iShares head talks inflows

Mark Wiedman discusses turnaround at world's largest ETF provider

Feb 3, 2013 @ 12:01 am

By Jason Kephart

Mark Wiedman had a lot to be happy about last year.

During his first full year as global head of BlackRock Inc.'s iShares business, the world's largest exchange-traded-fund provider led the industry in inflows for the first time in three years.

iShares took in more than $60 billion in net inflows for the full calendar year, $8 billion more than rival Vanguard, which led the industry the previous two years.

“I'd like to define success as serving clients as well as possible, as opposed to competing versus others, but we like to win,” Mr. Wiedman said.

The turnaround didn't happen by accident.

Mr. Wiedman oversaw the launch of the iShares Core funds, a series of low-cost, building-block ETFs to keep up with the ever-falling expense ratios at The Charles Schwab Corp. and The Vanguard Group Inc.

The new products were backed by an aggressive ad campaign that included regular spots during “Monday Night Football.”

“We committed a lot of money and energy behind a branding campaign to let advisers and their clients know who we are,” Mr. Wiedman said. “It's part of our job to make the adviser's job easier by communicating to the end-investor what we stand for.”

The biggest change, though, was one initiated by Vanguard, said Mike Rawson, an ETF analyst at Morningstar Inc.

As iShares was ramping up its brand campaign in October, Vanguard announced that it would be switching the underlying indexes for 22 of its ETFs to lesser known, lower cost indexes from the Center for Research In Securities Prices. Included in the switchover was the $61 billion Vanguard MSCI Emerging Markets ETF (VWO).

“New money that would have gone to Vanguard went to iShares instead,” Mr. Rawson said.

Mr. Wiedman recently sat down to talk about iShares' changes, the future of ETFs and how he plans to keep iShares in first place.

InvestmentNews: The Core products were targeted at the buy-and-hold investor. What took iShares so long to start targeting that segment of the market?

Mr. Wiedman: The magic of the ETF is that it brings buyers and sellers together of every type: institutional, retail, Latin America pension plans with a financial adviser in Omaha [Neb.]. That allowed us — perhaps for too long — to overlook that there are very different kinds of buyers, and they need different kinds of products to meet the needs of different segments. We have to think about those client segments and not allow the ETF's universality to confuse us into thinking there's only one kind of buyer.

InvestmentNews: The branding campaign and the product launches both happened in October, but BlackRock wasn't the only ETF company making changes that month. Vanguard also said that it would be switching a number of its underlying indexes. Did that play a role, as well?

Mr. Wiedman: There were some external index changes that were helpful, but that's really about the institutional market. Retail success has been more about offering competitively priced products with iShares quality.

InvestmentNews: Has the ETF industry reached the point where provider brands matter more than index brands?

Mr. Wiedman: There are some indices that have tremendous value to clients — brands that represent a worldview, a way of slicing up the entire world and articulating investment choices in that world. That kind of brand has a lot of value to a lot of different kinds of advisers. There are other indices that have much less value to clients than perhaps they would have 10 years ago.

InvestmentNews: BlackRock filed with the Securities and Exchange Commission to launch its own indexes. If you could make your own indexes at a cheaper cost, why wouldn't you?

Mr. Wiedman: It's partly about cost, but it's actually more importantly about bringing BlackRock intellectual capital to bear. Traditionally, what we've done, sometimes, is create really interesting investment strategies and then hand them over to an index provider to charge us for the manufacturing. What we want more of an option to do in the future is to produce those kinds of indices under a BlackRock brand. That is the future. It hasn't been approved by the SEC.

InvestmentNews: What is iShares doing to help financial advisers?

Mr. Wiedman: Last year, we took the first steps of creating the largest field force in the U.S. The minor logic behind it is, from my point of view, let's get more people talking about iShares. The major logic, from the perspective of the firm, is to answer an unmet need in the marketplace. There is no asset manager truly working with financial advisers to help construct portfolios — asset allocation, risk analytics. Our vision is, we want to be the financial adviser's genuine portfolio construction counselor. We needed to bring the sales forces closer together, because otherwise, we get tangled in internal active-versus-passive debates. That debate is an internal debate; clients have moved on. The answer is both.

InvestmentNews: Are there some places where passive works better than active or vice versa?

Mr. Wiedman: There's been a lot of thinking about this globally, and there are many schools of thought. My personal view is, it boils down to your conviction in an active manager's ability to generate alpha. It's not structural. There's no evidence you'll find more of it in emerging-markets small-cap than U.S. large-cap.

InvestmentNews: What will drive the growth of ETFs?

Mr. Wiedman: Fixed-income ETFs are the giant frontier ahead of us. The logic around a fixed-income ETF is actually more powerful than an equity ETF. In a world in which liquidity is drying up in the fixed-income markets, where investment banks are shrinking their inventories, buyers and sellers need a place to meet. The fixed-income ETF is that place. Our aspiration is to go from $300 billion in fixed-income ETFs now to $2 trillion over the next 10 years. We hope other people will help us grow that business, but if they don't, we'll do it ourselves.

Right now, the only real users of fixed-income ETFs are asset allocators and wealth managers, not bond people. The real money and the real opportunity is with the $40 trillion, $50 trillion, $60 trillion globally with fixed-income professionals, asset managers, central banks, sovereign-wealth funds and commercial banks. These are the people who should be using ETFs. The benefit for financial advisers will be all that liquidity that's going to pour into the market.

InvestmentNews: What about the future for equity ETFs?

Mr. Wiedman: That's harder to say. It's more mature, but I would put it in perspective. I would estimate there's about $600 billion of retail-ETF money. There's $11.5 trillion sitting in active mutual funds. ETFs don't just compete with mutual funds but single stocks, too. Early days is probably a little too strong [a phrase], but [we're] well, well away from maturing in this industry. Twitter: @jasonkephart


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