ABOUT THE SPEAKER Nik Bienkowski Co-Founder HANetf Key Topics For - - PowerPoint PPT Presentation

ABOUT THE SPEAKER Nik Bienkowski Co-Founder HANetf

Key Topics For Today

• State of the European Fund and ETF Market
• European and US ETF Market Compared
• Opportunities for ETF Issuers in Europe
• Considerations for Launching ETFs in Europe
• Distribution of ETFs in Europe
• Conclusion

State of the European Fund and ETF Market

State of the European Funds Market

• Europe Is World’s Second Largest Funds

Market – Roughly 31% of Global Assets

• Europe Is World’s Second Largest ETF

Market - Roughly 17% of Global ETF Assets

• Total Funds AUM Up 6% in Europe in 2016
• Total ETF AUM Up 13% in Europe in 2016

State of the European Funds Market

• Investment Funds Represent 52%
• f AUM, and Discretionary

Mandates Make Up The Rest

• European UCITS AUM Totals

Approximately 8.7trn, with the Balance in Alternative Investment Funds (AIFs)

• Over 30,000 UCITS Funds Exist In

Europe

State of the European Funds Market

Passive Investments, Though Successful, Still Have Room To Grow

Index Assets Represent Roughly 12% of European AUM vs. 30% in the U.S. ETFs Earned 60% of Net Index Cash Flows Over Past 10 Years

State of the European Funds Market

• Bonds Account for the Lion’s Share
• f the European Investment

Portfolio managed in Europe, Outpacing Equities.

• That Position Has Remained Steady
• “Other” Strategies Are Growing

Fast

Source: EFAMA

State of the European Funds Market

• Since 2008, the Share of Cash and

Money Market Instruments Has Declined Sharply From 16% to 7%.

• Other Assets – Including Real

Estate, Hedge Funds, Structured Products and Private Equity – Have Soared

Source: EFAMA

State of the European ETF Market

As of June 2017:

• 2,286 ETPs
• 5,896 Listings
• 60 Providers
• 27 Exchanges
• 65% of AUM is in Equities

Top ETF Issuers By Market Share:

• BlackRock: 46.4% (€253b)
• db X-trackers: 9.8% (€53b)
• Lyxor: 9.3% (€51b)
• UBS ETFs: 5.5% (€30b)
• Amundi: 4.6% (€25b)
• Vanguard: 4.4% (€24b)

Source: ETFGI

New Entrants To European ETF Marketplace

With record inflows has come record new launches and new developments, including: New Issuers:

• WisdomTree, China Post, BMO,

Fidelity Pending Issuers:

• JP Morgan, Franklin Templeton,

Goldman Sachs, Multiple Chinese Asset Managers New Product Themes:

• ESG, Factors, Thematic

Source: Morningstar

European Vs. US Market

Features Europe US Product

• 2286 ETPs - $686bn AUM
• Share class currency hedging allowed
• UCITS regulations don’t allow single assets (e.g. gold) or more than 2x leverage
• Synthetic replication possible
• 2041 ETPs - $2,973bn AUM
• Share class currency hedging not allowed
• 3x leverage and gold are possible in a fund-like structure
• Synthetic replication only possible as a CPO

Issuers

• Primarily banks & asset managers
• Start-up issuers uncommon (exceptions include ETF Securities, Boost, Think)
• Single product companies not possible
• Dominated by asset managers
• Start up / entrepreneurs more common (PowerShares, Global X, Direxion, etc…)
• One-off entrepreneurs possible: HACK

Investors

• 80/20 split institutional/retail
• 50/50 split institutional/retail

Regulators

• EU trying to be consistent but not all countries are in the EU
• Local differences still exist, e.g.: active ETFs (portfolio disclosure), bitcoin (how to treat it),

commissions, iNAV, trade reporting

• Multiple regulators but rarely are regulations contradicting

Distribution

• ETPs must be registered in each country for pubic sale
• Retail investors prefer to buy a locally listed product in local language & currency
• Marketing is country specific, local languages vary
• Tax rules differ by country and investor type
• Single market
• Common tax rules
• Common language
• Single marketing strategy

Trading & Settlement

• Market makers can be paid by the issuer to support their products
• Liquidity is spread across multiple exchanges (27) in different countries
• Each ETF is listed on average on 3 different exchanges
• Multiple trading lines in multiple currencies + multiple share classes
• Settlement occurs in local country depots, with different buy-in rules and fines. Market

makers need to move inventory between markets

• Approx. 70% of ETF trading is OTC with 30% being on-exchange
• Market makers cannot be paid
• Liquidity focused on three Exchanges
• One settlement system through DTCC and common rules
• One main trading currency (USD)
• Approx. 70% of ETF trading done on exchange
• All trading reported to consolidated tape

Platform

• High barriers to entry
• Regulation and compliance infrastructure required across multiple jurisdictions
• Multiple domicile options – Dublin, Lux, plus other EU countries
• Lower barriers to entry
• Common regulation and compliance requirements
• Common domicile

Retail vs. Institutional Growth In Europe

• The growth of the European ETF market

remains driven by demand from institutional investors.

