2. Editor’s Note
R
obert G. Allen, a famous businessman and author once shared this thought
about investing, “How many millionaires do you know who have become
wealthy by investing in savings accounts? I rest my case.”
Certainly, investors these days know better than just to invest in savings accounts.
In many cases, as what we’ve seen in the US recently, savvy investors even go as much as
dipping their toes in a pool of exotic investment products just to maximize profits. The
merits (or demerits) of such an activity is a different topic altogether but investor activity, as
a whole, is generally in an upswing, particularly, the Exchange Traded Fund (ETF) market.
According to Deborah Fuhr, Partner at ETFGI and one of the chairperson at the keynote
speakers at the coming ETFs Asia 2013 conference happening in Hong Kong, it has been
an “active” year for ETFs in 2013. Assets in Exchange Traded Funds (ETFs) and Exchange
Traded Products (ETPs) hit an all-time high of over US$1.9 trillion as of November 2012. In
Asia Pacific (ex-Japan), ETF Assets as of May 2013 is at US$88.9 billion.
The opportunities for ETF investors are arguably aplenty. But challenges, especially in Asia,
are also part of the game. In this special report, we’ll take a closer look at ETFs in the Asian
context, the role of advisor fees in unleashing investor demand and the ups and downs of
synthetic ETFs.
Darwin Jayson Mariano
IQPC Worldwide
2
w w w. I n d e x E T FA s i a . c o m
3. ETF Special Supplement
An “Active” year
for ETFs in 2013
by Deborah Fuhr
each region reached new all-time highs: The November 2012 report of ETFGI recorded
US$1.3 trillion in US Listed ETFs and ETPs, European listed ETFs and ETPs accounted for
US$359 billion, Asia Pacific ex-Japan US$82 billion, Japan US$48 billion, Latin America
US$11.6 billion and Middle East and Africa US$22.8 billion. Year-to-date through end of
November 2012, ETF and ETP assets increased by 24.2 percent from US$1.5 trillion to
US$1.9 trillion.
We expect index tracking ETFs and ETPs will continue to contribute to a compounded
annual growth rate of 20 to 25 percent over the next few years as more investors embrace
using ETFs and ETPs in more asset classes, in larger sized allocation for both tactical and
strategic investments and as building blocks for an entire portfolio.
Slow growing Actives
Deborah Fuhr, Partner, ETFGI is
presenting at the ETFs Asia 2013
conference in Hong Kong. To attend,
email enquiry@iqpc.com.sg or call
+65 6722 9388.
I
t is safe to say that 2012 has ended as
another very good one for Exchange
Traded Funds (ETFs) and Exchange
Traded Products (ETPs). Globally, we
are likely to see record net new asset
flows and a record level of assets in ETFs
and ETPs go in index tracking ETFs and
ETPs as well as in many of the countries
and regions where ETFs and ETPs are
listed.
At the end of May 2013, the global ETF/
For a number of years many commentators have highlighted active ETFs as the next
potential significant area of growth for the ETF and ETP industry. To date however, active
ETFs have not seen significant growth in terms of number of products or assets. At the end
of November 2012 there were 108 active ETFs and ETPs with US$14 billion in assets,
accounting for less than 1 percent of all assets invested in ETFs and ETPs.
The questions around active ETFs are interesting. Is this move an active or a defensive
move by mutual funds to thwart the perceived disruption innovation and threat of ETFs, or
is the ETF industry trying to assimilate traditional mutual funds.
To begin to understand this we must first consider what “active” actually means. Active
funds refer to a portfolio management strategy where the manager makes specific
investments with the goal of outperforming a specific benchmark and hence delivering
alpha. Active ETFs are not ETFs that are designed to track non-market cap indices as some
commentators have suggested.
Like many imitations of successful products however, the end result may not have all
the benefits and features of the original, so the very principles that underpin the first and
traditional ETF may be lacking in this new model.
ETP industry had 4849 ETFs/ETPs, with
9875 listings, with a record level of
US$2.14 trillion
Assets in ETFs and ETPs listed globally hit
an all-time high of over US$1.9 trillion and
w w w . I n d e x ET F A s i a . c o m
Transparency an obstacle to growth
We have years of historic data illustrating how difficult it is to find traditional active funds
that consistently deliver alpha, and there is no guarantee that Active ETFs will deliver
consistent Alpha.
