UK Asset Owners: The 2021 Outlook

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As I sit here in my front room, just as I imagine many of you reading this are, I can’t help but wonder: where did the last year go? On February 1st 2020, almost a year ago exactly, the front pages of newspapers were dominated by Brexit updates and fears of an unknown virus were only just emerging. A year on, Brexit has happened, the US has a new President and of course, the media is dominated by reports about the global fight against the Coronavirus pandemic. A lot has changed.

What’s in store for 2021?

For my team and I, the professional focus throughout this period has been raising awareness of how Asset Owners in the UK can use Exchange Traded Funds (ETFs). Whilst ETFs are a relatively new and rapidly growing area in asset management, the UK Asset Owner market is one of the oldest in the world - with some of the world’s oldest defined benefit pension funds and an insurance market dating back hundreds of years. Bringing those two forces together hasn’t been straightforward, but it is now abundantly clear that ETFs can be of significant use to these UK institutions.

‘Why?’ I hear you ask. Allow me to explain. ETFs have become extremely cost effective, whilst offering investors the ability to be very precise, target specific factors and themes, and more recently implement different flavours of sustainable strategies. The cost effectiveness is directly linked to the growth in size of the market. As a general rule of thumb, the larger an individual ETF becomes, the more it is traded over exchange and the lower the transaction costs become to trade that ETF. For many Fixed Income (FI) ETFs, where a number of single ETFs are over $1bn in size, trading costs are now a handful of basis points, versus other investment wrappers where the same exposure can cost the investor significantly more.

With these evolutions in the ETF market, we are focused on working with UK Asset Owners in the following areas, so that they too can capitalise on the growth of the ETF market.

  • Fixed Income ETFs

Due to the liquidity benefit that FI ETFs can bring, we believe that there are two specific ways to most effectively use FI ETFs:

  1. Tactical allocations: FI ETFs are an efficient tool to implement tactical market views, allowing pension funds and insurers to capture attractive market entry points, gaining access to asset classes including investment grade, high yield and emerging market debt in one single low-cost trade.
  2. Interim exposures: FI ETFs can also be effective when looking to gain interim exposure to FI markets, for example ahead of a manager selection process.
  • Sustainable ETFs

As the wave of global assets continues to move towards more sustainable strategies, we are working with our clients every day to help them achieve their ESG objectives through our expansive fund offering. In 2020, we saw US$ 22.6bn flow into UCITS iShares sustainable ETFs1, which are helping UK Asset owners to navigate the transition to a more sustainable future, by building more resilient portfolios and aiming to achieve better long-term risk adjusted returns.

  • Building Custom Liquidity Sleeves

Over the past two years we have seen a sharp pick up in what we call ‘liquidity sleeves’ – combinations of ETFs specifically designed on a client by client basis to help with liquidity challenges in the portfolio. We are seeing this manifest itself in two main ways:

  1. Managing liquidity for private market allocations: many of our clients are allocating assets to private market strategies. An increasing number are using ETFs as part of the pre-funding period, to help manage drawdowns whilst still retaining market exposure
  2. Managing complex cashflow requirements: an increasing number of our clients are building tailored ETF combinations that replicate their longer-term strategic asset allocations. These sleeves act as a type of cash equitisation tool, so that a build up of cash does not lead to a drag on performance.

If you would like to speak to me or any of my team about how ETFs may help you achieve your investment objectives, then please do get in touch.

In the meantime, we can only imagine what the headline on the 1st February 2022 will read, but we sincerely hope that the headlines of the Coronavirus fade away from the front pages.

1BlackRock, 2021

Armit Bhambra
Head of UK Asset Owners