• Fund distribution channels, particularly in

Continental Europe, remain dominated by commercial banks, which have traditionally favoured the placement of high-margin products.

• Many of the large fund platforms serving

financial advisors—particularly in the UK—have been reluctant to undertake the necessary investment in technology that is required to facilitate the distribution of funds that trade on an intraday basis like ETFs.

• Short of the pending regulatory changes, the

status quo is being challenged by the growing popularity of robo-advisors.

Source: Analysis by The Vanguard Group, Inc. using data as at June 30, 2012, from The Vanguard Group, Inc., Bain & Co. and Investor Economics. UK / Continental Europe Institutional classification includes Wealth Managers.

Opportunities For ETF Issuers In Europe

Opportunities For ETF Issuers In Europe

2nd largest ETF Market:

• Tailwinds behind global ETF market, rising tide
• Europe is the 2nd largest ETF market and growing at

~20% p.a.

• Access untapped demand
• To target a larger share of growing global flows, you

need to be in the largest markets

Opportunities For ETF Issuers In Europe

Market Structure Evolving:

• Commissions still allowed in many countries … for now
• Not all platforms accept ETFs … but that’s changing fast.
• Retail investors account for approx. 20% of ETF AUM. Set to

grow fueled by RDR, MIFID II and the growth of robos

• European banks developing their D2C platforms and making

ETFs available for the first time

• Small % of local AMs offer ETFs, but this is changing fast. Time

is ripe now to get in before too late.

• Structured products are becoming more regulated with hidden

fees being attacked

Opportunities For ETF Issuers In Europe

UCITS Is A World-Renowned Wrapper:

• Add UCITS solution to ”star” local products, making Asset

Managers offering global – UCITS can be preferred to 40 Act funds by many LatAm, Asian clients

• Many US wealth managers need UCITS for “offshore” client

portfolios

• Access local investors with tax and legal friendly wrapper – US

ETFs can be disadvantageous

• Offers ability to add extra share classes to same fund, which is

not possible in the US

Regulation Favoring ETFs

• Positive regulatory changes along with continued favour for low cost passive investment

solutions is driving ETF AUM growth

• Regulations are focusing on increased liquidity, fees, commissions, benchmarks, and

transparency

• In the retail market, regulation such as MiFID II and the Retail Distribution Review (RDR) is

helping to bring more individual investors into the ETF market. MiFID II is bringing liquidity to exchanges: under the Directive, whether the trade is onscreen or done via OTC, it will be printed, so the market will see the whole spectrum of liquidity.

• The UK’s FCA published the Asset Management Market Study Interim Report in November

2016 and the key theme coming from the report is that actively managed funds are underperforming their benchmarks after costs are deducted.

Regulation Favoring ETFs

• MIFID II is an important and wide-ranging pan-

European piece of legislation that will support ETF growth

• Focus on increased transparency is expected to strengthen

the case for ETFs

• ETFs will be captured by post trade reporting requirements
• 50% to 80% of ETF trading volume is traded OTC, most of

which is currently unreported

• A European consolidated tape would increase

transparency around ETF liquidity and help drive AUM

• Looks to address concerns around commission based

advisory models

Considerations For Launching ETFs In Europe

Considerations When Coming To Europe (1)

Home Jurisdiction Where to incorporate the fund company. Luxembourg and Ireland are most common. Other options exist. Ireland has been more common for ETFs while Luxembourg has been more common for mutual funds Language and familiarity of service providers can be a deciding factor US managers tend to end up in Ireland and Chinese managers have tended to Luxembourg Listing Venue Where to list the ETF. Multiple listings give local investors access in their home country, as well as local language, local brokers, local PR, and familiarity Share classes A UCITS can be launched with multiple share classes with each additional share class costing less than 40% of a new fund. This means investor demands can be maximised under the same ETF, allowing scale to be achieved faster and cheaper. Most common are non-distributing versus distributing, or currency-hedged Tax Tax rules in different countries for different investor types can influence product structure Tax can occur at the investment level, fund level and investor level Taxes include: WHT, FTT, income and CGT Dublin has a favorable US tax treaty rate over Luxembourg. 15% vs. 30% Registration or Private Placement Registration allows access to retail investors. In some countries registration is even required to access non-retail investors Private placement is cheaper but more restrictive. Need to keep detailed notes Distribution Multi-country registration and agents required. Local listings preferred. Multi-lingual sales teams required. Product Structure Does the strategy meet the UCITS rules. For example, 3x leverage and single commodities are not UCITS compliant. ETNs/ETCs can also be issued under a different structure which allow for underlyings not possible under UCITS such as single commodities such as physical gold, oil, and 3x leverage Physical & Synthetic Both are possible although trend is for physical replication where possible, especially for plain vanilla benchmarks Multi counterparty swaps are the norm for synthetic ETFs, with transparent and diversified collateral Asset Classes All asset classes are possible under UCITS, including commodity indices

Considerations When Coming To Europe (2)

