Exchange-Traded Trillions | Chief Investment Officer

(January 25, 2013) — Assets held in exchange-traded products (ETP) reached a record $2 trillion this month, as product ranges have grown to entice investors, BlackRock has reported.

The ETP market had record inflows last year, the giant asset manager’s research team said today, attracting $262.7 billion in new money. Assets at the end of the year had grown by 27%.

Good growth continued through the start of the New Year and on January 18 the ETP market was valued at $2 trillion, BlackRock said. This was double the $1 trillion figure it reached in 2009, some 19 years after the first product was launched.

Dodd Kittsley, global head of ETP research for BlackRock, said: “The dynamics of the ETP market are changing and developing. As ETPs become better known and understood in different regions and amongst different types of investors, uptake is fast increasing. Added to this, ETP providers are expanding and deepening their coverage of different assets classes and regions, allowing investors to put ETPs to use in new ways and employ them to access areas where they couldn’t before, such as emerging market debt.”

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Fixed income ETPs and emerging market equity ETPs saw record inflows last year, notching up $70 billion and $54.6 billion respectively.

Following the quasi-collapse of the banking system in 2008, many investors rushed towards passively invested funds, such as ETPs, in an attempt to avoid paying actively managed fund fees for relatively poor performance.

There was an explosion of new products and providers, alongside long-established asset managers launching ETP units.

A good indicator of the potential growth of the market came when BlackRock acquired competitor Barclays Global Investors, which owned the large ETP provider iShares, in December 2009.

“ETPs were once thought of as primarily equity-based funds for institutional investors, and today’s milestone proves this is certainly no longer the case,” said Kittsley.

Frontier investors--located in cities outside of the major international financial centers--are re-taking responsibility of the end-to-end management of their assets, according to two university professors.

(January 24, 2013) — A growing community of long time-horizon institutional investors known as ‘frontier investors’ that includes sovereign funds, public pension funds, and endowments, located in cities outside of the major international financial centers (IFCs) are rethinking how they allocate capital, according to a research paper.

Their goal: to ‘insource’ asset management, according to Adam Dixon of the University of Bristol and Ashby Monk from Stanford University.

The authors assert that these large beneficiary institutions located outside IFCs represent a window of opportunity to remake the map of the investment management industry. However, “replicating the external market for financial services within the community of frontier investors brings up significant issues related to scale and expertise,” the authors warned.

“The global financial services industry has been subject to ongoing criticism in the wake of the 2008-09 financial crisis,” the paper asserts. “From social movements like Occupy Wall Street to the economic elites at the World Economic Forum, there is widespread concern that the leading edge of the financial services industry has lost sight of its overarching objective function: To facilitate the efficient allocation of economic resources over space and time under conditions of risk and uncertainty.”

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According to the paper–titled “Frontier Finance”–this growing community of long time-horizon institutional investors is pushing back against the misaligned incentives, high fees, poor returns, and short-termism embedded in most third-party asset management agreements– all of which the financial crisis fueled.

The objective of frontier investors aiming to insource asset management is to maximize the welfare of beneficiaries, the authors claim.

Click here to read the full paper.