ETF Investment Decreases While Fixed-Income Continues to Rise

The European Institutional Asset Management Survey indicates that institutional investment in ETFs decreased by 6% over the past year, but the motivation for the change is not clear-cut.

(July 8, 2011) – The most recent European Institutional Asset Management Survey (EIAMS) shows that institutional investment in exchange-traded funds (ETFs) dropped significantly between 2009 and 2010, IFAOnline reported. The percentage of funds investing in ETFs dropped from 34% in 2009 to 28% in 2010. The study reports that in the last year overall fund allocations to equities fell by 2% while fixed-income investment rose to 58%, a 7% increase from last year.

The decrease in ETF investment is not a clear indicator of investor sentiment. On one hand, it would suggest that investors have a somewhat negative outlook and are moving away from equity-heavy ETFs and towards less risky fixed-income investments. More optimistically, investors may feel that they no longer need the liquidity afforded by ETFs; additionally, many investors use ETFs to hedge against risk in other areas. If either of these sentiments – outlined in an article from aiCIO’s summer issue – are true, then the turn away from ETFs provides reason for optimism for institutional investors in the post-crisis market.

Another possible driving force behind the decrease in European institutional ETF investment is the recent emergence of “synthetic” ETFs. According to BBC,in the aftermath of the crisis many European banks started offering “synthetic” ETFs that are structured around complicated derivatives. BBC reports that there is little doubt that as investors started to unearth the contents of these new ETFs, their eagerness to invest in them waned.

Regardless of the reason for the decrease in ETF investment, one fact seems clear: the big winner here is fixed-income investment. Along with the 7% increase in investment in the past year, the EIAMS also reveals that 22% of institutional investors plan on increasing their fixed-income investment while only 16% plan on decreasing such exposure. The growing interest in fixed-income investments suggests that investors are increasingly pessimistic about the speed and strength of economic recovery.

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The survey also reveals that 21% of funds plan on reducing cash holdings while only 5% plan on increasing them. Investors seem more optimistic about commodities, where 15% plan on increasing investment and only 3% plan on decreasing, and other alternatives, which 34% of funds plan on increasing and just 9% plan on decreasing.

By Justin Mundt

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(July 8, 2011) – In the second major mortgage-backed securities related settlement in as many weeks, Wells Fargo & Co. has agreed to pay $125 million to a group of pension funds to settle a lawsuit over the sale of mortgage pass-through certificates.

Holders of mortgage pass-through certificates are entitled to income payments from pools of mortgage loans or mortgage-backed securities.

A group of investors including pensions fund in Detroit and New Orleans brought a proposed class-action lawsuit in 2009, accusing Wells Fargo and several underwriters of misleading them about the risks of mortgage-backed securities they purchased from 2005 through 2007 worth over $67.5 billion. A federal judge in San Jose, California in 2010 threw out claims against underwriters including Goldman Sachs, JPMorgan Chase, and UBS and narrowed the claims against Wells Fargo.

The proposed settlement agreement “is intended to avoid the distraction and expense of litigation,” Wells Fargo spokesman Ancel Martinez told Reuters. She stressed that the settlement did not constitute an admission of liability or violation of any law.

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The proposed settlement, filed on July 6, must still be approved by the court.

On June 29 Bank of America agreed to pay $14 billion to a group of investors who had bought unsound mortgage-backed securities through the bank’s Countrywide Financial subsidiary. If the settlement passes several legal hurdles, including a challenge from a group of mortgage-bond investors who attacked the deal’s fairness, the settlement will be the banking industry’s largest single settlement stemming for the 2008 housing market collapse. Observers at the time noted that Bank of America’s settlement would increase pressure on other banks fending off legal challenges connected to the sale of mortgage-backed securities right before the 2008 market collapse.

<p>To contact the <em>aiCIO</em> editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a></p>