3
4. In the US, the SEC requires ETFs to provide
transparency of their holdings and defines,
active ETFs as funds that do not track an
index. Successful active equity managers
are less willing to provide transparency on
their ‘secret sauce’. Some less well-known
active equity managers have been willing
to run active ETFs with full transparency.
These products have had limited success in
raising assets and some have been closed.
Well known fixed income managers are
more likely to offer transparent active ETFs
as the benchmarks are much larger and
bond investment strategies are harder to
copy. Two relatively new and successful
active ETFs in the US by PIMCO the
Total Return ETF and the Enhanced Short
Maturity ETF have gathered approx.
US$5.9 billion in AUM.
In addition to gaining permission to launch
transparent active ETFs and transparent
active ETFs which will make use of
derivatives, managers in the US are trying to
gain permission from the SEC to allow them
to manage non-transparent Active ETFs. The
proposal includes proxy portfolios designed
to mimic the performance of the real
holdings while disguising the ETF’s actual
holdings and transparency on a quarterly
basis both without in-kind creation or
redemption. Navigate Fund Solutions is
working on developing exchange-traded
managed funds, or ETMFs, which will be
active non-transparent funds that trade
based on a reference to future NAV.
These proposals for non-transparent Active
ETFs are similar to how exchange listed
and traded active open-ended funds have
worked in Europe for over 25 years prior
to the launch of the first ETF in US in 1993.
4
The alternative breed
What the new year holds
Euronext offers nearly 200 funds in a segment
which operates NAV +/- pricing. Deutsche
Borse has over 2,800 funds tradable via
continuous auction with specialists on the
Xetra. In Denmark more than 420 mostly
active UCITS funds are traded on the
exchange. They are not identified as ETF’s
nor do they want to be, as they do not have
the typical ETF characteristics.
It is likely that we will see new asset
managers enter the ETF industry offering
new types strategies as active ETFs in 2013.
Since the launch of the first ETF in the US
in January 1993, three years after the first
ETF was launched in Canada, we have seen
that there are many challenges to launching
a successful index ETF. The challenges to
overcome in launching a successful active
ETF are much greater. One of the main
challenges is consistently delivering alpha –
a challenge most active fund managers find
hard to do consistently in mutual funds.
In March 2010, the Securities and
Exchange Commission’s (SEC) made an
announcement of a regulatory review for
mutual funds, ETFs, and other investment
companies use derivatives. Since that
announcement the SEC suspended
consideration of exemptive requests
under the Investment Company Act of
1940 for actively managed ETFs that
invest in derivatives, although some
actively managed ETFs were granted SEC
relief prior to 2010 were in some cases,
permission to use of derivatives.
In August 2011, the SEC issued a
consultation asking for public comment on
derivative use by 40 Act mutual funds and
ETFs. On December 6 in New York, Norm
Champ, the director of the Securities and
Exchange Commission’s (SEC’s) Division
of Investment Management, announced
that the Division would now consider
exemptive requests for actively managed
ETFs that intend to invest in derivatives.
He said the SEC is still reviewing the
issues raised in the consultation, but
will now consider exemptive requests
relating to actively managed ETFs that use
derivatives, but not currently exemptive
requests relating to leveraged and, it is
assumed, inverse ETFs.
Learning the Basics
The key characteristics of the index
tracking ETFs are:
• Transparency – typically the full list of
holdings are published daily.
• Flexibility – trade and settle like stocks,
with intraday pricing and trading, place
stop and limit orders, increments of one
share and go long or short like a stock.
• Cost effectiveness – asset weighted
average TER for ETFs is 0.31 percent.
• Diversification – exposure to an entire
benchmark.
• Indicative NAV – real-time value of the
underlying portfolio is available
• Liquidity – two sources: secondary,
volume on exchange and primary, in kind creation/redemption process
trading the underlying holdings by
authorized participants.
Republished article Courtesy of
WealthAsia Media (www.wealthasia.net)
w w w . I n d e x ET F A s i a . c o m
5. ETF Special Supplement
Highlighting ETF’s
Areas of Concern
by Deborah Fuhr
F
or some two decades, ETFs
enjoyed seemingly unstoppable
progress, with the features
inherent to the original ETFs –
transparency, liquidity, simplicity,
diversification and cost efficiency in a fund
wrapper with the ability to buy or sell any
time during the trading day - presented
this product as a serious challenger to the
traditional mutual fund industry.
