluding ETFs) were minus US$131.5 Bn, while net sales of ETFs domiciled in the US were positive US$64.0 Bn in the first nine months of 2009 according to Strategic Insight.
  
  
• Additionally, there were 142 other Exchange Traded Products (ETPs) with assets of US$88.1 Bn from 17 providers on one exchange.
  
  
• Combined, there were 914 products with assets of US$793.6 Bn from 41 providers on two exchanges in the US.

European ETF and ETP Industry 2009

• European ETF assets have hit an all time high of US$223 Bn at year end 2009 which is 3.1% above the previous all time high of US$217 Bn set in November 2009 and 39.7% above the high of US$160 Bn recorded in July 2008.
  
  
• At the end of December 2009 the European ETF industry had 821 ETFs with 2,359 listings and assets of $223.5 Bn, from 32 providers on 18 exchanges.
  
  
• In Europe net sales of mutual funds (excluding ETFs) were US$210.5 Bn while net sales of ETFs domiciled in Europe were US$36.5 Bn during the first ten months of 2009 according to Lipper FMI.
  
  
• Additionally, there were 184 other Exchange Traded Products (ETPs) with assets of US$19.1 Bn from six providers on six exchanges.
  
  
• Combined, there were 1,005 products with assets of US$242.6 Bn from 34 providers on 18 exchanges in Europe.

Active Investing

I had done a brief introduction of active and passive management in our last discussion. Today let us move ahead and delve into active investing, its nuances and some reasons why it is more of a pseudo-science relative to passive investing.

As we had discussed active investing is an attempt to out perform the market averages (as represented by the relevant indices) by trying to find good deals in the market.

Stock picking (is therefore the crux of active management)-whether done by the investor himself, his advisor or through a fund manager-the idea is to find some stocks which seem to be better or more attractive than many others that are listed in the market.

The term active management covers categories such as mutual funds, hedge funds, private equity, portfolio management, portfolio advice, and insurance schemes and so on. If the core activity is stock picking and also trying to time markets-it amounts to active investing.

How do I beat the market?

It has to be done via price of a security-there is no other method of beating the market. As I had written in my previous article-I buy a stock with the belief that its price will eventually move up and vice versa.

In other words-as an active investor-I arrive at some kind of a ‘price’ for a security-which according to my research should be ‘the fair price’ or value, ‘fair’ relative to the market price.

Research techniques for active management could be anything-fundamental analysis, chart patterns, management meetings, tips, information from a friend, astrology, quant models, reading business literature and magazines, watching TV business channels etc. It could even be a combination of all these methods, including macro-economic studies.

For example, if I indulge in fundamental analysis, a popular technique could be discounting future cash flows to arrive at a ‘fair value or price’ in the present. In order to arrive at a discounted number I have to feed some estimates based on my analysis in the model.

We know that the market price at any given moment-reflects the combined wisdom, knowledge, information of all market participants, it contains countless decisions of many buyers, sellers, analysts.

Think of the stock market as something similar to a vast data processing machine-the market price is the result of all that combined information-the price is like a magnet which attracts iron pieces and in my analogy ‘pieces’ represent information, knowledge, etc which is available or lies scattered in the market due to the presence of a large number of investors.

When the active investor arrives at a ‘fair’ price as result of his research-he does it independent of the market process. In other words the active investor (believes) that he is ‘setting’ a correct price as ‘estimated’ by him…and in reality this is done ‘outside’ the market process.

This would imply that the active investor has available with him all the requisite knowledge, information, data etc-more than the combined market wisdom.

Active investing therefore believes in the fallacy of an individual (some kind of an expert or authority) who has more knowledge and information than the market-and this helps him to arrive at ‘fair’ price of a security independent of the market process. The active investor believes that he can estimate security prices better than the market.

The great economist Friedrich von Hayek taught us that information in a market place lies scattered among thousands of market participants-and no individual or any select group of persons is / are privileged enough to have all the information required to arrive at fair prices.

Information in a free and efficient market lie at the fringes-in bits and pieces among a large number of ‘rational’ market participants-and is not ‘centralized’ with any individual.

The term ‘rational’ applies to all investors who are attempting to make a profit in the market by ‘out guessing’ his numerous counterparts-all conducting a similar exercise.

We should therefore consider all investors as ‘rational’ because they are all trying to make money or ‘out perform,’ whatever maybe their method of research!