Short & Leverage A maximum leverage factor of +2x and -2x is currently available under UCITS Timeline Is time to market important? This will drive your entry decision. Build, partner or outsource Scale Scale is important to benefit from economies and build a credible brand with investors Being too small, or having few products of interest, makes it much more difficult to gain the attention of gatekeepers, decision makes, and product approval teams Service providers Service Providers are often the same between US and EU but can vary. Service offerings and costs may vary between Europe and US, thus impacting choice of service provider AP and MM resources are finite and they are selective in whom they work with. APs differ between Europe and US and must be signed up with local AP agreements Portfolio Management Where a foreign manager plans to use its own existing portfolio manager, it is necessary to check if that foreign PM meets the regulatory requirements for UCITS Hiring Finite number of experienced ETF specialists in the market. Recruitment from outside the ETF market will be important if the ETF market is to grow Corporate decisions Organisational structure requires tax and legal input Board structure needs to be considered as board meetings require travel to Europe every 3 months. Professional local directors can be hired and can also be outsourced to service providers Reporting currency: most costs will be in Euro and GBP. Currency fluctuations will affect P&L back at home

Timeline of An ETF Launch In Europe

Corporate structuring 3-6 months Service provider DD and negotiation 3-6 months Office and hiring 6-12 months Fund documentation and set-up 3-9 months Authorisation and licensing 2-6 months Listing and trading 3-6 months (assuming multiple markets) Passporting / cross border registration 3-6 months (assuming 5-6 main markets), but this will be on-going Sign up of APs 2-12+ months Investor due diligence and fund track record 3-36 months TOTAL time to launch for new Issuer 12-30 months (depending on product complexity, urgency, service providers, recruitment)

Distribution Questions and Challenges In Europe

Distribution Questions

KEY QUESTIONS

• Which countries to

target and how

• Registration (Passport)
• r private placement
• Exchange listings
• Marketing and PR
• Sales
• APs and MMs
• Local peculiarities: tax

reporting, eligible assets, and more.

Source: PWC 2016

Distribution Questions – Which Countries?

• EU has the UCITS directive intended to make cross border marketing of funds

more simple and removing local regulator from complete disapproval

• Switzerland is not part of EU and has its own Swiss authorisation process which

is a well-worn path (as do other non-EU countries, including Asia and Middle East)

• The issuer will need to determine its overall strategy and goals for Europe, while

specific products may also be targeted to specific clientele (eg. leverage ETFs have done well in Italy)

Registration or Private Placement ?

• Passporting ETFs across EU member states generally allows retail / public

marketing

• Passporting / registration is necessary if cross-border listing also desired
• Rules can slightly vary across EU countries including what disclosure

documents are required, language and access to information

• Need to consider what happens to UK post-Brexit
• Private placement is possible, however rules constantly change:
• Some countries OK to access via private placement, e.g. Switzerland
• Other countries not, e.g. France
• Rules vary: qualified investor definition; definition of solicit, inbound vs.
• utbound queries; number of investors to contact; etc.
• It is important to keep detailed records and have a proper process in place

Cross-Border Listing?

Source: Dillon Eustace

Marketing, PR and Sales

• Not A Build-It-And-They-Will-Come

Market

• Significant Opportunity But You Must

Know The Market

• Each Market Is Different And

Requires Specialized Efforts

Source: Deloitte.com Performance magazine issue 22

Conclusion

• The European ETF market is growing and there are opportunities for new entrants
• UCITS structures are attractive to European, Asian and LatAm clients
• Barriers to entry in Europe are higher than the US
• The European market is more complex and fragmented than the US market
• European expertise and experienced talent is important
• Can’t assume that what you did back at home is optimal for a foreign market
• A well-coordinated plan is required as well as service providers who understand and

want to work with you

Appendix – Sources of Information

• Sources of Information:
• Accounting & consultancy firms: E&Y, PWC, KPMG, Deloitte
• Law firms: Dillon Eustace, William Fry, Matheson, Maples, Goodbody,
• Asset management bodies: EFAMA
• Regulatory bodies: CESR, CBI, FCA, BaFIN, FINMA, etc
• Stock exchanges
• ETF issuers
• ETFGI, ETF.com, DBX ETF report, Blackrock ETF report, various Market Maker ETF

reports

Appendix – Share Class Hedging

In Europe, it is possible to issue multiple share classes of the same fund:

• Each share class is considered to be the same fund, and the assets are considered to be assets of the

fund

• If three share classes exist with $2m, $1m and $97m of AUM, the fund assets are $100m, making all

share classes equally desirable as the fund has >$100m AUM

• The costs of launching additional share classes are usually no more than 40% of the cost of a new fund,

thus cost savings are made versus launching a complete new fund

• This feature of UCITS funds is not as readily possible in the US

Features of ETF share classes include:

• Distributing versus non-distributing. The ETF strategy and target investor will determine the optimal

share class(es)

• Local tax differences will also determine whether accumulating or distributing is optimal
• Currency-hedging is allowed. For example, a US equity fund could be issued with unhedged, EUR-hedged,

GBP-hedged and CHF-hedged classes of the same fund

• Different share classes can have a different TER