In 2008 however, the events following
the Lehman Brothers collapse led to a
cold wind blowing over this growth and
revealed a dark problem at the core of
the ETF industry – counterparty risk.
Fears were amplified by the product
promoters themselves who argued the
detriment of one type of ETF offered by
their competitors to the benefit of their
alternative model.
For retail investors, the issue of counterparty
risk had never really existed until the 2008
financial crisis. But the crisis ushered in a
new era for the investment product buying
public, an era of seemingly untouchable
institutions collapsing or seriously
wobbling. Such calamities moved the
whole question of structural risk – the risk
you assume through the method by which
an investment exposure is delivered to you
– on a par with that investment risk itself.
It was indeed ironic that the genesis of
w w w . I n d e x ET F A s i a . c o m
this concern lay in an exchange traded
exposure that was far removed from the
principles that underscored the original
ETFs.
Exchange Traded Notes (ETNs) had
become increasingly popular as a way of
delivering products speedily to market,
often at a discounted cost to the promoter,
if not price to the investor, when compared
against traditional ETFs. In addition these
products allowed investors – institutional
and retail – access to exposures that
would not be permitted in a traditional
fund. While the lack of regulation around
investment risk might be understood by an
investor – and it remains the case that there
must be an issue over retail investors being
able to access certain types of exposure on
an unadvised basis through purchases on
the stock exchanges – the fact that these
products traded and settled like ETFs
meant the crucial fact that the method by
which these exposures were delivered to
investors were effectively unregulated.
The net effect of this lack of regulation
meant that the traditional protections
implicit in fund regulation – segregation
of assets, diversification of investment
exposures, collateralization of exposures
and independent oversight – were simply
not present. While the promoter might
argue this lack of regulation was disclosed
in the prospectus of the note this was of
cold comfort to the stock market purchaser
who may have never even had sight of
that document and assumed his ETN or
ETC was equivalent to an ETF rather than
materially different both in terms of that
investment exposure and its deliverance
and more particularly its protections.
In short, investors in the note were
assuming investment risk and full exposure
to the issuer.
Once this structural weakness in the
market was revealed, investors and
regulators stood back and took a hard
look at all exchange traded exposures.
Perhaps the key articulation of concerns
was through the report of the Financial
Stability Board in 2011, which identified
four key areas of concern:
• the increasing complexity of exchange
trade products such as inverse and
leveraged exposures;
• concerns around securities lending in
physically backed ETFs;
• concerns around synthetic ETFs
especially where the swap counterpart
and the product promoter were part of
the same entity;
• concerns around non fund exchange
traded exposures such as the exchange
traded notes discussed above.
The debate around these four areas of
5
6. concern has been most pointed in Europe
where it is possible to have physically
replicating ETFs and those replicating
using derivatives. In the US the latter
product is not effectively permitted
and equally it is clear there will be
for the foreseeable future no further
authorization of new leveraged and
inverse ETFs as the regulator has been
reviewing the use of derivatives in ETFs
and mutual funds since 2010.
exchange traded funds arose from the
It is ironic though that the fears around
The evolution of this debate will influence
6
counterparty exposures in notes and
while there may be counterpart exposure
in synthetic products and in physically
backed through securities lending it is
within the context of highly regulated
fund vehicles. The regulation of notes at a
the growth of ETFs in Asia Pacific both in
terms of the acceptability of UCITS and
non fund structures in the various markets
but also in the growth and increased
regulation of the local funds industry.
The expansion of the exchange traded
exposures markets will continue.
product level is largely untouched and it
appears their accessibility will be limited
though distribution channels.