Hence active management expertise revels in the fable of centralized information available with an expert stock picker or active manager-and that such individuals can consistently pick attractive securities because they can arrive at ‘fair’ price better than the market process.

A highly competitive stock market is comprised of many brilliant individuals-such as fund managers, portfolio managers, insurance managers, treasury managers, stock pickers, investment advisors, analysts, high net worth individuals, retail investors, foreign investors, hedge funds, pension fund managers etc.

Most of them pick stocks and construct portfolios using a combination of active management techniques. Stock picking and analysis is not rocket science or cutting edge technology that is available to a select few.

Therefore thousands and thousands of investors (many among them professionals) are constantly sifting through a large number of securities quoting on the market by using more or less similar techniques.

They do this to narrow down on a short list which they believe are attractive stocks-relative to a large number of other securities listed on the market.

This constant endeavour of numerous market participants’ results in a ‘fair’ market price-at most times. When we say ‘fair’ price, it need not necessarily mean ‘correct’-it simply implies that the price at any given point in time happens to be the best estimate of all that is known by the market.

All that is known by the market is already discounted in the price-fresh news hits the market at random.

In other words even if the market price is occasionally unfair; it is randomly so. In an efficient market it is not very easy to ‘consistently’ capitalize on the mispricing. Trying to spot mispricing also pushes up the cost of active management.

Let us summarize,

• Active investors attempt to out guess market prices and derive what they think should be the ‘fair’ price of a security independent of the market process.

• It means that individual active investors-have more information or knows more than the market. This is nothing but a fallacy-because it is impossible to have more information than the market on a consistent basis.

• When an individual active investor attempts to out guess the market (price), it is almost like playing chess with the market. The market is nothing but numerous investors in the aggregate-most of whom are active and trying to out guess their counterparts.

We shall discuss passive management in greater detail next time and this will help us understand why it stands on more solid ground as compared to active investing.

Where to Invest in 2010?

Equity: The Indian market is attractive to investors in the developed markets, since the growth rates expected of Indian Economy is much higher (in the range of 7%-9%) than expected in the developed markets (0-2%). The portfolio allocations from international investors are likely to continue and in the medium term (3 to 7 yrs.) our market is expected to generate good returns for the investors. The other big driver for Indian equities will be the continued build up of infrastructure and particularly the large capacities being added in power generation. This will have a multiplier effect on growth rates. Investors would do well to have exposure in the range of 20-60% of their medium term portfolio to high quality equity schemes.

Regular Equity Investors may also opt for new innovative Value averaging Investment Plan (VIP) or Systematic Transfer Plan (STP) on Benchmark S&P CNX 500 Fund which is based on a formula and allows you to invest more in the falling market and less when markets are moving up, back testing results show a higher returns to the extent of 3.5% for VIP as compared to Systematic Investment Plan (SIP) as this method takes the emotion out of the investment decision and helps the investor to invest in disciplined manner.

Indexing or Exchange Traded Funds (ETFs) have gained popularity in global markets. With a large number of institutional investors in the market, it has become impossible for any active investor to consistently beat the market, hence the best way to participate in the market is through index funds. ETFs are the most efficient route to take exposure to an Index and when compared to any other open ended index funds ETFs are transparent, low cost, traded on the Exchange just like any other stock and offers solution across asset classes.

Why Indexing?
An interesting study done by Benchmark Mutual Fund called as ‘Myth of Eternal Alpha’(refer to the chart) states that last year nearly 80% of active managed funds had underperformed their benchmark index.













How one can ETFs?
• You can diversify your core equity holding with a single ETF unit
• Use it to build a long term core holding of equity by systematically investing in various index funds like Nifty ETF, Nifty Junior ETFs, Bank ETF etc
• If bullish on market, just buy a Index ETF and no need to do individual stock picking
• If you have some stock in your portfolio, just do a switch trade by selling the stocks in your portfolio and buying an Index ETF of your choice
• Taxation is like shares (long term Capital Gain is zero and Short Term is 15%)

Gold: Worldwide the Governments have announced massive stimulus packages. This is expected to be inflationary and is also resulting in debasement of currencies. Gold is the ideal offset to this situation. Hence, worldwide the investors are allocating a small part of the portfolio to gold and ideally retail investors should look at allocating around 10% of their portfolio to Gold.
Investing in physical gold comes with the problems of , purity, insurance & storage cost, Wealth tax and liquidity issues, hence the ideal way to take an exposure in this asset class is through a Gold ETF – which gives the investor exposure to gold while eliminating drawbacks of physical gold. Gold ETF units held for more than one year qualify for long-term capital gains at 20 per cent, whereas the holding period in physical form has to be three years to qualify for long-term capital gains.

