The possibility that Barclays' iShares exchange traded fund business could be sold to another big ETF provider, reducing competition by creating an industry behemoth, is worrying advisers.
More likely, say some industry observers, is that the ETF group — as of Dec. 31, the largest in the United States by assets with $254.7 billion spread across 178 ETFs — may be swallowed by a large asset manager, such as
Fidelity Investments of Boston, that is looking to jump into exchange traded funds.
London-based Barclays PLC last week confirmed that it has held discussions with a number of potential buyers to sell the iShares business, one of its crown jewels, as the bank looks to raise cash to bolster its capital base.
A call to Barclays about potential bidders wasn't returned.
The sale is expected to be limited to the iShares business, not the bank's San Francisco-based Barclays Global Investors unit, of which iShares is a part.
"I think it's a truly valuable franchise," Bruce Bond, president and chief executive of competitor Invesco PowerShares Capital Management LLC of Wheaton, Ill., said about iShares. "I'm really surprised to see Barclays let that go."
Although surprising, a sale isn't necessarily cause for concern if it is to the right buyer, advisers said.
But a purchase of iShares by State Street Global Advisors of Boston or
The Vanguard Group Inc. of Malvern, Pa., would be problematic, said Richard Romey, president of ETF Portfolio Solutions Inc., an Overland Park, Kan.-based advisory firm with $40 million in assets.
Together, Barclays, SSgA and Vanguard control more than 80% of ETF assets.
"I don't want just one large company," Mr. Romey said, adding that competition among ETF providers forces providers to take advisers seriously.
The level of attention that ETF providers pay to advisers is unique, said Tom Mench, chairman and chief investment officer of Mench Financial Inc. in Cincinnati, which manages about $140 million. He doesn't think that the attention, or the quality of the iShares ETFs themselves, would decline if a sale took place.
"If the management team stays intact, then it's a transition in ownership and not a change in methodology," Mr. Mench said.
It seems highly unlikely that SSgA or Vanguard will buy iShares, however.
Apart from the fact that SSgA and Vanguard would have trouble ponying up the $6 billion that iShares could fetch, there are antitrust issues to consider because the resulting entity would control such a large portion of the ETF market, said Bradley Kay, an analyst at Morningstar Inc. of Chicago.
Vanguard, in fact, has never ex-pressed an interest in becoming the biggest ETF provider. Instead, the company has gained market share by offering a set of "strategic investment offerings," said Tom Lydon, president of Global Trends Investments, a Newport Beach, Calif.-based firm that manages $75 million in assets.
SSgA and Vanguard declined to comment.
It makes much more sense that Fidelity or The
Charles Schwab Corp. of San Francisco would be interested in the iShares business, Mr. Lydon said.
On Jan. 30, Schwab's investment management arm filed with the Securities and Exchange Commission to create its first ETF.
Fidelity launched the Fidelity Nasdaq Composite Index Tracking Fund (ONEQ) in 2003 but hasn't followed up with any other ETFs.
"The fact that mutual funds have seen fairly large decreases in revenue, based on redemption and depreciation in funds ... it would be a natural move for [Fidelity and Schwab] to beef up their ETF presence," Mr. Lydon said.
ETFs had record inflows of $176 billion last year, while investors withdrew $179 billion from U.S. mutual funds.
Net inflows into iShares totaled $56.3 billion last year — just shy of its 2007 record of $58.2 billion in net inflows.
Fidelity and Schwab declined to comment on any potential interest in acquiring the iShares business.
A NEW PUSH
Even before the iShares business came on the market, however, rumors were swirling about Fidelity's making a push into ETFs.
Anthony W. Ryan, an alumnus of SSgA — the firm responsible for bringing the first ETF to market in 1993 and the second-largest ETF provider by assets — was named head of asset management strategy and product development at Fidelity last month.
"Right now, we can't speak to any initiatives that may or may not happen under [Mr. Ryan's] leadership," said Stephen Austin, a spokes-man for Fidelity
(InvestmentNews, Feb. 23).
It wouldn't surprise Mr. Kay, however, if Fidelity bought iShares.
The potential cost of buying iShares in a market where credit is still hard to come by, however, raises the possibility that the business won't be sold at all, he said. Even private-equity firms would have a hard time financing the deal, Mr. Kay said.
Whatever the outcome, advisers will be watching closely.
Ken Solow, chief investment officer for Pinnacle Advisory Group, said that he isn't "overly concerned" about the fate of the iShares business. The Columbia, Md.-based firm manages $550 million.
But Mr. Solow is concerned about what a sale means for Barclays' iPath exchange traded notes, the debt issued by Barclays Bank and distributed through Barclays Global Investors. He has recommended ETNs in the past.
A sale actually could have a positive effect on such notes if it makes Barclays stronger, Mr. Solow said.
Advisers won't know for sure, however, until a deal is finalized.
E-mail David Hoffman at [email protected].
