It’s fair to say that Source, one of Europe’s leading ETF providers, has hit the ground running in 2014. Already the firm has added four new funds to its product suite of 74 ETPs, 52 of which are equity ETFs. One of those launched was a variation on a share class of an existing fund. The other three, meanwhile, were among the biggest global launches year-to-date by size of assets raised.
“One of those was the CSOP Source FTSE China A50 Ucits ETF, the first ETF in Europe to track China A shares, which launched with the equivalent of USD235m in renminbi. The second was the Source Goldman Sachs Equity Factor Index World ETF, which launched with USD225m,” confirms Michael John Lytle (pictured), chief development officer at Source. The third new fund launch was the first actively managed covered bond ETF in Europe, which was launched under the PIMCO Source label.
The Goldman Sachs ETF is the latest ‘beta plus’ product at Source. It tracks an index based on five equity market factors: low beta, momentum, size, value and quality. Beta plus has been gathering increasing traction amongst European investors contrary to the general assumption that ETFs are constrained to simply deliver market beta. Also, at the end of January it was announced that Warburg Pincus, a private equity firm that focuses on growth investing, was acquiring a majority stake in Source. Innovation is very much part of the Source DNA, and no doubt played an important factor in the acquisition deal.
“The CSOP fund is a good example of how we strive to bring innovative products to investors,” says Lytle. “Furthermore, our China A share fund was groundbreaking in that it was the first to offer that exposure in a European ETF. Our business model since we launched has always been based on a partnership approach to bring products to market that others could not. Our partnership with PIMCO, for example, has brought a number of unique fixed income products to market.”
There are eight such products now available to investors, with Lytle noting that in 2013 Source was able to raise over USD2bn in these funds managed by PIMCO. The largest net inflows – approximately USD500m – went to the short-term high yield corporate bond ETF, with USD250m going to its emerging market local bond ETF. “Two of the MINT products, which are short maturity funds that aim to enhance yield through active management also did very well. We have almost USD1.4bn in our USD-denominated MINT ETF. The EUR-denominated MINT ETF is close to EUR1bn,” confirms Lytle.
“Investors continue to look for innovative investment solutions to boost performance in this low return environment. We are humbled by our clients’ positive response to both our actively-managed and smart passive fixed income ETF range and their continued trust in PIMCO’s ability to add alpha,” says Howard Chan, PIMCO’s ETF product manager in EMEA.
Aside from innovation, Source will only launch a new product if it has total conviction that the fund will raise meaningful assets. Lytle expands on the firm’s philosophy: “Conviction for us is multi-faceted. Firstly, it has to be a great strategy that will add value to investors. This could be by giving them access to new areas of the market e.g. the MLP ETF we launched last year gives investors access to US energy infrastructure.
“Alternatively, it could be a strategy that trades in an established part of the market but gives investors better exposure: one example would be the Man GLG Europe Plus ETF,” says Lytle. This product uses a systematic strategy for Man GLG to select the best BUY recommendations from brokers to capitalise on short-term market anomalies and deliver outperformance to investors.
The second step is understanding whether or not a strategy can be packaged and work in an ETF format. Can the necessary trading desks be harnessed to make it sufficiently liquid? As Lytle points out, most ETFs that come to market are based on existing strategies; previously available as mutual funds, managed accounts or structured products.
“It is necessary to consider a range of elements to determine whether a strategy will be successful in an ETF format. You can have a fantastic idea for an ETF but if it’s too volatile, or isn’t transparent enough then it’s just not going to work. If you’re not able to deliver liquidity and transparency then you are fundamentally failing on the promise of an ETF.”