Morningstar Magazine - October/November 2017 - 30
Dispatches
Low gilt yields initially pushed investors into riskier
assets such as corporate credit, commercial
property, and even equities. But as spreads in
corporate bonds have narrowed and rental yields
have fallen, we have seen increasing appetite
for more esoteric asset classes designed to meet
demand for income.
The trend to more exotic solutions is evident in
the increase of gross issuance within the
investment trust sector. Providers have risen to the
challenge either by launching funds - raising
capital from investors and listing on an exchange,
of which Neil Woodford's Patient Capital Trust was
a recent and notable example-or by selling
shares in the secondary market to meet ongoing
investor demand.
Over the past 12 months to August, investment
trusts have raised GBP 9.6 billion in these two
ways. Of this, 74% has been within what could
broadly be termed "alternative income":
those assets not directly comparable to equities
or conventional bonds and which distribute a
structured yield to shareholders. Issuance in what
could be termed "conventional income," such as
multiasset or UK and global equity income
trusts, totaled GBP 668 million. There, Finsbury
Growth & Income led the way with GBP 112 million
of issuance. Conventional issuance amounted
to around GBP 950 million, which was dominated
by activity in the secondary market from Scottish
Mortgage with GBP 299 million.
The structure of closed-end investment companies
is ideal for investment in alternative asset
classes, especially where regular investor
distributions are a predominant objective. They are
able to gear (a form of borrowing) as well as
use income and capital reserves to smooth and
boost distributions. Moreover, they do not
have to meet investor redemptions. Because of
this, the closed-end structure is arguably
the best way to invest in these esoteric and
illiquid asset classes.
In recent years, there have been new company
launches in areas such as infrastructure,
specialist commercial and residential property
(including student accommodation,
medical, logistics, and storage), renewable
30
Morningstar October/November 2017
energy, airline and oil rig leasing, alternative
credit, asset-backed investments, and peer-topeer lending.
Investors, and their advisors, must decide if these
investments are suitable to form part of a
diversified portfolio. But they can't have their cake
and eat it, too. In other words, a high headline
rate of distribution comes with a range
of potential risks: defaults, interest-rate sensitivity,
discount volatility, regulatory and taxation
concerns, illiquidity, and ultimately potential
capital erosion. As always, investors should tread
carefully and seek professional advice
where necessary.
change the relative level of risk compared to
a standard benchmark. As of June 30, there were
a total of 199 return-oriented products (using
dividend, fundamental, momentum, or quality
strategies), 40 risk-oriented products (low
volatility, for the most part), and 186 products
classified as "other" (mainly equal-weight funds
or those exposed to non-traditional commodities). Of the 32 new strategic-beta offerings
launched in Europe in the first half, 18 are
classified by Morningstar as return-oriented, two
are risk-oriented, and the remainder fall into
the "other" category.
European Strategic-Beta Growth
2017 Flows and Total AUM
David Holder is a senior analyst with Morningstar manager
research based in the U.K.
Net Flows
Jan-Jun (EUR Bil)
AUM
(EUR Bil)
5.13
40.99
-0.13
8.61
Other
0.74
8.14
Strategic Beta Total
5.74
57.74
87.04
1,249.67
6.60
4.60
Return-Oriented
Strategic-Beta Products
Gain Ground in Europe
GREATER EUROPE
France
Risk-Oriented
Passive Products Industry Total
% Strategic Beta
Source: Morningstar. Data as of 6/30/2017.
European strategic-beta funds gathered EUR 5.7
billion during the first half of the year.
According to Morningstar data, 425 strategic-beta
offerings were available in Europe at the end
of June. (Of these, 375 are exchange-traded funds
and 50 are unlisted passive funds.) This was up
from 393 at the end of 2016.
Two funds stand out, with EUR 826 million and EUR
766 million, respectively, of net inflows in the first
half of 2017: iShares MSCI USA Value Edge
Factor UCITS ETF and iShares MSCI Europe Value
Edge Factor UCITS ETF EUR. These are well ahead
other strategic-beta products; Amundi ETF
Jpx-Nikkei 400 UCITS ETF EUR came in third with
EUR 330 million of net inflows.
Overall, the European indexed product industry
raised more than EUR 83 billion over the
first six months of 2017, for a total of EUR 1,250
billion in assets overall. There are 3,371 funds
in total, including 2,283 exchange-traded
funds and 988 traditional unlisted funds. During
the first half of the year, strategic-beta funds
attracted 6.6% of total flows to passive products in
Europe. They accounted for 4.6% of the entire
indexed management market at the end of June.
These are not the largest funds by total assets,
however. The largest strategic-beta funds
in Europe, and the only two to surpass the 2 billion
mark, are iShares Developed Markets
Property Yield UCITS ETF USD, which invests
in the global real estate sector and had EUR 2.7
billion at the end of June, and the SPDR
S&P US Dividend Aristocrats UCITS ETF, with
EUR 2.4 billion.
Strategic-beta products go beyond traditional
market-capitalization indexing approaches,
generally seeking to increase performance or to
The most active provider was BNP Paribas BNP:FR,
with 11 new offerings in the first half, followed
by Candriam with five launches, and Amundi with
Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017
Contents
Morningstar Magazine - October/November 2017 - Cover1
Morningstar Magazine - October/November 2017 - Cover2
Morningstar Magazine - October/November 2017 - 1
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Morningstar Magazine - October/November 2017 - Contents
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