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Getting Active About Passive Connect 4 Investment Forum 2013 - Nothing Passive about Index A professional’s guide to index investing June 2013 FOR PROFESSIONAL.

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Presentation on theme: "Getting Active About Passive Connect 4 Investment Forum 2013 - Nothing Passive about Index A professional’s guide to index investing June 2013 FOR PROFESSIONAL."— Presentation transcript:

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2 Getting Active About Passive

3 Connect 4 Investment Forum Nothing Passive about Index A professional’s guide to index investing June 2013 FOR PROFESSIONAL CLIENTS ONLY

4 3 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

5 4 What we’ll cover For professional clients only The index fund landscape What is an index fund? Implementation and portfolio construction Due diligence Support

6 5 Changing fund landscape Market ActiveIndex The market barbell ‘Mediocre’ middleThe real alpha playersThe real beta players Investors will shift towards both ends of the market For professional clients only

7 6 Indexing on the rise For professional clients only 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 growth in the sales of ETFs across Europe Source: ETF Landscape, BlackRock Investment Institute, as at December ,000 1,250 1,500 1,750 2,000 2,250 45, ,000 35,000 30,000 25,000 20,000 15,000 10,000 5, ,000 Tracker Funds AUM (LHS) Tracker Funds Net Sales (RHS) Source: Investment Management Association Tracker Funds – AUM and Sales (£m)

8 7 RDR – a catalyst for indexing For professional clients only 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.”

9 8 What we’ll cover For professional clients only The index fund landscape What is an index fund? Implementation and portfolio construction Due diligence Support

10 9 What is an index fund? 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) 9 For professional clients only

11 ETFs versus traditional trackers BLOCKSBUILDING COST-EFFECTIVETRANSPARENTSIMPLE Typically core asset classes Daily trading Wide range of asset classes and sectors Intra-day trading EXCHANGE TRADED FUNDS TRADITIONAL INDEX TRACKERS ETFs and traditional index tracker funds: Same but different 10 For professional clients only

12 11 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

13 12 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 For professional clients only

14 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 13 For professional clients only

15 14 How to access our funds For professional clients only  Access BCIF, iShares ETFs and BlackRock Consensus through these platforms

16 15 What we’ll cover For professional clients only The index fund landscape What is an index fund? Implementation and portfolio construction Due diligence Support

17 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 Planning Sample allocation of time spent per service offering Insurance Tax Planning Comprehensive Financial Planning Retirement Planning Mortgages Investment Management 16 For professional clients only

18 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. Sample multi-asset fund Outsourcing: Consider multi-asset solutions 17 For professional clients only

19 18 Mixed Investment 0- 35% Shares Mixed Investment % Shares Mixed Investment % 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. For professional clients only

20 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 Advisers Sample allocation of time spent per service offering Mortgages Fund Manager Research Investment Management Tax Planning Insurance Retirement Planning 19 For professional clients only

21 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 Equity income Equities Corporate bonds Property Government Bonds Cash Equities Alternatives  But….greater index allocation means limiting alpha potential 20 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 For professional clients only

22 21 iShares Minimum Volatility funds Illustrative potential for enhanced risk-adjusted profile Source: BlackRock 2013 For professional clients only

23 22 What we’ll cover For professional clients only The index fund landscape What is an index fund? Implementation and portfolio construction Due diligence Support

24 23 Four steps to index fund selection 1. Evaluate the provider 2. Quick “rule in rule out” criteria 3. Evaluate the product structure Fully replicating Optimised Derivative replicating ETF Stratified Sampling 4. Select the product GeneralPerformanceTrading and valuationTER/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. For professional clients only

25 24 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 ✔ For professional clients only

26 25 What we’ll cover For professional clients only The index fund landscape What is an index fund? Implementation and portfolio construction Due diligence Support

27 26 More information? For more information about BlackRock’s index offering, you can visit our websites: for BCIF and BlackRock Consensus 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. For professional clients only

28 27 Index – The Horizon Building Blocks Top Creations iShares 1 Top Creations BCIF iShares FTSE Gilts UK 0-5 $31mBCIF - Global Property Securities Equity Tracker Fund $94m iShares MSCI Emerging Markets Minimum Volatility $11mBCIF - UK Gilts All Stocks Tracker Fund $85m iShares MSCI World Minimum Volatility $11mBCIF - Emerging Markets Equity Tracker Fund $26m iShares Markit iBoxx £ Corporate Bond 1-5 $10mBCIF - UK Equity Tracker Fund $15m Top Redemptions iSharesTop Redemptions BCIF iShares Markit iBoxx £ Corporate Bond ex-Financials $18mBCIF - Balanced Managed Fund – Aggregate $-20m iShares S&P Commodity Producers Gold $3mBCIF - Overseas Corporate Bond Tracker Fund $-5m iShares Markit iBoxx £ Corporate Bond $2mBCIF - North American Equity Tracker Fund $-4m iShares Markit iBoxx £ Corporate Bond 1-5 $2mBCIF - 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 For professional clients only

29 28 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: Registered in England No 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 For professional clients only

30 29 BCIF All 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 Funds BlackRock 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 ). For professional clients only

31 30 Regulatory information BlackRock 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) , 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 UK Most 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 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 investors This 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 warnings Investment 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. For professional clients only

32 31 '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. For professional clients only

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