London-based fixed income exchange-traded fund provider Tabula Investment Management announced this week that it aims to expand its Nordic business.
Over the past few years, the investment manager has had a couple of representatives in the region establishing a client base. However, the opportunity in the Nordics is enormous, and Tabula says it will benefit from increased focus on the region by a well-known professional.
To attract more clientele, Tabula has reeled in Abdallah Muhammad to lead coverage of the Nordics. Muhammad is an experienced ETF professional, whose resumé includes institutional sales for Blackrock, Janus Capital Group and, most recently, Invesco.
"In the past few years, there has been substantial growth of interest in fixed income ETFs in the Nordics across all client segments," Muhammad tells AMWatch. "More investors are seeking to gain exposure to parts of the fixed income universe through ETFs."
Tabula is in contact with a few thousand investors, distributors and other persons of interest for the ETF provider, according to the company CEO Michael John Lytle, who says that the first Nordic investors to invest in Tabula's products were smaller institutions and wealth managers.
Now the company has started dipping its toes into conversations with investors from the regional insurance and pension markets, too.
Lytle says that it's first and foremost important to have ESG product to attract capital from Nordic investors, and that Tabula is preparing for a launch that will hopefully take place "before the end of the year."
"As an asset manager, you simply need to have an interesting ESG offering, and that is why we have hired Abdallah now, in order to start conversations with Nordic clients," he says.
The ETF market is challenging for a traditional asset manager because they (the asset managers, ed.) expect to know their clients, execute trades directly, be in control of the transaction process and know exactly who owns their funds, whereas the ETF world is much more like marketing distribution. You need to make sure that a very large number of institutional investors are aware of your products
Intersection between asset management and banking
The CEO describes his firm as a provider of solutions within the fixed income space with credit, corporate bonds and alternative risk premia ETFs with ongoing charges between 0.29 and 0.55 basis points.
"Fixed income has lagged behind equities for very obvious reasons," Lytle explains. He claims that ten years ago investors were questioning whether fixed income was relevant for passive investors because, unlike equities, fixed income consists of several sub asset classes such as high-yield, investment-grade, emerging markets and government bonds. In addition, the sheer number of securities is about nine million in fixed income, compared to around 70,000 in listed equities.
"Data is also an issue. In the equity world, you can just assume that if you pick a company that's listed on a normal exchange, it will have a live price and a closing auction, which gives you a daily price, and there’ll be trading in the company every day. You can’t assume that in fixed income," Lytle says.
Lytle points to the fact that exchange-traded funds were spun off the equity trading businesses at the investment banks which created a natural focus on the equity asset class.
Coming out of Morgan Stanley in 2009, the Tabula CEO co-founded UK-based Source, which is now the ETF arm of Invesco in Europe. He describes Source as a joint venture between Morgan Stanley and another Wall Street behemoth – Goldman Sachs.
"Later, we added Merrill Lynch, J.P. Morgan and Nomura to the partnership. There was a growing recognition of the fact that the ETF space is actually an intersection between asset management and banking," says the CEO, who worked 18 years at Morgan Stanley, between years 1990 and 2009.
Lytle says that, from an asset manager's perspective, ETFs employ a different distribution mechanism, which represents both an opportunity and a challenge.
"The ETF market is challenging for a traditional asset manager because they (the asset managers, ed.) expect to know their clients, execute trades directly, be in control of the transaction process and know exactly who owns their funds, whereas the ETF world is much more like marketing distribution. You need to make sure that a very large number of institutional investors are aware of your products," Lytle, a former Blackrock managing director, says.
While banks focus on relatively short-term objectives, an asset management company needs a longer-term investment approach.
"And that’s what we are focused on at Tabula," he says.
More first-time buyers
Global fixed income ETFs saw a 30 percent increase in AUM over the past year ending on 30 June, at which point it had reached USD 1.3trn in assets under management globally. Unsurprisingly, market leader Blackrock expects the global ETF assets will reach USD 2trn by 2024.
"Part of the reason why companies like Blackrock are so focused on fixed income is because they recognize the opportunity to convert current granular fixed income investors into being ETF investors."
Some 60 pension funds, insurers and asset managers were first-time buyers of iShares’ range of bond ETFs, Blackrock has said.
In the Nordic region, several of the largest pension funds have invested in customized ETFs, such as Varma and Ilmarinen.
Varma launches ETF with strict ESG criteria: "We wanted outright an investment target where we can play a central role in planning the fund's strategy"
According to Lytle, roughly 30 "plain vanilla, straight-forward products," from a product universe of between 400 and 500 fixed income ETFs encompass more than half of the European fixed income assets.
Source had a partnership with Pimco, which Lytle highlights as being the leading player in the actively-managed fixed income space.
"These (products, -ed.) were quite innovative and interesting to sell to clients, but Pimco and Invesco ended their partnership in June."
As previously described by AMWatch, the two major asset manages ceased their European distribution partnership as of June 2020, when they decided to "implement a seamless transition process that acts in the best interest of investors."
"This significantly reduced the fixed income ETF offering that Invesco had for their salespeople, but now they have started building up their own brand," he says.
Invesco's head of Nordics Sales Stefan Behring and Head of EMEA ETF Gary Buxton recently told AMWatch about the US-asset manager's ETF product development following a study, showing that more than half European institutional investors forecast that half of their ESG investments will be held in passive products within the next five years.
"Today, the starting point is that we will launch an ESG version of a product, unless we simply can't, as opposed to a few years ago where the thinking was whether to launch the ESG version of a strategy," Buxton told AMWatch.
"Throughout Europe, there is no one size fits all in terms of implementing ESG into ETF vehicles, which makes it tricky for providers such as ourselves," he said and added:
"Besides bespoke solutions, I think we will come to a point where our offering includes several products with various levels of ESG integration within the same benchmark. At least, we want to give investors the ability to choose how they want to have ESG integrated in various degrees."
English Edit: Nielsine Nielsen