SAN FRANCISCO — In an effort to catch industry leader Barclays Global Investors, State Street Global Advisors has raised the wholesalers’ compensation for effecting the sale of exchange traded funds and lowered the amount it pays for effecting sales of its mutual funds and separately managed accounts.
The investments arm of Boston-based State Street Corp. made the compensation change as part of a larger restructuring (InvestmentNews, March 19) headed up by SSgA senior managing director Anthony Rochte, whom it hired away from Barclays last year.
The compensation change began taking effect at the start of the year, according to financial advisers and an executive who recently left SSgA. The executive asked not to be identified.
Barclays of San Francisco, which has $280 billion of ETF assets, towers over SSgA, which ranks second, with $103 billion.
The Vanguard Group Inc. of Malvern, Pa., is next, with $29 billion, according to Financial Research Corp. of Boston.
State Street’s move to catch Barclays comes late in the game, some advisers said.
“SSgA thought BGI would fumble the ball, and now they’re saying, ‘We’ve got to hustle,’” said Kim Arthur, managing director of Main Management LLC, a San Francisco firm that manages $220 million.
Industry participants said that the compensation change has affected SSgA’s sales force. Some of the company’s wholesalers left because they sold primarily SMAs and mutual funds, advisers and observers said.
One particularly strong wholesaler in the Chicago area departed this year, according to the executive who asked not to be identified.
“I can confirm we’re realigning our distribution effort, and we’ve re-emphasized our exchange traded funds,” Mr. Rochte said while declining to comment on the compensation and personnel issues.
Yet the structure of the sales force differs from that of Barclays, according to Lance Berg, spokesman for the latter company.
“The SSgA sales force is still responsible for all three product lines,” he said. “Our sales force exclusively markets exchange traded products.”
SSgA may be on the right track since shifting financial incentives for wholesalers typically makes a big difference in what gets sold, according to Burton Greenwald, a Philadelphia-based fund consultant.
“In the mutual fund industry, [the financial incentives] can have a heavy impact,” he said.
This effect already is apparent to Scott Kubie, chief investment strategist for CLS Investment Firm LLC of Omaha, Neb., which manages $3.5 billion, of which 50% is invested in ETFs. “The sales support we’ve gotten from State Street has improved dramatically,” he said.
But the moves have yet to stem net outflows from SSgA’s ETFs of about $5.8 billion year-to-date through last Wednesday. This poor showing comes on the heels of State Street’s reporting net inflows of just $2.9 billion last year, according to FRC, down from net inflows of $5.6 billion in 2005 and $13 billion in 2004.
Barclays had net inflows of $49 billion last year, up from $44.6 billion in 2005 and $44.1 billion in 2004.
But the outflow figures for SSgA are misleading, Mr. Rochte said, as the bulk of those can be attributed to the SPDR Trust Series 1 (SPY), a $60 billion ETF that typically has seasonal outflows early in the year.
“When you look beneath that, we have strong flows,” he said. “We launched 13 new [ETF] products and had 30% of net new flows from new ETFs [across the industry] in the past 12 months.”
But an executive who works closely with SSgA, who asked not to be identified, said that the company’s success with new ETFs was skewed by the popularity of SPDR Dow Jones Wilshire International Real Estate (RWX), which accounted for the bulk of these gains.
With SSgA’s ETFs leaking assets, the biggest beneficiary in market leadership could be Vanguard, according to industry participants.
Vanguard had $8 billion of net inflows last year, according to FRC, up from $4.7 billion in 2005 and $2.7 billion in 2004. The company had inflows into its ETFs of $5 billion year-to-date through last Wednesday, according to FRC.
The company will continue to gain ground on SSgA, said Martha G. Papariello, principal of advisory services at Vanguard.
“Consumers haven’t heard of Barclays … or State Street,” she said.
“They’re both institutional by background; they’re trying to establish a reputation with [retail customers],” Ms. Papariello said. “We clearly have the advantage.”