Extracted from article
“Cautionary tale” by Deborah Fuhr
with permission from Benchmark /
WealthAsia Media (www.wealthasia.net)
w w w . I n d e x ET F A s i a . c o m
7. ETF Special Supplement
Asia Pacific
(Ex-Japan) ETF and
ETP Growth
ETF Assets
($US Bn)
ETP Assets
($US Bn)
#of ETFs
#of ETPs
2005
10
0.1
34
1
2006
18
0.2
48
1
2007
28
0.2
73
1
2008
24
0.5
102
5
2009
40
0.8
135
10
2010
53
1.0
211
12
2011
56
1.0
321
14
2012
87
0.9
409
19
May-13
88.9
0.7
444
19
ETF Assets
ETP Assets
#ETFs
#ETPs
81
450
72
400
63
350
54
300
45
250
36
200
27
150
18
100
9
Assets (US$ Bn)
500
50
0
#ETFs / ETPs
90
0
2005
2006
2007
2008
w w w . I n d e x ET F A s i a . c o m
2009
2010
2011
2012
May-13
Source of information: ETFGI
7
8. 5 Things
to Remember when
Selecting an Advisor
2
1
Remember to check
their background
and credentials
Some planners may refer to a college or
graduate school diploma and their networks
of business partners, but do they really
know about retirement and tax planning?
Can they help you determine how much
insurance you need while suggesting the
best way to fund your teenager’s college
education? Do they know how your
investment should be protected while
addressing how a fund is performed.
That’s where the need to know their
credentials comes in. Present and past
experience of an advisor is important.
For instance, you can ask what were the
four worst investment decisions they have
made over the past five years, and how
they corrected them.
Many designations and qualifications are
awarded to those who have trained and
passed exams on financial planning. Find
out what a planner had to do to earn her
credentials and who awarded them.
8
4
Remember to
check if they will
provide specific
recommendations
for investments
Find out ahead of time if they’ll provide
specific handholding or more general
directions. Sometimes it will depend on
how self-directed you are. You may want
someone who’s going to tell you exactly
what kind of insurance to get, how much
to purchase or what investments to buy.
On the other hand, you may feel more
comfortable and confident by giving them
the ability to pick funds and not offering
any input in that department.
3
Remember to check
how fees aregoing
to be paid
The advisor should clearly explain and
state in writing how fees will be paid for the
services they are providing. The most basic
methods of payment are: fees based on an
hourly or flat rate, fees based on a percentage
of your portfolio value, normally referred
to as Assets Under Management (AUM),
and commissions paid on transaction.
Whether you want your money pro-actively
managed, will help determine which model
works best for you.
Remember to check if
they are registered
investment advisor
with a regulatory
body
If the advisor is registered, they owe you a
fiduciary duty, which is a way of saying that
they must put your needs first. Investment
professionals who are not registered are
held to a lesser standard – normally referred
to as “suitability” – which means what they
recommend and sell to you should be
appropriate for you in accordance with the
defined investment suitability guidelines.
If the advisor is registered, you should ask
for a copy of their registered certificate or
reference number.
5
Remember to ask
yourself: Do I like
this person and their
approach?
At the end of your meeting, ask yourself:
Do I like this person? Is there any chemistry
with this advisor? Do they appreciate my
needs? After al, you are about to enter
into an intimate relationship that will
hopefully last a long time. If you have any
reservations, move on. There are plenty of
qualified advisors out there who would
like to help you out.
Extracted from article “Checklist for Advisor Selection” by Leong Sue Jean with
permission from Benchmark / WealthAsia Media (www.wealthasia.net)
w w w . I n d e x ET F A s i a . c o m
9. ETF Special Supplement
Is fee-based
advisory system the key
to unleash investor
demand in Asia?
the investment mix in Asia? What are the pros and cons of a “do-it-yourself” approach?
In the words of Vincent Chen, Chief Executive Officer of VIT Partners “there are pros and
cons that go beyond the dollars and cents.”
Darwin Jayson Mariano: In your opinion, is a fee-based advisory system
needed in Asia to create investor demand?
Vincent Chen, Chief Executive Officer,
VIT Partners is presenting at the ETFs
Asia 2013 conference in Hong Kong.
To attend, email enquiry@iqpc.com.
sg or call +65 6722 9388.
I
n building up an investment portfolio,
advisors have always played a pivotal
role in maximizing returns. However,
since the financial crisis of 2008,
Asian investors have changed their
investments from complex, often exotic
products to simplified products. To create
investor demand, some analysts point out
that an advisor plays an essential part of
the growth process, and therefore, feebased advisory system is essential. How
will this system change the dynamics of
w w w . I n d e x ET F A s i a . c o m
Vincent Chen: For me, It is highly probable that under a fee advisory system, investor
demand for ETFs will go up as investing in ETFs is a simple and effective way for
financial advisors to help investors get beta exposure. We at VIT believe that a financial
advisor should engage the client on their investment goals and recommend the most
suitable investment products. Sometimes, this means the client needs alternatives in
their portfolio to obtain diversification and alternative alpha. This invariably involves
the financial advisor being well versed in a wide range of products including ETFs and
providing the client access to the relevant products.
