getting active about passive connect 4 investment forum 2013 - nothing passive about index a...

Getting Active About Passive

Connect 4 Investment Forum 2013 - Nothing Passive about Index

A professional’s guide to index investing

June 2013

FOR PROFESSIONAL CLIENTS ONLY

4

Learning outcomes

For professional clients only

Understand the rise in popularity of indexation and how the index funds landscape has changed

Knowledge of index tracking funds, ETFs and multi-asset index solutions and how they can be used in portfolio construction

Evaluate the features and benefits of index funds and the different management techniques

Evaluate index providers and understand what due diligence is required when selecting an index product

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What we’ll cover


The index fund landscape

What is an index fund?

Implementation and portfolio construction

Due diligence

Support

2

3

4

11

5

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Changing fund landscape

MarketActive Index

The market barbell

‘Mediocre’ middleThe real alpha players The real beta players

Investors will shift towards both ends of the market


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Indexing on the rise


Over the past ten years traditional index trackers have almost doubled as a percentage of total UK AUM from just over to 3% to close to 6%. That’s £39 billion total AUM.

42.9% annual growthin the sales of ETFs across Europe

Source: ETF Landscape, BlackRock Investment Institute,as at December 2012

-250

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,25045,000

2002

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

2003 2004 2005 2006 2007 2008 2009 2010 2011

-5,000

Tracker Funds AUM (LHS) Tracker Funds Net Sales (RHS)

Source: Investment Management Association

Tracker Funds – AUM and Sales (£m)

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RDR – a catalyst for indexing


What does this mean for you?

Advisers wishing to remain independent have a responsibility to consider ‘whole of market’ product offerings

Cost and transparency are important components when determining the suitability of an investment

Index funds may be more appropriate for certain clients

ETFs are “RDR ready” having never supported commission payments

Many providers have launched index-based multi-asset funds as pre-made, RDR-ready solutions

Retail Distribution Review

According to the FSA, Index funds such as ETFs “can be a cheap and transparent way to invest in a particular market, even under our current whole of market requirement, these products should be considered when deciding which products are suitable for a retail client.”

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What we’ll cover





Due diligence

Support

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Index funds seek to deliver the performance of a chosen index.

They typically do this by holding the index constituent stocks at their index weights, or a representative sample.

Tracking error: Measure of how closely a portfolio follows the index to which it is benchmarked. Index funds aim for a tracking error of zero.

References to the names and logos of each company mentioned is merely for explaining the investment strategy and should not be constructed as investment advice or investment recommendation of those companies.

INDEX

Fund manager

purchases securities

to represent the index

Exchange traded fund

Index tracker fund

(eg. FTSE 100, MSCI World, FTSE All Stocks Gilt)

10For professional clients only

ETFs versus traditional trackers

BLOCKSBUILDING

COST-EFFECTIVETRANSPARENTSIMPLE

Typically core asset classes

Daily trading Wide range of asset classes and sectors

Intra-day trading

EXCHANGETRADED FUNDS

TRADITIONAL INDEX TRACKERS

ETFs and traditional index tracker funds: Same but different

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Managing index funds

For professional clients

Full replication

Exposure to each security in the index,

Optimisation

Exposure to a representative sample of securities in the index

Stratified Sampling

Dividing the index into cells to gain a representative sample

Most common and preferred method

Full transparency and low tracking error

Practical for indices with lots of constituents

May track index less accurately than full replication

For tracking hard-to-access markets

Complex structure and risks inherent with “swaps”

Synthetic replication (ETFs only)

Form of optimisation reliant on swap agreements

Similar to optimisation May track less accurately

but reduced transaction costs for investors

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2. Transparent

3. Efficient building blocks

4. Cost-effective

1. Diversified

Why are index funds so popular?

Broad portfolio of securities spreads risk

Straightforward investment objective

Highly transparent holdings

Can be used as building blocks for a portfolio – freeing up funds for other investments

Provide consistent market exposure

Average management fee generally lower than active funds


Traditional Index tracker

ETF

How can advisers access index funds?

Private Client

Adviser

Generally accessed easily

Generally ETFs are traded between brokers on the secondary market, however they are also widely available on UK platforms.

Through a broker

On a platform


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How to access our funds


Access BCIF, iShares ETFs and BlackRock Consensus through these platforms

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What we’ll cover





Due diligence

Support

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Using investment tools and solutions

For many advisers, using investment tools and solutions may prove the best option for their business model. Reasons for this include:

Ability to focus time and resources on area of expertise (i.e. tax, financial planning, etc.)

