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New ETF provider Tabula tackles fixed income ETFs

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MJ Lytle, chief executive of the new European ETF provider Tabula Investment Management, is a veteran of the European ETF market.

He was one of the founders of Source back in 2008, having had an 18-year career with Morgan Stanley, predominantly in the fixed income space.

Lytle says: “We recognised that there was an intersection between investment banking and asset management in the ETF space. ETFs are funds but distributed through brokerage accounts and trading transactions which means that as an asset manager you pitch to clients but you don’t execute.”

He had observed that Deutsche and SocGen with its Lyxor brand had recognised this and harnessed it by creating their single bank solutions, while iShares was looking at ETFs as a traditional fund wrapper.

“We wanted to tackle this opportunity but not have a solution provided by one bank as that was too narrow. At the time, counterparty risk was a bigger and bigger issue.”

Source wanted to be arm’s length from any bank that the team worked with operating as a stand-alone fiduciary third party benefiting from being a complete asset manager with its own capital structure.

At the time, the ETF market was growing but, Lytle observes, was less developed than now with a product range that was dominated by plain vanilla ETFs.

“The initial opportunity was to do some pretty straightforward funds with index exposure. This got us into the mix with clients, competing head to head on a slightly differentiated product offering.

“Within a year of launching, people began to pitch us ideas for active and smart beta ETFs which we thought were quite complementary to plain vanilla index products. In addition to normal equity and commodity plain vanilla exposure we added in algorithm-based smart beta ETFs and active fixed income ETFs with Pimco. At one point we represented over 90 per cent of the active ETF assets in Europe, mainly because other products in the space hadn’t been well distributed.”

Source was sold, initially to Warburg Pincus who sold it to Invesco in 2017 and while on gardening leave, Lytle started looking at fintech ventures and other strategic opportunities in the asset management world.

And then mid-May saw the launch of Tabula, Lytle’s new ETF provider focusing on fixed income ETFs.

“It’s definitely a crowded market, particularly in the equity space which is why I am focused on fixed income,” Lytle says. “I believe that investors are underserved in ETFs in the fixed income space.”

Equity ETFs dominate, with 30 per cent of equity assets now managed passively in some form or another but less than 5 per cent in fixed income.

“Part of the reason is the lack of a proper definition of what is beta,” Lytle says. He notes that there are assets in the space but they are concentrated around a small number of funds. Of the 400 fixed income ETFs in Europe, the top 20 represent around 45 per cent of the assets.

Price compression on equity ETFs has levelled up the difference in fees between fixed income and equity ETFs, making fixed income ETFs increasingly competitively priced.
Tabula awaits approvals from the Irish central bank for its new funds and can only disclose that its initial focus will be on credit exposure.
 
“It’s a good time in the cycle as people want credit exposure. They want yield but are concerned about interest rate exposure,” Lytle says. “Credit is only the beginning of what we will focus on and we have an interesting range coming. Fixed income is a series of different quite disparate asset classes from government bonds to municipal bonds, money markets or emerging market bonds. Within equities you have some different exposures by country and sector but the slice and the exposure are always the same.”

For its first outing, Tabula will work with IHS Markit. Distribution will be through the institutional space, insurance companies, pensions, asset managers.

“It’s a great opportunity to launch a business now,” Lytle says. “The ETF space is seemingly quite crowded but the number of providers focused on fixed income is much smaller and clients are receptive to someone who offers differentiated products and engages on the education side.”

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