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Barclays Global Investors

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Presentation on theme: "Barclays Global Investors"— Presentation transcript:

0 Improving Client Outcomes
iShares play an important role in efficient portfolios

1 Barclays Global Investors
One of the world's largest institutional asset managers $2.0 trillion AUM* 3,004 clients in 54 countries* Managing 2300 funds** Tracking over 250 indices worldwide** 12 locations, over 3000 staff*** iShares, Exchange Traded Funds from Barclays *Source: Barclays Global Investors (BGI), November 2007 **Source: Barclays Global Investors (BGI), May 2007 ***Source: Barclays Global Investors (BGI), September 2007 SNUG060606Q2

2 iShares - Global business focusing on Local needs
GERMANY 80 FUNDS iSHARES.EU DUBLIN 62 FUNDS iSHARES.EU US 159 FUNDS iSHARES.COM CANADA 24 FUNDS iSHARES.CA HONG KONG 3 FUNDS iSHARES.COM.HK European listings on: 7 exchanges London Stock Exchange Euronext Paris Eurolist by Euronext Amsterdam Deutsche Börse (XTF Exchange Traded Funds Segment) Borsa Italiana SWX Swiss Exchange Virt-x European listings on: 5 exchanges Deutsche Börse (XTF Exchange Traded Funds Segment) Euronext Paris SWX Swiss Exchange Vienna Stock Exchange Borsa Italiana As of 13 May, 2008

3 Global ETF AUM Is Forecast to Reach $2trl by 2011
The Global ETF Market Has Experienced Strong Growth Since 2000 – Both in Terms of AUM & Funds Global ETF Market Growth (AUM & No. of Funds) US CAGR ( ) = 37% Europe CAGR ( ) = 114% Global CAGR* ( ) = 40% Global ETF AUM Is Forecast to Reach $2trl by 2011 Source: Morgan Stanley, Exchange Traded Funds – Q Global Industry Review, 31 March 2008 * Compound annual growth rate

4 ETF Usage within Private Client Portfolios
Current Future Discretionary Management Tactical access to markets New Cash deployment Manager search & transition Advisory Mandate Client driven demand Difficult to access asset classes Business Considerations No retrocession on iShares Can not trade ETFs Discretionary Management Fee based environment Strategic “Core”& tactical “Satellites” Active Risk Budgeting Advisory Mandate ETF Wrap model portfolios Small account aggregation Business Considerations Fiduciary responsibility to clients Regulatory changes Minimization of manager blow-ups

5 Quick review of Modern Portfolio Theory
Optimal mix of asset class benchmarks Alternatives Commodities Developed Equity Potential return (%) Fixed Income Cash Potential risk (%) Blending uncorrelated assets creates Efficient Frontier Source: Markowitz, “Portfolio Selection”, The Journal of Finance, March 1952

6 So which asset class performs best?
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 +10% +11% +12% +24% -12% +26% +14% +13% +1% +9% -20% -27% +2% +24% -3% +21% +26% +32% +13% -28% -30% +8% +32% +25% +11% +37% +76% +29% -24% +12% -14% -8% +25% +17% +30% +24% +22% -31% -25% -12% -6% +33% +26% +35% -2% +66% +56% +9% -7% +15% -8% +14% +3% -4% +41% +42% +38% +7% +16% +5% +15% -6% -4% +40% +14% +19% +15% -8% -12% +31% +37% +30% +19% -9% +7% +13% -10% +16% +27% +3% LEGEND AND DATA SOURCES Commodities Source: Dow Jones – AIG Commodity Index - Total return Infrastructure Source: Macquarie Global Infrastructure 100 Index – Total return Emerging markets debt Source: JP Morgan Emerging Markets Bond Index - Total return Property Source: FTSE EPRA/NAREIT Global Index – Total return Private equity Source: LPX Private Equity Index – Total Return Convertible bonds Source: UBS Global Convertible Corporate Bond Index – Total return Developed equity Source: MSCI World Equity Hedged Index – Total return High yield bonds Source: Merrill Lynch Euro High Yield Index – Total return Emerging markets equity Source: MSCI Emerging markets US$ Index – Total return All returns are shown in US dollars Spread of returns between highest and lowest performing strategies 40% 49% 37% 62% 32% 54% 43% 33% 30% 40% Sources: Please refer to notes below.