The fee-based advisory system would make the advisors accountable for the services
they provide and accountable for the growth of their clients’ portfolios. This system is in
great contrast with a commission based system which encourages advsiors to increase a
great number of transactions regardless of the portfolios’ performance.
DJM: How do you foresee a fee-based advisory system to change the dynamics
of the investment mix in Asia?
VC: Since the financial crisis in 2008, Asian investors have changed their investments
from complex products to simplified products. The investors now want transparency in
products and fees as well. The move to low-cost ETFs is going hand-in-hand with a shift to
fee-based compensation, in which the advisors charge a percentage of the client’s assets.
Fee based advisory is likely to take off when the financial advisors prove they can add
value to the investor’s portfolio. To attain alpha, financial advisors may suggest that
investors take up higher risk products that fall within the investor’s risk tolerance. This
often entails allocating a part of the investor’s portfolio to alternatives like commodities,
9
10. hedge funds, private equities and real estate. I see this trend emerging in Asia and it is
part and parcel of the rising levels of maturity and sophistication of the average Asian
investors.
DJM: Do you think the current “do-it-yourself” investment approach is more
cost efficient for the end user?
VC: The “do it yourself” investor takes on the challenge of constructing his own portfolio
and saves on the financial advisory fee he would otherwise have paid his financial
advisors. There are pros and cons to this approach beyond the dollars and cents of
the fee. Other than asset allocation and product selection, an investor can benefit
from the services of a professional advisor on independent investment risk assessment
10
and wealth management throughout
the investor’s life cycle. Missing out on
professional insights on managing an
investment portfolio especially during
market downturn can subject the
investor’s portfolio to stress losses that can
be avoided and better managed. Further,
with alternatives taking an increasingly
important role in an investor’s portfolio,
a financial advisor like VIT will provide
access to such products and critical
insights on generating alpha from them.
w w w . I n d e x ET F A s i a . c o m
11. ETF Special Supplement
Understanding
Synthetic ETFs
S
ince the credit crisis shook
up the global financial system
in
2007-2008,
investors
have become increasingly
concerned over products
using derivatives. Swapbased ETFs are
no exception. The two most common
criticisms of synthetic ETFs are their
complexity and lack of transparency. In
this article, we will try to demystify these
funds and shed some light on the risks
involved in investing in them.
Unlike a cash-based ETF, a synthetic
ETF does not hold the underlying index
constituents. Instead, it holds a basket
of securities which may be completely
unrelated to the index it is tracking and
to which investors have recourse in case
of issuer’s failure. The fund typically
will enter into a swap arrangement in
which it gives away the performance
of the collateral basket in return for the
performance of the fund’s reference
index. The swap counterparty is usually
an investment bank.
This structure has been widely
embraced in Europe because it reduces
tracking error, it is lower in cost and
it enhances market access. In fact,
today there are more ETFs that use the
synthetic replication method than those
that use physical replication, although
cash-based ETFs have the greater share
of assets in Europe. Despite having
numerous
undeniable
advantages,
swap-based ETFs bear counterparty
and collateral risks that should not be
overlooked.
w w w . I n d e x ET F A s i a . c o m
11
12. Collateral to Offset
Potential Damage
Within the context of a synthetic
replication ETF, counterparty risk is the
risk that the swap writer fails to fulfill its
obligations. The regulators in each market
seek to limit risk by requiring issuers
to maintain collateral. For example,
under UCITS III, this risk is limited to
10%, which means that the ETF issuer
or the swap counterparty must provide
collateral amounting to at least 90%
of the ETF’s net asset value (NAV). The
basket of securities held (or pledged) as
collateral is marked-to-market on a daily
basis to ensure that its value does not fall
under the respective regulatory limits
within each market. In practice, all ETF
issuers maintain a margin of safety, which
varies from one provider to another. They
all maintain different levels of collateral
(measured as a percentage of the funds’
NAV) and reset their swaps at different
trigger points.
