ETF strategists need better communication with advisers to sustain growth: analysts

Fast-growing ETF money managers told marketing can help navigate shifting tides in asset flows

May 7, 2014 @ 10:40 am

By Trevor Hunnicutt

Advisers: Expect more calls from portfolio managers who may or may not call themselves ETF strategists.

Active money managers who build portfolios primarily with exchange-traded funds are here to stay, but they will need to invest more in marketing to advisers in order to survive famously fickle retail investors.

That was the conclusion of several industry analysts brought together in New York this week by BlackRock Inc., the world's largest provider of ETFs, at its annual conference for a group of managed account providers it considers among its most important clients.

Speaking to some of the fastest-growing money managers in the investment business, Matt Hougan, president of research firm ETF.com, said sales and marketing efforts with advisers are a make-or-break investment.

Attracting assets is not going to be a matter of portfolio management but “more about who can articulate their strategy, deliver consistent returns — probably with reduced risk — and keep their clients invested during periods of panic,” Mr. Hougan said. “What's going to matter is if you can convey your message to advisers in a way they can convey to clients that will keep them invested during periods of underperformance.”

The iShares Connect conference, held Monday to Wednesday, offered dozens of BlackRock's institutional clients access to its top executives and ideas about how to improve their businesses, the beneficiary of billions of dollars driven by financial advisers since the 2008-09 financial crisis.

Assets overseen by managers tracked by BlackRock unit iShares Connect more than doubled between 2011 and 2013, to $95 billion from $38 billion. (iShares runs $683 billion in U.S.-listed ETFs, according to ETF.com.)

BlackRock sees firms growing, though more slowly, to $120 billion in assets in 2015. That's a 26% rise over the next two years for a diverse industry segment topped, in terms of assets, by F-Squared Investments Inc., the Charles Schwab Corp.-owned Windhaven Investment Management Inc. and Good Harbor Financial.

The firms have been buoyed by their increasing availability alongside brand-name mutual funds on brokerage platforms, growing interest in the index-based ETFs and demand for tactical management through market cycles, according to analysts and managers.

But growth is not easy for a nascent segment with an identity crisis. At one point, the head of the iShares Connect program, Katharine Earhart, sought feedback onstage on whether to use a term other than “investment strategists” to describe the money managers. And even though they benefit from the promotion of firms such as BlackRock, a number are wary of being identified by a product — the ETF —rather than their investment thesis or trading prowess.

Retail investors can also be flighty, with the tide of flows turning just as easily against fund managers, especially in periods of underperformance. That volatile demand can make it difficult for the asset-driven businesses to grow consistently.

In an open session, consultant Lee Kowarski said he was “shocked” at firms' lack of planning on how to differentiate themselves from competitors.

He said most are using the same language — describing themselves as a tactical manager, for instance — to convey their value to brokerage home offices and registered investment advisers, whose clients access the funds via separate accounts and platforms, such as AssetMark and Envestnet.

BlackRock also is in the managed account business. Last month it announced a joint offering with Fidelity Investments.

“You are competing with the BlackRocks and every other mutual fund company, and everyone else out there, so the client, the distributor, is used to having a certain amount of expertise in how they're covered” by account managers, said Mr. Kowarski, whose consultancy, kasina, partnered with BlackRock to research asset managers that use ETFs.

The message isn't lost on the audience: Half of the 63 firms surveyed by BlackRock said marketing is one of their top three obstacles in increasing assets. And three-quarters of them plan to channel significant revenue into marketing.

That's more firms than those who said they plan to reinvest in sales, technology or portfolio management.

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