7 Asset Allocation plays largest role in portfolio performance
Academic research: Asset mix determines around 90% of variation in fund returns¹ But, not a one-off decision – must be revisited regularly² Investors today have access to many more asset classes and financial instruments Implementation easier today than yesteryear – more asset classes, better products Time to revisit client’s strategic asset allocation ß α “Determinants of Portfolio Performance”, Brinson, Hood & Beebower, 1986; "Asset Allocation Dynamics and Pension Fund Performance“, Blake et al, 1999 “Strategic Asset Allocation: Portfolio Choice for Long-Term Investors”, Campbell & Viciera, 2002

8 How do active managers add value?
Total Return Positive Alpha Participating in the asset class Skill or luck Beta 0% Negative Alpha

9 Managing your active manager risk

10 Ingredients of investment management
Science (Modern Portfolio Theory) + Art (Implementation – strategic and tactical) + Managing Client Emotions (Fear, greed, tax aversion)

11 Why index a portion of a client portfolio?
Consistency and reliability of long term returns relative to the market Low Cost Diversification: buy the market no active manager risk no surprises More time for your business Client facing activity Overall business strategy To research & implement an asset allocation Low supervisory burden Control Active Manager Risk Index funds provide margin of safety

12 Active portfolio management presents “active manager risk”
Active manager return The over- or under-return earned by an active manager relative to a benchmark Active manager risk The annualized standard deviation of a manager’s active return (usually calculated as tracking error)

13 Active Manager Risk Hypothetical
Active return vs. Equity benchmark 10-year annual active return: 0.24% 10-year annual tracking error: 5.80% Equity Index return Annual active return: -2.53% Annual tracking error: 5.22% Annual active return: 2.11% Annual tracking error: 6.10% -10 -5 5 10 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Active return (%) For illustration only. Not indicative of any investment or manager.

14 Active Manager Risk Hypothetical
2% active risk budget 60% Equity Index / 40% large cap active manager Annual active return: -0.97% Annual tracking error: 2.00% Equity Index return Annual active return: -2.53% Annual tracking error: 5.22% Annual active return: 2.11% Annual tracking error: 6.10% -10 -5 5 10 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Active return (%) For illustration only. Not indicative of any investment or manager. 100% active manager Portfolio with a 2% active risk budget

15 Active Manager Risks – other considerations
Manager Turnover Style drift Unknown portfolios (hidden risk) Explaining underperformance to your clients Costs to “be in the game” Trading cost Research cost Manager marketing cost Risks need to be monitored and controlled

16 Core-Satellite portfolio construction
Measuring risk within a portfolio How can active manager risk, introduced to the portfolio by active managers, be controlled? Setting a specific risk budget How can active managers and index managers be held within the same portfolio? What is the overall impact to the portfolio? How many managers, how much to each? What tools and resources do Barclays Global Investors make available?

17 ETFs Can Enhance Risk Adjusted Portfolio Returns
Core Optimal strategic asset allocation decisions (betas): allow investors to achieve optimal trade-off Objective: generate lowest possible risk for given expected return Satellites Active investment decisions (alphas): aim at shifting the efficient frontier Objective: outperform the reference benchmark for a given level of risk Core + Satellite Active satellites Original Core Portfolio Optimized Core Risk This example is provided for illustration purposes only. It does not represent a current investment recommendation.

18 Core-Satellite: ETFs Can be Used in the Core or Satellite
ETF(s) in the Core : Broad market indices FTSE 100, MSCI Europe ex UK, MSCI Emerging Markets £ Gilts, Inflation, € Corporate Exposure to diversified baskets of securities Optimized Core: sector, style or country indices ETF in the Satellite : Concentrated, focused ETFs: Sector and style Individual countries and regions Alternative asset class Over/under weight tactical allocations ETF(s) Active Strategy 3 Active Strategy 1 Active Strategy 2 Core: Broad benchmark exposures Easily adjusted for TAA Can be optimized Portfolio ETF Satellite ETF Satellite ETF Satellite

19 iShares Asset Class Illustrator
Diversification can lower risk, increase return This example is provided for illustration purposes only. It does not represent a current investment recommendation.

20 Efficient portfolio management
Same risk / higher return Expected return Less risk / same return Current portfolio Risk (volatility) This example is provided for illustration purposes only. It does not represent a current investment recommendation.