ETF providers set average “minimum
collateral” thresholds for their ETFs. Each
time the marked-to-market value of the
collateral falls under that minimum, the
fund provider resets the swap and asks
the counterparty to deliver additional
collateral (cash or securities). Resetting
these swaps brings counterparty exposure
to zero as the collateral posted to the
fund is typically reset back to 100% of
the fund’s NAV. Some providers bring
their funds’ collateral back to over
100% (counterparty exposures become
negative) while others maintains a
minimum counterparty exposure of 2%
to 3%, resulting in a permanent undercollateralization.
It’s worth noting that all the limits can
vary from one asset class to another,
depending on their relative levels of
volatility. For example, fixed income funds
will typically have lower thresholds than
equities because they are less volatile.
It’s also understood that ETF providers
maintain
some
flexibility
around
12
(ii) whenever there is a subscription
or redemption at the fund level, and/
or (iii) on a regular basis. Resetting a
swap to zero eliminates (temporarily)
counterparty exposure. So the more
frequent the reset, the better, in terms of
investors’ protection--although it does
result in additional costs for the fund.
these limits so long as the 90% UCITS
threshold (10% maximum exposure) is
not breached. In terms of best practices,
we think it is safe to say that the higher
the level of collateralization, the more
protection is provided to investors in the
event of a counterparty defaulting.
Collateral Quality and
Frequency of Swap Resets
The level of collateralization is not the
only factor that should be taken into
consideration when assessing investor
protections in swap-based ETFs. Various
additional factors come into play, in
particular the quality of collateral as
well as the frequency of swap resets.
The collateral will only play a role if the
swap provider fails and no replacement
is found. In that hypothetical situation,
the ETF provider would have to quickly
liquidate the substitute basket of assets,
which is likely to be uncorrelated to the
underlying index. This is the reason why
collateral baskets are usually composed
of securities that are liquid (blue chip
equities, government obligations, etc.)
and preferably traded in or near the same
time zone as the market where the ETF
is traded.
Swap-based ETF providers have defined
different sets of criteria for what they will
accept into their funds’ collateral baskets,
with some being more conservative
than others. For example, some issuers’
equity ETFs hold only domestic stocks as
collateral and rule out investing in other
regions’ securities. The issue with holding
non-domestic stocks as collateral is that
they might not be able to be sold in a
timely manner in the event of a default
on the part of the swap counterparty due
to different trading hours.
Another factor worth paying attention
to is how frequently the swap is reset.
Swaps are usually reset when (i) the
exposure to a counterparty reaches the
trigger point set by the ETF provider,
Room for More
Transparency
Most leading ETF providers have
synthetic replication ETFs. Better
tracking and access to new asset classes
are undeniable advantages. However,
investors need to fully understand the
counterparty risk embedded in the swaps
and determine the level of risk they feel
comfortable with. For that, they need
to check the relevant ETF prospectus to
see what policies the manager follows.
However, in many cases we think the
information provided on prospectuses
and websites does not fully enable
investors to make informed investment
decisions. While most ETF issuers have
been quite candid with us about the
operational details of their collateral
policies, they do not disclose them on
their websites or in their filings. As far as
collateral is concerned, we believe that
fund providers should commit to full
transparency –as it’s supposed to be one
of the key advantages of ETF ownership.
Investors should not have to call or send
an e-mail to request snapshots of their
ETF’s collateral basket. Information like
the identity of swap counterparties, the
composition of the collateral basket and
how often swaps are reset is information
investors have the right to know. It should
be made readily available to them.
Extracted from article
“Looking under the hood” by Hortense
Bioy with permission from Benchmark /
WealthAsia Media (www.wealthasia.net)
w w w . I n d e x ET F A s i a . c o m
13. ETF Special Supplement
Synthetic ETFs:
A Chief Investment
Officer’s Point of View
Kingsley Jones, Chief Investment Officer, Jevons Global speaks candidly about the pros
and cons of synthetic ETFs and the regulations that are currently in place. He also shares
his views on the derivative system in Asia and whether a “blow up” is imminent in the
foreseeable future.
wrong; counter-party risk in the event of
default by a swap or derivative issuer; risk
of changed market access regulations; and
the basis or performance risk of matching.
