With Invesco currrently in the process of completing another major acquisition – this time a close to USD5 billion deal to buy US asset management firm OppenheimerFunds – etfexpress Managing Editor Beverly Chandler talks takeover tactics and more with Dr Chris Mellor, the company’s head of EMEA ETF, Equity and Commodity Product Management…
“Obviously Invesco has a reasonably long history in growing through acquisition,” Mellor (pictured) says. He himself arrived with the Invesco purchase of Source in August 2017, which took Invesco’s assets in ETFs to USD220 billion globally and, within Europe, saw their ETF assets rise from USD3.5 billion to USD30 billion.
“This was a reasonable change in scale, particularly in Europe,” Mellor says. The subsequent Guggenheim acquisition was more US focused but brought with it BulletShares ETFs which was known for its innovative products in the US. Oppenheimer brings 17-18 ETFs which are largely listed in the US.
Mellor was on the product management side at Source for three and a half years, having spent 15 years before that as an investment strategist doing research on equities.
His role now is as product expert for the equity and commodity range, looking at what is going on in the product set and at new products.
“We have been pretty busy,” Mellor says. “There are two groups of new things we need to do – produce innovative and interesting different products that Invesco, with the PowerShares brand and Source, has a reputation for, but also a certain amount of gap filling in the simple beta product range as well.”
The majority of Invesco’s ETF clients in EMEA are institutional or professional investors from pension funds, to insurance companies through to wealth managers and private banks. Mellor recognises that ETF investors in the US tend to be 70 per cent retail against 30 per cent institutional, while in Europe, the reverse is true.
“The reality is that in the US, there is a long-term culture of share ownership and investment with 401k retirement plans so it is a natural thing for investors to buy ETFs.
“In Europe, there has always been a degree of disintermediation with retail investors going to a bank and accessing investment products through that route through funds.”
Despite the Retail Distribution Review in the UK, the uptake of ETFs by financial advisers has been very slow to build.
“It’s part of a cultural thing,” Mellor says. “There have been changes in regulation which been helpful but there are still structural impediments for financial advisers to use ETFs.”
Most retail fund supermarket type platforms treat ETFs as equities, not funds, charging a standard trading charge, which makes it more expensive to make small regular investments via an ETF.
“I think that there are ways to work around it but requires action from ETF providers but also administration changes from product warehouses and ultimately it has to be driven by investor demand,” Mellor says.
The key thing Mellor is seeing at the moment in terms of investor behaviour is the growth in vanilla ETF demand, for products based on the S&P 500, for instance.
“There are some very clear short-term shifts in terms of more safe haven areas of the market but the lions’ share of growth has been in core beta building blocks,” he says.
Another strongly growing area is simple smart beta single factor ETFs and then, more recently, demand for what Mellor calls ‘the more intelligent areas of the markets’, multi-factor smart beta, ‘done well and combining the factors properly’.
“It’s something that both Source and Invesco has a long history in doing,” Mellor says. “Back in September we launched another multi factor smart beta product in the Invesco Goldman Sachs Equity Factor Index range with exposure to emerging markets on multi factors – it’s an exciting area.”
ESG is a conversation Mellor says he has in almost every meeting across the EMEA region, but especially in Scandinavia or the Netherlands.
“It’s a must-have topic area,” he says. “Everyone’s opinion varies from country to country and culture to culture. Most agree on the ‘e’ and the ‘g’ but the ‘s’ throws up more problems. We are trying to design a product that can be used by the broadest range of people and we are doing a lot of work on this – watch this space as we will be launching ESG products shortly.”
The summer saw Invesco cut fees on some of its ETFs and Mellor comments: “There is always going to be pressure on fees - how low can they go? There was an index tracking fund launch in the US from Fidelity with zero fees, which focuses the attention, but we have low levels of fees in key beta benchmarks – offering the EUROSTOXX 50 at five basis points, for instance. Does cutting the fee further make much difference? Knocking a basis point of the fee is not going to make much difference to the end performance and the true cost of an ETF may not be reflected in the fees. What matters a lot more is the true cost of the fund.”
Mellor points out that withholding tax on a perfectly vanilla S&P 500 ETF in the US will be 30 per cent, while one that is physically domiciled in Ireland will have a 15 per cent tax rate.
Another issue is whether an ETF is a physical or synthetic fund as synthetic funds can offer better performance than their physical peers.
“With a Swap-based ETF you can tap into the kind of dividend rates you get in the futures market which price close to gross dividends for a more accurate reflection and better performance,” he says.
“Overlying through it is that the true cost of the ETF is different to the headline fee – what are the costs of running the portfolio and it goes back to the true cost of a holding measured by the performance of the funds. Our S&P 500 ETF, after fees, has outperformed the best physical competitors by almost 0.2 per cent year-to-date as a result of better dividend participation rates.”
“The other part of your overall cost of ownership is how much does it cost to get in and out which for a mutual fund is harder to see but with an ETF is easy to see and measure. It’s controllable, measurable and transparent in an ETF.”
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