21 iShares Asset Class Illustrator

22 Lower Total Cost of Ownership & improving risk/reward using iShares
TER Return Risk Return / Risk All Active Funds 1.50% 12.00% 18.00% 0.67 All iShares 0.40% 13.10% 12.50% 1.05 Blended 50/50 0.95% 12.55% 14.44% 0.87 Lowering costs to client leads to improved outcomes Risk is not linear, and is greatly reduced by adding less volatile investments σport = √ (wa2 σa2 + wb2σb2 + 2wawbρabσaσb) Figures are for illustrative purposes only Combined portfolio risk assumes correlation of 1 between two portfolios

23 Why is the risk/reward ratio improved with an iShares allocation?
Index Returns 3 yr 5 yr Morningstar category Index 3 Yr 5 Yr # Below Index Total % Below Index Emerging Market Equity MSCI Emerging Market 23.39% 27.60% 190 244 78% 140 199 70% Euro Equity Large Cap MSCI Europe 9.27% 14.88% 1,065 1,460 73% 895 1,197 75% UK Large Cap Equity FTSE 100 9.41% 13.80% 604 645 94% 464 553 84% Euro Fixed Income Lehman Euro Aggregate 2.41% 3.45% 1,985 2,404 83% 1,788 1,923 93% Active Fund Underperformance Alpha is elusive, yet active risk is always present Morningstar, 28/2/08 data of fund share classes underperforming category benchmark, BGI analysis

24 Active managers face a TER “headwind”
Average Total Expense Ratio (TER) comparisons in Europe Type of Fund Exchange Traded Funds* Average Expense Ratio (bps) European Sector Exposure Eurozone Sector Exposure US Sector Exposure Global Exposure Country Exposure Europe Country Exposure United States International/Emerging Markets Style Regional Exposure Europe Regional Exposure Eurozone Fixed Income Commodities All Equity Overall ETF 39 38 55 61 40 62 67 53 43 19 50 49 45 Open-Ended Mutual Funds** Average Active Fund TER Average Index Fund TER Average Bond Fund TER 171 91 103 Source: Lipper, Morgan Stanley Investment Strategies. *As of end December 2007 *Although these investment vehicles may be similar to ETFs, they are not identical and may offer additional benefits to investors over ETFs, such as increased returns and customized investment management. **As of end December 2007, for funds with a Q4 fiscal year end, the data used in the average are from 2006.

25 Headline TER is not the “Effective TER” - Lending Inside iShares Funds
Securities Lending Returns to the Fund** TER Effective TER DJ Euro STOXX 50 0.27% 0.35% 0.08% DJ STOXX 50 0.18% 0.17% FTSE Eurofirst 80 0.25% 0.40% 0.15% FTSE/Xinhua China 25 0.74% 0.49% DJ Euro STOXX Mid Cap DJ Euro STOXX Select Dividend DJ Euro STOXX Small Cap 0.13% FTSE Eurofirst 100 0.12% 0.28% MSCI Eastern Europe 10/40 0.09% 0.65% S&P 500 0.32% Return levels depend on demand for the underlying securities inside the fund High lending yield in European iShares is due to yield enhancement trades In emerging market countries scarcity of assets is a primary demand driver Actual historic returns Funds TER are subject to additional costs, such as trading, rebalancing, stamp (where applicable) ** Source: BGI, most recent audited financials (US audited 31/08/07, DJ Euro Stoxx 50 30/09/2006, all other Dublin iShares as of 28/02/07)

26 Indexation is anything but passive

27 Philosophy remains unchanged
Index management Indexation is anything but ‘passive’ Minimising costs is vital Index funds are always chasing the index Dedicated trading research team Controlling investment and operational risks is essential Focused on risk at every level Significant investment in technology Identifying opportunities to improve returns Using intelligent trading techniques Adding value through securities lending Return Risk Cost Philosophy remains unchanged

28 Minimising costs Smart trading saves you a small fortune
Explicit Costs Index funds are always chasing the index Benchmarks assume zero costs Maximising crossing limits market trades Size and diversity of global client base Careful market trading keeps value in your fund Our global scale keeps costs low Focused trading research ensures quality execution Improving portfolio efficiency Use of new tools and instruments Implicit Costs

29 Controlling risk No surprises
Investment risk tightly controlled Closely replicate risk characteristics of index Stock, industry, country and size segment Carefully manage risk/cost trade-off Exceptional standards of operational risk management All guidelines are stored electronically Individual managers assigned trade limits Investment in technology Development of systems to enhance process

30 Improving returns Helping to re-coup costs
Index Changes – Predictable or Not? Pro-active approach to index events Focused research into index changes Leveraging global knowledge Developing risk controlled strategies Improving returns through: Securities lending Intelligent trading Use of new investment tools

31 Indexation is not ‘passive’ investing
-0.2 0.0 0.2 0.4 0.6 US Equities European Equities Japanese Pacific Rim Proactive approach to Index changes Detailed control of risk and value Coordinated global trading Announcement Index Entry Index Entry Point Return Cost Risk 9.7 6.2 5.6 4.8 3.9 3.7 1 2 3 4 5 6 7 8 9 10 A B C D E F Index Weight (%) Index BGI Portfolio Diverse client base  better trading costs Proprietary trading cost model Scale  better market trading Global technology platform Strict control of operational and investment risk Multi-faceted risk control structure Tested investment process