Benchmark AMC sees demand rising for Gold ETFs

The Reserve Bank of India bought 200 tonnes of gold from the International Monetary Fund in November 2009. It is thought of as the ultimate currency as it came to the country’s rescue in 1991 when India faced its worst balance of payments crisis and had to pledge 67 tonnes of gold to shore up its dwindling foreign reserves.

Gold has been one of the best performing asset classes in 2009. India’s gold imports in 2009 have been pegged at 200 tonnes. The COMEX gold index was up 25% in 2009. Gold prices in India have been up 23%. It is currently trading close to USD 1,100 per ounce.

In an interview with CNBC-TV18, Sanjiv Shah, ED, Benchmark Asset Management spoke about the widespread interest in gold and gave a prognosis for gold in 2010.

WATCH THE INTERVIEW

Here is a verbatim transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: How widespread is the interest in gold as an asset class in India. Traditionally it has been more as a conservative asset class; a rainy day asset class. But have people really taken to the idea of reaching out to gold through a financial asset as in terms of BeES?
A: They have, to be honest with you. What has happened is that if you look at it, traditionally in India, out of approximately 800 tonnes of gold which was consumed, about 200 tonnes, as analysed by the World Gold Council and others, was investment demand, not in jewellery but in bars and coins.
Now we believe that that demand really is getting translated into Exchange-Traded Funds (ETFs) slowly. But surely we think people are moving into buying gold for investment instead of physical into ETFs. And we have seen that through the range of retail investors who have come into our funds, literally from Srinagar down to Andaman Islands.
The other factor is if you look at the number of people who are active in the gold ETFs, we have seen a lot of SIP kind of things happening because we have seen lot of investors buying one-one gold every month and the number of investors have gone up to 60,000-65,000, nearly tripled in the last 4-5 months.

Q: Is gold leading people to invest or the investments are leading the price of gold higher, which means we are making a self fulfilling prophecy? I want to quote a data - In 1980 gold has already touched almost USD 700 per ounce then it did nothing it stayed around USD 500 per ounce upto 2004 and then started its rise. My question is over a 20-30 year period gold doesn’t seem to outperform anything. So what brings the case that at the moment it will continue to run up and if it will where will it go?
A: That is a fair point. One of the articles in the press has written a fact that if you look at 1980, USD 800 per ounce and as of today about USD 1000 per ounce, so if you are a citizen and had really put money only in dollars, treasury bills you would have made more money.
But if you look at the flipside if you are a Japanese investor 200 yens to a dollar, the yen has gone up to about 100 yen a dollar what happens then? If you invested in gold, you in a sense lost out because of the fact that the dollar has not moved. But the reality is that in times of economic strife, people want to look at gold as an asset class and not really trust the central banks.
In 1980 why were the gold prices so high? Because you had the oil shock, you had economic turmoil starting in 1975. Post that you had a benign environment for economic growth.

Q: That is the point – do you think gold can continue to run up if we are in a strong economy because that is where we seem to be this year?
A: It is a chicken and egg in a sense. The fact that gold has done so well even after in 2009 when the economic growth has been much better than what people expected does it indicate the fact that basically people are not sure about the growth which is going around especially in the rich world, especially in the Western world. Now the jury is out.
Look at it this way. Your question is basically if economic growth is going to happen gold priced cannot be going anywhere but the flipside is that if gold prices are going up does that indicate in some manner, is the market indicating to us that the Western economies are not going to do as well in 2010-11 as we go along.

Now that jury is out. Analysts keep claiming that gold prices should go up given the quantitative easing and the day the quantitative easing stops obviously gold prices are going to see some amount of tracing back. But would that affect economic growth? We don’t know to be honest. In India our advice to investors is simple and that is that if you are buying gold buy it through the financial asset.

Equity Funds struggle to beat Sensex in 2009

After easily outpacing it in earlier years, equity funds seem to be losing the race to the bellwether Sensex in 2009.

In 2009, only half of the equity funds managed to deliver a better return to their investors than the Sensex did. This situation is in stark contrast to the previous bull market of 2007, when eight out of 10 funds trounced the Sensex.