Business scalability

More client face time

ABC Financial PlanningSample allocation of time spent per service offering

InsuranceTax Planning

ComprehensiveFinancial Planning

RetirementPlanning Mortgages

Investment Management


Multi-asset funds that are invested in index funds to achieve asset allocation will generally have the benefits of:

Transparency

Efficiency

Cost-effectiveness

Some providers also offer “risk-rated” multi-asset funds, making it easier for advisers to recommend risk-appropriate funds to clients.

Equities Property

Commodities Emerging Markets

Equity income Bonds

Sample multi-asset fund

Outsourcing: Consider multi-asset solutions


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Mixed Investment 0-35%

Shares

Mixed Investment 20-60% Shares

Mixed Investment 40-85% Shares

Global Equities

ABI Sectors

BlackRock Consensus Funds

Five core asset allocation solutions for a range of investor risk appetites. Each Fund contains weighted asset allocation broadly in-line with industry standard averages as represented by the ABI Pension Sector averages.


In-house portfolio management

For some advisers, constructing more bespoke client portfolios integral to their business. Factors to consider include:

Adviser value proposition focused on internal investment research and expertise

Ability to create a personal investment management track record

Time intensive

CBA Financial AdvisersSample allocation of time spent per service offering

MortgagesFund Manager Research

Investment Management

Tax Planning

Insurance RetirementPlanning


Core satellite portfolios

Example strategy: Index funds in the core

Reduced cost

High diversification

Sources of alpha from niche markets and high-conviction managers

Index funds

Equities

Bonds

Equities

Equityincome

Equities

Corporatebonds

Property

GovernmentBonds

Cash

Equities

Alternatives

But….greater index allocation means limiting alpha potential

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Example strategy: Active funds in the core:

High diversification

ETFs enable intra-day trading and for more granular and precise asset allocation in the satellite

Greater alpha potential from the core

But…more active funds can mean higher overall cost

Active funds

Active funds and traditional

index trackers

But…more choice can mean greater complexity

Example strategy: Blend of active and index funds in the core:

Place alpha where you know it exists, beta everywhere else

Costs optimised

High diversification, flexibility and granularity where required


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iShares Minimum Volatility fundsIllustrative potential for enhanced risk-adjusted profile

10% 12% 14% 16% 18% 20% 22% 24%5%

7%

9%

11%

13%

15%

17%

19%

21%

Annualised Risk

An

nu

alis

ed P

erfo

rman

ce (

US

D)

MSCI EM

MSCI World

MSCI EM Min. Vol.(related iShares ETF:

EMMV, EMV)

MSCI World Min. Vol.(related iShares ETF:

MVOL, MINV)

MSCI Europe Min. Vol.(related iShares ETF:

MVEU, IMV)

S&P 500 Min. Vol.(related iShares ETF:

SPMV, MVUS)

S&P 500

MSCI Europe

Source: BlackRock 2013


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What we’ll cover





Due diligence

Support

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4

2

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Four steps to index fund selection

1. Evaluate the provider

2. Quick “rule in rule out” criteria

3. Evaluate the product structure

Fullyreplicating

OptimisedDerivative replicating

ETF Stratified Sampling

4. Select the product

General Performance Trading and valuation TER/TCO

Note: Quick “rule in rule out” criteria considers tax, regulatory, compliance items which would determine if the fund is eligible for consideration at all.


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Do your due diligence

Large scale operator ✔Track record in index portfolio management ✔Dedication to providing servicing support to advisers and investors ✔Broad range of funds ✔Competitive pricing ✔Dedicated research teams ✔Robust corporate governance ✔Index specific risk management systems ✔Commitment to product development ✔Responsible and transparent securities lending ✔Domicile location and regulation levels ✔


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What we’ll cover





Due diligence

Support

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4

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More information?

For more information about BlackRock’s index offering, you can visit our websites:

www.blackrock.co.uk for BCIF and BlackRock Consensus

www.ishares.co.uk for our ETF offering.