32 Disclaimers Regulatory Information
Barclays Global Investors Limited ('BGIL'), which is authorised and regulated by the Financial Services Authority ('FSA'), has issued this document for access by Professional Clients in the UK only and no other person should rely upon the information contained within it. iShares plc and iShares II 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 Important information is contained in the relevant prospectus, the simplified prospectus and other documents, copies of which can be obtained by calling , from your broker or financial adviser, by writing to Barclays Global Investors Limited, iShares Business Development, Murray House, 1 Royal Mint Court, London EC3N 4HH or by writing to the Manager of the Companies: Barclays Global Investors Ireland Limited, New Century House, International Financial Services Centre, Mayor Street Lower, Dublin 1, Ireland. 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 are not authorised or registered for distribution and where no prospectus for the Companies has been filed with any securities commission or regulatory authority. The Companies may not be acquired or owned by, or acquired with the assets of, an ERISA Plan. Risk Warnings Shares in the Companies may or may not be suitable for all investors. Barclays Global Investors Limited does not guarantee the performance of the shares or funds. The price of the investments (which may trade in limited markets) may go up or down and the investor may not get back the amount invested. Your income is not fixed and may fluctuate. Past performance is not a reliable indicator of future results. The value of the investment 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. Affiliated companies of Barclays Global Investors Limited may make markets in the securities mentioned in this document. Further, Barclays Global Investors Limited and/or its affiliated companies and/or their employees from time to time may hold shares or holdings in the underlying shares of, or options on, any security included in this document and may as principal or agent buy or sell securities.

33 Disclaimers Index Disclaimers
'Dow Jones', 'STOXX', 'Dow Jones EURO STOXX Mid Index', 'Dow Jones EURO STOXX Select Dividend 30 Index' and 'Dow Jones EURO STOXX Small Index' are proprietary and copyrighted material and trade marks and/or service marks of Dow Jones & Company, Inc. and/or STOXX Limited and have been licensed for use for certain purposes by Barclays Global Investors Limited. iShares DJ Euro STOXX MidCap, iShares DJ Euro STOXX Select Dividend and iShares DJ Euro STOXX SmallCap are not sponsored, endorsed, sold or promoted by Dow Jones or STOXX, and neither Dow Jones nor STOXX makes any representation regarding the advisability of investing in such funds. 'Dow Jones', 'STOXX', 'Dow Jones EURO STOXX 50 Index' and 'Dow Jones STOXX 50 Index' are proprietary and copyrighted material and trade marks and/or service marks of Dow Jones & Company, Inc. and/or STOXX Limited and have been licensed for use for certain purposes by Barclays Global Investors Limited and iShares II plc. iShares DJ Euro STOXX 50 and iShares DJ STOXX 50 are not sponsored, endorsed, sold or promoted by Dow Jones or STOXX, and neither Dow Jones nor STOXX makes any 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'). 'FTSEurofirst®' is a trademark jointly owned by FTSE International Limited ('FTSE') and Euronext N.V ('Euronext'). The FTSEurofirst 100 Index and FTSEurofirst 80 Index are compiled and calculated by or on behalf of FTSE. None of the Exchange, the FT, FTSE or Euronext sponsors, endorses or promotes iShares FTSEurofirst 100 and iShares FTSEurofirst 80 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 and Euronext. Barclays Global Investors has obtained full licence from FTSE to use such copyright and database rights in the creation of these products. The FTSE/Xinhua China 25 Index is calculated by or on behalf of FTSE/Xinhua Index Limited ('FXI'). FXI does not sponsor, endorse or promote iShares FTSE/Xinhua China 25. All copyright in the index values and constituent list vests in FXI. Barclays Global Investors has obtained full licence from FXI to use such copyright in the creation of this product. 'FTSE™' is a trade mark jointly owned by the London Stock Exchange plc and the Financial Times Limited. 'Xinhua' is a service mark and trade mark of Xinhua Finance Limited. All marks are licensed for use by FXI. 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 Barclays Global Investors and any related funds. 'Standard & Poor’s®', 'S&P®', 'S&P 500' are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Barclays Global Investors, N.A. iShares S&P 500 is not sponsored, endorsed, sold or promoted by S&P and S&P makes no representation regarding the advisability of investing in this product. 'iShares' is a registered trademark of Barclays Global Investors, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. © 2008 Barclays Global Investors Limited. Registered Company No All rights reserved. Calls may be monitored or recorded.


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