Odds of one in two

Diversified equity funds, as a category, averaged a return of about 80 per cent between January 1 and December 24, 2009 (the cut-off date for this analysis). That matches the Sensex return and is, in fact, superior to that of the CNX Nifty.

However, if you were an equity fund investor, you had only a one in two chance of owning a fund that outpaced the Sensex this year. Only 97, or half the equity funds in operation, delivered more than 80 per cent return this year.

Twice shy

If equity funds had managed to do so well against the indices in 2007, what affected their participation in the market rally of 2009? Excessive caution after the steep reversals of last year appears to be the key reason. The relentless decline in stock prices during the 2008 meltdown prompted many fund managers to seek cover against further NAV erosion. They either reduced their equity exposure and held a larger proportion of cash in their portfolio or leaned towards defensive sectors such as FMCG.

Many managers also crowded into large-cap stocks and cut back their mid- and small-cap exposures to reduce risk. Such strategies backfired as the market climbed steeply in 2009, with mid-cap stocks and some of the riskier sectors staging a rebound.

Mr Ajit Dayal, President of Quantum Mutual Fund, explains it thus: “2009 was challenging for many momentum managers. The Sensex was stuck in the 8,000-10,000 trading range till March 2009; many fund managers felt that it would fall to the 6,000 levels. So, they stayed on the sidelines.

“Then, when the first sign of green-shoots appeared, the index galloped to 12,000 levels by mid-May, catching many by surprise. The 17-per cent surge in the index the day after the election results put many fund managers in a difficult spot. They had refused to buy at 8,000 and 10,000 levels and did not know how to react to this unexpected 14,000 index.”

He explains that value-oriented fund managers (like Quantum) managed to outperform by diving in when stocks looked cheap.

Top performers shine

While equity funds as a class struggled to match the indices, the top performing equity funds did manage to comfortably trounce them. The 25 top performing equity funds of 2009, for instance, returned anywhere between 100 and 150 per cent.

Mr Pankaj Tibrewal, fund manager of Principal Emerging Bluechip Fund, a topper, explains that it was the fund's contrarian calls — to deploy fully in March 2009 and buy into highly leveraged companies and beaten-down sectors — that helped lift the returns to these levels. “By March 2009, pessimism was at an extreme and we took the call that the market was oversold. But if you ask me today whether we expected the market to double from those levels, the honest answer is ‘No',” he says.

ETFs: The Smarter Route to Index Investing

Though their look and feel is similar to index funds, exchange-traded funds perform better as they come with lower costs and better efficiency

Markets have returned 72.08% so far this year. Is your equity portfolio up that much? Investors in markets often feel that they have done well, but they usually count just their profits and neglect the losses.

If you invest directly through stocks, chances are that your return is around this number or lower as some stocks may have outperformed but others may have underperformed the index. If you invest through mutual funds, your experience at the portfolio level would be similar. For example, large-cap funds, on an average, have risen by 70% over the same time. So, had you bought the index instead of a large-cap fund, you would have gained more and paid less in costs.
We need to re-examine this entity called “index”. It is not just a way to track the health of the markets and benchmark returns from products that invest in the same market, but also to actually invest and get that average market return.

There is enough research out there that proves that there is no fund manager in the world who has managed to beat the index consistently over time. The same research points to index investing—or buying all the shares in an index and holding them till the index itself changes its composition—as a way of investing in equities that involves the lowest cost, least effort and lowest risk.

Number crunching on the Indian markets show an average return of 12-15% a year, if the index is held over a 10-year period. You could buy either the Nifty or the Sensex. Index investing is cheaper because you do not have to pay for all the research and star fund manager salaries. A one percentage point difference in cost for Rs1 lakh invested for 20 years will yield a difference in return of around 19 percentage points at an assumed return of 15%.

Index investing also frees you from the burden of choice and of tracking your investments. With over 250 equity funds in the market, getting to choose the fund you finally buy is an exercise in itself. Next, you need to track its performance to see if it is still at the top of the heap. Just buying an index does away with this burden of choice and the need to track.
Once you decide to take the index-investing road, you have a choice of two buses in the mutual funds space.

First, called index funds, will behave like any other mutual fund, but will invest only in index stocks. These do not list on the stock exchanges (though this will change once all funds begin to list). Second, called exchange-traded funds (ETFs), will also invest in index scrips, but through a slightly more roundabout process—one that makes their costs lower and their efficiency in mimicking a fund smarter.

