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LGIM’s new ETF range seeks to avoid the crowds in core building block portfolios


News came earlier this month that Legal & General Investment Management (LGIM) had launched its first core ETF range, post the purchase of ETF provider ETF Securities close to a year ago.

Howie Li (pictured), head of ETFs, LGIM, explains that the range of core low-cost equity ETFs incorporates an index design, from Solactive, that should help shield investors from unpredictable behaviour of crowded trading that is experienced by equity indices commonly tracked by most core ETFs.

Li says: “When we were at ETF Securities, we had to be in precise and specialised areas and post-acquisition one of our ambitions was to become a much more full-service provider beyond our commodities and thematic exposures.”

The process of growing into a more full-service business within the huge firm of LGIM, with close to GBP1 trillion under management, meant that the ETF team felt they had to offer traditional building block products for asset allocators.

Li comments that while there are a number of basic building block market cap index ETFs on the market, and that is where much of the growth in the ETF industry has come from, there have been various criticisms as to how much thought has gone into creating them.

“We wanted to offer core equities exposure but recognised the need to redefine how people think about core products going forward,” Li says. “We have been on a client-led journey and we have asked clients from wealth managers to financial institutions to independent financial advisers, what they want.”

Li comments that MiFID has driven demand for cheaper products and that clients expect low cost core market cap benchmark products but the ETF team also wanted to recognise the risks that were coming into play in these products.

“The investment landscape has changed and we need to recognise that, if it has changed and we expect more index money coming in, we should be looking forward and constructing core portfolios differently,” Li says. “With many more investors buying index tracking products it creates unintended risk for short term price volatility and what could happen during major index rebalances.”

With more money tracking indices in general, opportunists could wait for the times that there was more buying and selling activity of underlying stocks as the indices were being rebalanced, Li says.

“It’s a completely rules based activity and opportunists can see market activity coming which presents risks for investors, as there would be artificial inflation of prices for a short period of time.”

The new LGIM ETF range focuses on addressing such risks, starting from the index design point of view, with a different rebalanced period to avoid the short-term price volatility and buying and selling when the market is at a more normal phase.

“We wanted to avoid the crowds and growing concern around this so you could buy and sell when you don’t have a short term flood of activity in the market caused by major rebalances.”

The other filter to the LGIM’s ETF range incorporates another huge change in the investment landscape – stocks to be avoided because of governance issues or climate change concerns.

“A business model based solely on the generation of carbon will be under pressure,” Li says, drily.

“It’s all about long term core investing and what stocks you want to avoid going forward. Raising the minimum bar for investing is increasingly important as investor feedback from our fund selection teams tells us we cannot hold certain types of companies. If you have a consistency of that it demonstrates a trend towards how people are investing and building portfolios and we are here to provide the solutions to clients.”

Howie notes that the recent sector classification GICs changes affected sector classifications that had stood for 19 years and the rising importance and changes in the technology sector.

“We are trying to think about the index design actively and mitigating risks of companies under pressure and packaging it,” he says.

The existing former ETF Securities’ products focused on broad commodities and thematics, such as the ROBO Global ETF, continue to be in focus.

“We have been servicing the wealth market, especially in thematics, for four and a half years and have lots of overlapping clients with LGIM,” Li says.

“What is exciting for us is that because thematic investment is new to LGIM the distribution team has embraced it and we have launched three new ETFs and seen net inflows into our thematic range.”

ROBO Global is over USD1 billion in assets now and the Cybersecurity launch has raised the most this year and now stands at USD700 million.

LGIM has a significant index business into which the new ETF division has fitted.

“Our ETF business really benefits from their history and track record in the index fund space,” Li says. “We are part of the index team and we can leverage some of the knowledge and expertise around core index investing.”

Investors can pick between investing in a certain benchmark through an index fund or through ETFs that can capture new assets, he says.

He observes that investors are moving from a fund of fund model to a fund of ETFs model. “What we have seen is that mutual funds and ETFs are becoming interchangeable and that will happen as there are a lot more ETFs to choose from.

“Some of these models are driven by costs and for me there are places for active funds but it is uniformly clear that investors want lower cost models. We have to look for the lower cost proposition and package something that works for investors.”

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