The pros of synthetic ETFs may include:
lower transactional charges within the
ETF structure; potentially lower fees if
the physical is expensive to trade; and
flexibility in market access for restricted
market access regimes.
Kingsley Jones, Chief Investment
Officer, Jevons Global is presenting
at the ETFs Asia 2013 conference
in Hong Kong. To attend, email
enquiry@iqpc.com.sg or call +65
6722 9388.
Darwin Jayson Mariano: What are the
pros and cons of synthetic replication
models vis-à-vis physical ETFs?
Our preference is for the physical, where
possible. There are additional risks
involved with synthetic ETFs over and
above the normal market risk and liquidity
risk. These include: regulatory risk in
respect of recourse if something goes
The typical solution to this risk is to place
documentation of the product carefully to
Kingsley Jones: How secure is the
derivative system now, especially in
Asia? Do you think there will be a
blow up in the foreseeable future?
The issue for any potential blow-up is
related primarily to Over The Counter
(OTC) instruments, since these do not
generally have the protection of a central
clearing house. The principal problem
we forsee is a lack of transparency on
cross-border exposures. There is no direct
evidence of this, to our knowledge, at this
stage. However, the type of instruments
which may be at future risk are commodity
related derivatives and market access
products such as China “A” share vehicles,
if the underlying counter-party risks
become too concentrated.
single counter-party exposure limits into
the mandate for the structure.
One
should
always
examine
the
assess these risks.
DJM: In your opinion, is enough
being done to regulate development
of synthetic ETFs? Do you think there
is a need for regulatory reform? And
in which area/s do you think reform
is needed?
KJ: We are not a regulator, so we do not
pretend to know how to regulate well. We
think the likely risk points are connected
with the possible concentration of counterparty risk in Over the Counter derivative
positions. Regulators will differ in their
views on how to handle this.
In our view, the central requirement for
investor protection should always be
fair and accurate disclosure of such risks
where they arise.
The specific measures a regulator might
take to control the growth of any such risks
are beyond our competence.
Disclaimer: Please note that we do all we can to ensure accuracy and timeliness of the information presented herein but errors may still understandably occur in some
cases. If you believe that a serious inaccuracy has been made please let us know. This article is provided for information purposes only. IQPC accepts no responsibility
whatsoever for any direct or indirect losses arising from the use of this report or its contents.
w w w . I n d e x ET F A s i a . c o m
13
14. Main conference: 25 September 2013 n Briefing Focus Day: 24 September 2013
Venue: The Park Lane Hong Kong Hotel, Hong Kong
INNOVATIVE STRATEGIES TO OPTIMISE
ETF PORTFOLIO RETURNS
The ETF space in Asia is experiencing exciting times with both bullish and bearish markets.
Despite the current volatility, growth in ETF investments has surged and the market is predicted
to reach unprecedented levels.
Now in its 4th year, IQPC will be running the ETFs Asia 2013 conference this September in
Hong Kong and will bring you the most respected names in the ETF industry and the largest
gathering of investors under one roof.
Distinguishing itself as the most diverse and innovative event in the ETF market in Asia, ETFs
Asia 2012 last year attracted over 200 delegates, including investors, portfolio managers,
issuers, exchanges, index providers, consultants and many more.
EXPERT SPEAKERS THIS YEAR INCLUDE:
Alexa Lam
Deputy Chief Executive Officer,
Hong Kong Securities &
Futures Commission
Tahnoon Pascha
Chief Executive Officer –
Equities & Fixed Income,
Aviva Investors Asia
Graham Bibby
Founder and Chief Executive
Officer, Richmond Asset
Management, Richmond Group
Deborah Fuhr
Partner,
ETFGI
Jaekyu Bae
Chief Investment Officer,
Managing Director, Samsung
Asset Management
Thomas Furda
Equity and Fund
Analyst, Independent
Researcher
Neil Thomas
Private Wealth Manager
Wealth Management Group
Limited
Martin W. Hennecke
Associate Director
Tyche Group
Vincent Chen
Chief Executive Officer,
VIT Partners Ltd
Simon Hopkins
Chief Executive
Officer, Milltrust
International Group
Dr. Ana Armstrong
Managing Director, Armstrong
Investment Managers
Paul So
Head of Beta Products,
Enhanced Investment
Products Ltd
www.IndexETFAsia.com