A range of brochures, guides, tools, videos, CPD modules and an ETF Adviser Toolkit are available on our websites and at BlackRock Adviser Centre.


http://www.blackrock.co.uk/

http://www.ishares.co.uk/

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Index – The Horizon

Building Blocks Top Creations iShares 1 Top Creations BCIF

iShares FTSE Gilts UK 0-5 $31m BCIF - Global Property Securities Equity Tracker Fund $94m

iShares MSCI Emerging Markets Minimum Volatility $11m BCIF - UK Gilts All Stocks Tracker Fund $85m

iShares MSCI World Minimum Volatility $11m BCIF - Emerging Markets Equity Tracker Fund $26m

iShares Markit iBoxx £ Corporate Bond 1-5 $10m BCIF - UK Equity Tracker Fund $15m

Top Redemptions iShares Top Redemptions BCIF

iShares Markit iBoxx £ Corporate Bond ex-Financials $18m BCIF - Balanced Managed Fund – Aggregate $-20m

iShares S&P Commodity Producers Gold $3m BCIF - Overseas Corporate Bond Tracker Fund $-5m

iShares Markit iBoxx £ Corporate Bond $2m BCIF - North American Equity Tracker Fund $-4m

iShares Markit iBoxx £ Corporate Bond 1-5 $2m BCIF - Japan Equity Tracker Fund $-3m

1 Source BlackRock. Data as at March 2013 The data shown in this document has been compiled and the computations were performed by BlackRock Advisors (UK) Limited, and have not been audited. We do not represent that such information is accurate or complete and it should not be relied upon as such. Any information expressed herein is unaudited and is subject to change.

Managing Risk Aquila Life Market Advantage (ALMA)

Outcome Orientated Solutions

BlackRock Model portfolios help you deliver innovative portfolio construction tools to your clients.

Managed Solutions


http://us.ishares.com/portfolio_strategies/model_portfolios/model_portfolios_active_index_overview.htm

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The following notes should be read in conjunction with the attached document:

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to go up and down. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Mandates we manage may be exposed to finance sector companies, as a service provider or as counterparty for financial contracts. In recent months, liquidity in the financial markets has become severely restricted, causing a number of firms to withdrawn from the market, or in some extreme cases, becoming insolvent. This may have an adverse affect on the mandates we manage.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

This material is for distribution to Professional Clients (as defined by the FCA Rules) and should not be relied upon by any other persons.

Subject to the express requirements of any client-specific investment management agreement or provisions relating to the management of a fund, we will not provide notice of any changes to our personnel, structure, policies, process, objectives or, without limitation, any other matter contained in this document.

No part of this material may be reproduced, stored in retrieval system or transmitted in any form or by any means, electronic, mechanical, recording or otherwise, without the prior written consent of BlackRock.

• UNLESS OTHERWISE SPECIFIED, ALL INFORMATION CONTAINED IN THIS DOCUMENT IS CURRENT AS AT APRIL 2013.


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BCIFAll BCIF tracker funds invest in a limited number of market sectors. Compared to investments which spread investment risk through investing in a variety of sectors, share price movements may have a greater affect on the overall value of the funds. The Continental European Equity Tracker, Corporate Bond Tracker, Corporate Bond 1-10 Year Tracker, Emerging Markets Equity Tracker, Japan Equity Tracker, North American Equity Tracker and Pacific ex Japan Equity Tracker fund invest a large portion of assets which are denominated in other currencies; hence changes in the relevant exchange rate will affect the value of the investment. The Bond Tracker, Corporate Bond 1-10 Year Tracker and the UK Gilts All Stocks Tracker invest in fixed interest securities issued by companies which, compared to bonds issued or guaranteed by governments, are exposed to greater risk of default in the repayment of the capital provided to the company or interest payments due to the funds. The funds also invest in fixed interest securities such as corporate or government bonds which pay a fixed or variable rate of interest (also known as the ‘coupon’) and behave similarly to a loan. These securities are therefore exposed to changes in interest rates which will affect the value of any securities held. The Emerging Markets Equity Tracker and Pacific ex Japan Equity Tracker invest in economies and markets which may be less developed. Compared to more established economies, the value of investments may be subject to greater volatility due to increased uncertainty as to how these markets operate. The Emerging Markets Equity Tracker typically invests in smaller company shares which can be more unpredictable and less liquid than those of larger company shares.

