Although a relatively late arrival at the ETF party, launching its first ETFs in 2016, USD714 billion investment firm Franklin Templeton has made up for lost time, with Caroline Baron, Head of ETF Sales EMEA, reporting that the firm’s global ETF assets now stand at USD3 billion.
Baron (pictured) arrived at Franklin Templeton in January 2018, having previously worked at BlackRock iShares where she covered French Institutional Clients and UK Wealth before moving to Invesco PowerShares where she was Head of UK Distribution focusing on Smart Beta strategies.
Franklin Templeton’s move into ETFs was inevitable, Baron says. “If you look at what is happening in investment management, the big revolution is that it is no longer just active or passive, but a mix of the two, and all conversations with clients are around those two angles – people want to know what solutions are available in ETFs.”
The decision to move into ETFs was a logical one, but Baron explains that the firm wanted to distinguish itself in the ETF space.
“The ETF market is very crowded so we were looking to see how we could make a difference in what we can bring – that would be interesting for clients. Our proposition evolved around the best way to bring our 70 years of active management experience into the ETF wrapper.”
There have been 10 years of ‘easy money’ Baron says. “There have been strong returns in the market with big momentum and now times are changing so clients are looking for tools that can help them weather the challenging market conditions we are in. And this is where Franklin Templeton can contribute to the discussion given the set of solutions we have developed for the market.”
Franklin Templeton’s ETF offering globally is split into three different buckets: traditional passive products in the US, smart beta – which has most of the assets – and active ETFs. Within Europe, the offering is currently focused on the smart beta and active ETF buckets.
“It means we are able to offer a diversified list of solutions depending on where the client is coming from,” Baron says.
Clients have mostly come from what Franklin Templeton calls institutions, firms from the private banks sector, discretionary fund managers, asset managers and family offices while there have been two other areas that have seen a little growth: pure retail and pure institutional firms, such as insurance companies, pension funds and corporates.
“The US is a very different market in terms of ETF users with 50 per cent retail clients because of the tax advantages there. That said, in Europe, we see that ETFs are becoming more appealing, in particular post MiFID II. Regulation is fostering more appetite for ETFs and more solutions around portfolios of ETFs which will help retail clients.”
Currently, within Europe, the firm focuses on five markets: the UK, Italy, Germany, Switzerland and Austria and has plans to extend the European coverage down the line.
“We wanted to focus on where we know the market well and have a strong presence,” Baron says.
There are nine physically replicated UCITS ETFs in the range, divided between smart beta and active. Within the smart beta bucket are two different sets of products, five multi factor ETFs leveraging on the firm’s quantitative experience and partnering with well-known index providers, plus two dividend products to produce income.
The active ETFs recognise the fact that traditional ETFs are market cap weighted or debt weighted. “We had a few investors saying that does not make sense. We needed something that does not use the size of a country’s or company’s debt as the primary constituent to build an ETF so our two active ETFs are run by our active teams under Marc Kremer, head of fixed income and David Zahn head of European fixed income from the Franklin Templeton Fixed Income group.”
Baron describes these two as pure active funds whose delivery mechanism is an ETF. “You have full transparency and the ability trade during the day, through an ETF with its flexibility and transparency.”
The multi factor part of the portfolio has attracted a lot of interest, Baron says. “If you look at what happened in 2018, markets were very bumpy with strong corrections through February, October and December so having tools that can help mitigate the downside is of real value to investors.
“In the last 10 years, since the financial crisis, you have pretty much had a straight line and with a portfolio using traditional cap-weighted ETFs you would have been successful, but following 2018, clients are saying it’s challenging and there is no mechanism to protect you around the downside.”
The decision was made to create something that Baron describes as ‘a bit more resilient’ using factor ETFs.
“But picking the right factor is quite challenging because you don’t know which one will perform when. So, the next stage is to mix the factors so we have a better experience that can give the protect when things go wrong and work when the market goes right.
“Existing multi-factor ETFs available on the market tend to have no convictions around the factors and tend to equal-weight those factors. We believe that not all factors are equal and this is why our range reflects those convictions. Our approach is grounded in academic research on factor behaviour, insights from Franklin Templeton’s bottom-up fundamental investing expertise and our extensive quantitative capabilities.
“As fundamental active managers, Franklin Templeton looks to identify attractively priced companies with a strong balance sheet so we focused on those two factors: Quality and Value. But we also understand that Momentum and Low Volatility also play an important role so they are included as well. The weightings we allocated to Quality, Value, Momentum and Low Volatility are fixed as it’s difficult to time factors.”
Of the seven products in the smart beta bucket, five are multi factor using quality and value, while the other two are income producing ETFs.
“We are looking to launch additional products down the line,” Baron says. “We are happy with the nine we have for the time being, but we are looking to develop that range further down the line.”
