Equal-weight funds tipped to be new European battle ground

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BlackRock and DWS are among asset managers thought to be eyeing up the launch of equal-weight index mutual funds amid rising investor demand for ways to access the strategies outside the exchange traded fund format.

Equal-weight mutual funds and ETFs track indices that include the same constituents as capitalisation weighted indices, but due to their equal weighting, they can provide an alternative for investors concerned about overconcentration in cap-weighted indices.

European equal-weight products of all kinds gathered record net flows in September of €2.9bn, bringing inflows for the quarter to €3.9bn, according to Morningstar data.

Now asset managers are looking to capitalise on the surge in inflows, growing competition for assets and the exchange trade fund wrapper’s poor access to UK model portfolio platforms.

This article was previously published by Ignites Europe, a title owned by the FT Group.

Legal & General Investment Management and HSBC Asset Management both unveiled S&P 500 equal-weight index funds earlier this month, with ongoing charges of 0.15 per cent and 0.17 per cent, respectively.

Both providers also offer “institutional plus” share classes of 0.1 per cent, depending on minimum investment, undercutting equivalent DWS and BlackRock ETFs — which have total expense ratios of 0.2 per cent — by half.

Dan Caps, investment manager at wealth manager Evelyn Partners, said: “The only way you are going to compete with something that is at scale and is doing a good job is to come in and do something on fees.

“The only way to really disrupt the status quo is to undercut and we are seeing asset managers do that.”

Asset managers were also trying to capture the growing UK model portfolio services (MPS) market, where index funds were much more widely available and easily traded compared with ETFs on platforms, he added.

According to Caps, BlackRock had a S&P 500 equal-weight index fund “in the pipeline” and DWS was also lining up a product in response to growing competition in the space.

Rather than launching a fresh index fund strategy, Caps expected both asset managers to unveil fund share classes of their existing ETFs, meaning they would be able to harness the scale and track record of existing products.

“They have both indicated they are launching these strategies and I would expect them to be fund share classes of the ETFs,” he said.

“It’s a perfect storm, it’s where the flow is going, they can undercut on price and if they launch it as a fund they can steal some of the MPS market as well.”

DWS said it “periodically reviews” its product range but that it “can’t comment on specific product initiatives”.

BlackRock said it “does not speculate” on future product development.

The two companies manage Europe’s largest equal-weight ETFs, which have attracted large inflows over recent months.

Flows into equal-weight ETFs totalled €4.7bn in the third quarter of this year, with the €9.4bn Xtrackers S&P 500 Equal Weight Ucits ETF and €3bn iShares S&P 500 Equal Weight Ucits ETF pulling in €2.1bn and €1.5bn, respectively, according to data from Morningstar.

Alongside the Xtrackers S&P 500 Equal Weight ESG Ucits ETF, the three products were among the 10 best-selling funds in the US large-cap blend category in the third quarter.

Jose Garcia-Zarate, associate director of passive strategies at Morningstar, said recent inflows into equal-weight funds were a reaction to overconcentration concerns, with the July and August market volatility providing the “perfect excuse to act on something that has been building up as a concern”.

Rising demand comes as ETFs have extended their dominance over index- tracking mutual funds within US equities over the past year, despite many of the platform issues preventing them from being widely traded within UK model portfolios.

ETFs accounted for 63 per cent of passive money among US large-cap blend equity funds as of the end of September, versus 55 per cent a year earlier.

“There is no denying the ETF is increasingly becoming the more popular vehicle, particularly for US equities. Investors are not just voting in favour of passive, they’re also voting for the ETF wrapper,” Garcia-Zarate said.

As for whether equal-weight strategies will break out into other exposures, Garcia-Zarate believes the primary focus for asset managers would remain US equities but added that global equities could also be an area of product development because of its large US exposure.

Caps said asset managers could also offer an equal-weighted strategy of the “incredibly concentrated” FTSE 100 in the future.

But he added: “I’m not sure we’re going to necessarily see the same success as the US in other regions.”

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at igniteseurope.com.