BlackRock Consensus FundsBlackRock Consensus Funds may be exposed to finance sector companies, as a service provider or as counterparty for financial contracts. Liquidity in the financial markets has been severely restricted, causing a number of firms to withdraw from the market, or in some extreme cases, becoming insolvent. This may have an adverse effect on the activities of the fund. Through investment in other collective investment schemes (“the underlying funds”), the Funds are exposed to economies and markets which may be less developed and compared to more established economies, the value of investments may be subject to greater volatility due to increased uncertainty as to how these markets operate. Certain of the underlying funds invest in fixed interest securities issued by companies which, compared to bonds issued or guaranteed by governments, are exposed to greater risk of default in the repayment of the capital provided to the company or interest payments due. These securities are exposed to changes in interest rates which will affect the value of any securities held. Over 35% of certain of the underlying funds may be invested in securities issued by any one government; therefore if these investments decline in value, this will have a pronounced effect on the overall value of the fund. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. The funds invest a large portion of assets which are denominated in other currencies; hence changes in the relevant exchange rate will affect the value of the investments. This material is for distribution to Professional Clients and should not be relied upon by any other persons. Unless indicated the fund information displayed only provides summary information. To ensure you understand whether our product is suitable, please read the Simplified Prospectus. Any decision to invest must be based solely on the information contained in the Company’s Prospectus, Simplified Prospectus and the latest half-yearly report and unaudited accounts and/or annual report and audited accounts. Investors should read the fund specific risks in the Simplified Prospectus and the Company’s Prospectus. We recommend you seek independent professional advice prior to investing. The Risk Categories assigned to each of the Funds are provided by use of Distribution Technology’s Dynamic Planner® risk profiling and asset allocation service. The Risk Categories are intended to provide risk profiling information to Financial Advisers in order to assist their understanding of a client’s attitude to risk and assessment of whether an investment in the Funds is suitable for their clients. The Risk Categories range from 1 (lowest risk) and 10 (highest risk) based on Distribution Technology’s analysis of the portfolios of the Funds. The provision of the Risk Categories by Distribution Technology does not constitute investment advice on the part of Distribution Technology or BlackRock and should not be relied upon by any person as such. No representation or warranty (including as to liability towards any party associated with any investment in the Funds and any third party), express or implied, is made by BlackRock as to the accuracy, reliability or completeness of the risk categorisations provided by Distribution Technology or the suitability therefore of any of the Funds for investors’ individual circumstances. It should be noted that the risk categorisations of the Funds are correct as at the date of this document but may be subject to change through a periodic review performed by Distribution Technology. The Risk Categories are also made available through Distribution Technology’s website (www.distribution-technology.com ).


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Regulatory informationBlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority ('FCA'), having its registered office at 12 Throgmorton Avenue, London, EC2N 2DL, England, Tel +44 (0)20 7743 3000, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. iShares plc, iShares II plc, iShares III plc, iShares IV plc, iShares V plc and iShares VI plc (together 'the Companies') are open-ended investment companies with variable capital having segregated liability between their funds organised under the laws of Ireland and authorised by the Financial Regulator.

For investors in the UKMost of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme on its default. The Companies are recognised schemes for the purposes of the Financial Services and Markets Act 2000. Any decision to invest must be based solely on the information contained in the Company’s Prospectus, Key Investor Information Document and the latest half-yearly report and unaudited accounts and/or annual report and audited accounts. Investors should read the fund specific risks in the Key Investor Information Document and the Company’s Prospectus.

Restricted investorsThis document is not, and under no circumstances is to be construed as an advertisement or any other step in furtherance of a public offering of shares in the United States or Canada. This document is not aimed at persons who are resident in the United States, Canada or any province or territory thereof, where the companies/securities are not authorised or registered for distribution and where no prospectus has been filed with any securities commission or regulatory authority. The companies/securities may not be acquired or owned by, or acquired with the assets of, an ERISA Plan.

Risk warningsInvestment in the products mentioned in this document may not be suitable for all investors. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. The price of the investments may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. We remind you that the levels and bases of, and reliefs from, taxation can change.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. The data displayed provides summary information, investment should be made on the basis of the relevant Prospectus which is available from BlackRock Advisors (UK) Limited.

In respect of the products mentioned this document is intended for information purposes only and does not constitute investment advice or an offer to sell or a solicitation of an offer to buy the securities described within. This document may not be distributed without authorisation from BlackRock Advisors (UK) Limited.

Index disclaimers"Barclays Capital Inc." and 'Barclays UK Government Inflation-Linked Bond Index', 'Barclays Euro Government Bond 1-3 Year Term Index' and 'Barclays Euro Short Treasury (0-12 Months) Bond Index' are trademarks of Barclays Bank PLC and have been licensed for use for certain purposes by BlackRock Fund Advisors or its affiliates. iShares® is a registered trademark of BlackRock Fund Advisors or its affiliates.The Underlying Indices are maintained by Barclays Capital. Barclays Capital is not affiliated with the Funds, BFA, State Street, the Distributor or any of their respective affiliates.

