Hamish McArthur I’m Hamish McArthur here in Barcelona at the Fixed Income Leaders Summit with Tom Stephens of JP Morgan Asset Management. Tom, welcome to the show.
Tom Stephens Thank you Hamish, great to be here.
Hamish McArthur So what’s the talking in the ETF community?
Tom Stephens We recently did a global study. We interviewed asset managers and institutional clients with assets under management in excess of 14 trillion dollars. Now, 76% of those respondents said they use ETFs and 29% of that are in those clients’ portfolios already. I think the most telling and most exciting point there is that in two to three year time, they expect that to go to 39% of their portfolios. So we’re very excited about that.
Hamish McArthur And how are they using them?
Tom Stephens The majority of the time, they’re looking at long term asset allocation. We’ve also seen liquidity and cash management uses of ETFs. And I alluded to it a second ago, the institutional clients, the actual fixed income money managers are doing portfolio transitions. And this has been a trend that has been well publicized. We’ve seen a lot of investment banks doing portfolio trades, basket of bonds into and out of ETFs.
Hamish McArthur Can you help investors to understand and source liquidity in ETFs, and Britain in particular, fixed income ETFs?
Tom Stephens Absolutely. It’s one of the main parts of my role as the head of capital markets at JP Morgan Asset Management. We’ve seen the fixed income ETF marketplace in the fixed income market change in three ways, fundamentally; so when you look at regulation, when you look at technology, and when you look at market participants. With regulation, it’s around price discovery and transparency of pricing levels where bonds are actually being executed. And that’s helping price discovery on an ETF level. Market participant-wise, we’ve seen changes in who those market participants are. Pre-financial crisis, it was the reserve of investment banks and the assets, the bonds that they held on their balance sheet. That has changed. We’ve seen technology come into play. You’ve seen more and different market participants come in to really disrupt that market, and technology in and of itself with portfolio trading, with ETF algorithms, with embedded fair values. That’s all really helping to improve what is price discovery on cash bonds and on ETFs. So when we talk to our clients and we talk to our authorized participants, now we’re trying to marry up that perfect blend of systematic and informed decision making, so that our clients get best execution.
Hamish McArthur What do you see as the future for fixed income ETFs?
Tom Stephens I think active fixed income ETFs is going to be the next level. We launched a range of ultra short, naught to one year, managed reserves, ETFs. Why? Because we are solutions driven. We wanted our clients to be able to work with us, and they told us that they wanted their cash to work harder. So we launched sterling, euro, and dollar ETFs with our liquidity team. We’ve also, from a strategic beta or smart beta approach, changed the way that the emerging market dollar, hard currency bonds are indexed. We worked very hard on a risk-aware benchmark, and this aims to reduce the top 10% of risky countries, and then it also looks to tilt back to high yield, to make sure that you’re actually getting the EM exposure that you want to do.
Hamish McArthur Fantastic. Tom, thank you so much for your time.
Tom Stephens Thank you.
Hamish McArthur I’m Hamish McArthur, and this has been ETF T,V here at the Fixed Income Leaders Summit in Barcelona. For more information on what’s come out of the conference, visit ETFTV.NET, and for our other reports on fixed income, visit TRADERTV:NET. Thank you for watching.