Money Matters recommends that you hop into the ETF bus to maximize your returns from the index-investing approach. Here are two reasons why you should take this ride.

Lower expenses
ETFs, much like any other mutual fund, incur costs such as fund management, administration marketing and so on. Typically, while active funds can charge up to 2.5% of the fund’s corpus every year, index funds can charge up to 1.5%, primarily because less effort goes in managing and marketing passive funds. Many index funds charge lower fees, though some such as Tata Index Fund and Birla Sun Life Index Fund still charge the full 1.5%. On the other hand, the average expense ratio charged by ETFs is 0.68%.

Though these differences look small, they can take away large bites out of your returns over the long term. Back of the envelope calculations show that if you invest Rs50,000 each in Nifty BeES (the biggest ETF on the Nifty) and an index fund for a 20-year period and the market rises by, say, 15% per annum, you will earn Rs7.50 lakh sitting in the ETF bus as against Rs6.29 lakh through an index fund.

If two products are tracking the same index, but one gives you a higher return, it doesn’t take too much to make a choice.


Lower tracking error
Just as you look at factors such as performance before you pick actively managed funds, you must look at the tracking error of passive funds (index mimicking funds). This is the difference in the performance of the fund from its benchmark index. The lower the tracking error, the better is your ETF. Tracking error happens due to fees charged by the fund, the amount of cash holdings and so on. Investors make the error of appreciating an index fund that outperforms the index. If you want outperformance, go to a managed fund. A good index mimicking product is one that will give you almost the same return as the index, or one with the lowest tracking error.
Apart from lower fees, an ETF’s innovative structure also ensures that it’s underlying portfolio is, at all times, mapped closer to its benchmark index than that of an index fund.
An ETF does not collect money from you directly. It only deals with a few market entities, known as authorized participants (AP). Assume that your ETF is benchmarked against the Nifty index. Remember, Nifty consists of 50 stocks. These APs buy (from the stock market) and surrender a basket of these 50 scrips (in proportion similar to that of Nifty) and exchange them for one ETF unit. They would then sell these ETF units in the stock market where the investor can go and buy.

Such is an ETF’s structure that even if the fund—say, in bad markets—wants to voluntarily hold more cash and less stocks, it can’t do so. This is because fresh units can only be created in exchange of a basket of securities, including a small portion of cash that is pre-defined.
Unlike an occasional index fund that is known to sometimes actively manage its portfolio in the middle of the month to earn a kicker in returns despite going against its mandate of passive management.
A lower and restricted cash level also ensures that an ETF is almost always fully invested in line with its benchmark index and mimics the index better. Better mimicking leads to lower tracking error. The average tracking error of ETFs as on November-end is 0.76, as against 1.26 of index funds. The difference tells the story.

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Tata to launch Gold ETF for Indian Investors

Tata is coming out with a new fund offer for its own gold ETF – Tata Gold Fund. The new units will be priced Rs.100, and trade in stock exchanges like other ETFs.

The Tata Gold ETF will hold physical gold or gold related instruments as the majority of its holdings. They plan to hold at least 90% of their assets in gold, and the remaining in money market instruments, bonds, securitized debt, and other debt instruments permitted by SEBI.
This is a passive fund, which means that the fund manager will not try to beat the returns of gold, but try and replicate it for the most part.

The recurring expense ratio of the fund is expected to be 2.50% of average weekly assets for the first Rs.100 crore. This is similar to what most other gold ETFs in India have to offer, with the exception of Benchmark mutual fund’s gold ETF, which charges an expense ratio of 1%, and Quantum gold fund’s gold ETF, which charges an expense ratio of 1.25%.

The minimum application amount during the Tata Gold NFO will be Rs.10,000 for retail investors. It is worthwhile to keep in mind that since this is a mutual fund NFO, and not a stock IPO, investors shouldn’t think about any sort of listing gain from this.

If you were looking for a gold ETF, then there is one more option for you to invest in. This fund is not really all that different from other gold ETFs that hold physical gold, so I wouldn’t really be all that excited about its launch.

I can only hope that all these new gold ETFs that are getting launched in the market bring down the fees that mutual funds charge investors. At 2.50%, this is quite high compared to the western gold ETFs, and one can only hope that time and competition brings this charge down.