BFA has entered into a license agreement with the Index Provider to use the Underlying Indices. BFA, or its affiliates, sublicenses rights in the Underlying Indices to the Company at no charge.


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'STOXX', 'EURO STOXX® Total Market Growth Large' and 'EURO STOXX® Total Market Value Large' are proprietary and copyrighted material and trade marks and/or service marks of STOXX Limited and have been licensed for use for certain purposes by BlackRock Advisors (UK) Limited. iShares EURO STOXX Total Market Growth Large and iShares EURO STOXX Total Market Value Large are not sponsored, endorsed, sold or promoted by STOXX, and STOXX makes no representation regarding the advisability of investing in such funds.

'FTSE®' is a trade mark jointly owned by the London Stock Exchange plc and the Financial Times Limited (the 'FT') and is used by FTSE International Limited ('FTSE') under licence. The FTSE 100 Index, FTSE 250 Index and FTSE Actuaries Government Securities UK Gilts All Stocks Index are calculated by or on behalf of FTSE International Limited ('FTSE'). None of the Exchange, the FT nor FTSE sponsors, endorses or promotes iShares FTSE 100, iShares FTSE 250 and iShares FTSE UK All Stocks Gilt nor is in any way connected to the funds or accepts any liability in relation to their issue, operation and trading. All copyright and database rights within the index values and constituent list vest in FTSE. BlackRock Advisors (UK) Limited has obtained full licence from FTSE to use such copyright and database rights in the creation of these products.

'FTSE®' is a trade mark jointly owned by the London Stock Exchange plc and the Financial Times Limited (the 'FT'), 'NAREIT®' is a trade mark of the National Association of Real Estate Investment Trusts ('NAREIT') and 'EPRA®' is a trade mark of the European Public Real Estate Association ('EPRA') and all are used by FTSE under licence. The FTSE EPRA/NAREIT UK Index is calculated by FTSE International Limited ('FTSE'). None of the Exchange, the FT, FTSE, Euronext N.V., NAREIT nor EPRA sponsors, endorses or promotes iShares FTSE EPRA/NAREIT UK Property Fund nor is in any way connected to the fund or accepts any liability in relation to its issue, operation and trading. All copyright and database rights within the index values and constituent list vest in FTSE, Euronext N.V., NAREIT and EPRA. BlackRock Advisors (UK) Limited has obtained full licence from FTSE to use such copyright and database rights in the creation of this product.

iBoxx and the Markit iBoxx € Covered Index are marks of Markit Indices Limited and have been licensed for use by BlackRock Advisors (UK) Limited. The Markit iBoxx € Covered Index referenced herein is the property of Markit Indices Limited and is used under license. The iShares Markit iBoxx Euro Covered Bond is not sponsored, endorsed, or promoted by Markit Indices Limited.

Markit iBoxx is a registered trade mark of Markit Indices Limited and has been licensed for use by BlackRock Advisors (UK) Limited. Markit Indices Limited does not approve, endorse or recommend BlackRock Advisors (UK) Limited or iShares plc. This product is not sponsored, endorsed or sold by IIC and IIC makes no representation regarding the suitability of investing in this product.

iShares funds are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or any index on which such funds are based. The Prospectus contains a more detailed description of the limited relationship that MSCI has with BlackRock Advisors (UK) Limited and any related funds.

Standard & Poor’s®', 'S&P®', are registered trademarks and 'S&P 500', 'S&P 500 Minimum Volatility', 'S&P Global Water' and 'S&P Listed Private Equity' are trademarks of Standard & Poor’s Financial Services LLC and have been licensed for use for certain purposes by BlackRock Fund Advisors or its affiliates. iShares® is a registered trademark of BlackRock Fund Advisors or its affiliates. iShares S&P 500, iShares S&P 500 Minimum Volatility, iShares S&P Global Water and iShares S&P Listed Private Equityare not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation regarding the advisability of investing in these products.

© 2013 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, ALADDIN, iSHARES, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, and BUILT FOR THESE TIMES are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.


getting active about passive connect 4 investment forum 2013 - nothing passive about index a...

Documents

investment index funds

index funds landscape

index providers

track index

index weights

chosen index

benefits of index funds

managing index funds