08/10/2012 How to index invest in the new world Pollyanna Rhodes BlackRock Selecting Best Beta Pollyanna Rhodes October 2012 FOR FINANCIAL PROFESSIONAL USE ONLY. NOT TO BE RELIED UPON BY INDIVIDUAL INVESTORS. 1 08/10/2012 Agenda  Expanding world of beta  The case for indexing  Total Expense Ratio vs. Total Cost of Ownership  The BlackRock difference  What makes us different Expanding World of Beta Themes behind the growth Growth in access opportunities • Exposure to new markets, segments and asset classes l US Index Fund Market Share 20.0% 17.0% 14.0% 11.0% 2009 2008 2007 2006 2005 2004 2003 2002 2000 • Delivery through “new instruments” 2001 8.0% Growth in beta tools probability 20-25% % of Total Fund AUM Growth in the use of beta Global ETF AUM • Investors are altering the way in which they use and view beta 350 250 200 150 100 50 2011 2010 2009 2008 2007 2006 2005 2004 Fixed Income ETFs Commodity ETFs Mar 2012 Equity ETFs 2003 2002 2001 0 2000 USD D/ Billio on 300 2 08/10/2012 How the fund landscape could look post-RDR The market barbell The real alpha p players p y ‘Mediocre’ Middle The real beta players p y Active Market Passive BFM UK Special Situations BGF Euro Corporate Bond BCIF UK Equity Tracker iShares MSCI World A shift towards either end of the market Expanding Access to Beta e.g. Growth of Beta Access Within Equities Private Equity Property Commodities Frontier Markets Alternative Weight High Yield ‘Screened’ Strategies Market Segments Emerging Markets Global Small p Cap Convertible Bonds Inflation Core Beta For illustration purposes only. 3 08/10/2012 Why index a portion of your portfolio? FOR PROFESSIONAL INVESTORS ONLY – FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY How the indexing landscape has changed Tracker Funds – AUM and Sales (£m) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5 000 5,000 0 -5,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Tracker Fund AUM Source: Investment Management Association 4 08/10/2012 A similar story for EFPs Global ETP Market Growth (US$, Bn.) European ETP Market Growth (US$, Bn.) $1,800 5000 $1,600 4500 $350 2500 $300 2000 4000 $1,400 3500 $1,200 3000 $1,000 $250 1500 $200 2500 $800 2000 $600 1500 $400 $150 1000 $100 500 1000 $50 $200 500 2011 May-12 2010 2009 2008 2007 2006 2005 2004 2003 2002 0 2001 $0 2000 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 May-12 $0 ETF Equity Assets ETF Fixed Income Assets ETF Commodity Assets ETF Equity Assets ETF Fixed Income Assets ETF Commodity Assets Source: BlackRock Investment Institute – ETF Research, Bloomberg. May 2012 FOR PROFESSIONAL INVESTORS ONLY – FOR PROFESSIONAL CLIENTS Why indexing in the first place? Active funds do generate alpha but it varies substantially over time… 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% % 0.0% 2001 2002 2003 2004 % of all funds outperforming 2005 2006 % Equity 2007 2008 2009 2010 % Fixed Income Source: Morningstar, Bloomberg, BlackRock. 1 year returns as at 31 December 2010. Universe includes European Domiciled Funds benchmarked against a selection of common equity and fixed income indices 5 08/10/2012 Why indexing in the first place? Active funds do generate alpha but it is not consistent 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2001 2002 2003 Year 1 2004 Year 2 2005 2006 2007 2008 Year 3 Source: Morningstar, Bloomberg, BlackRock as at 31 December 2010. Universe includes European Domiciled Funds benchmarked against a selection of common equity and fixed income indices Is the investors’ risk/return profile consistent with active product features? NO INDEX YES What is the most appropriate indexing methodology for the client’s investment time horizon, liquidity needs, exposure and income requirements? INDEX Are there skilled managers that can consistently add value in a market? Does your client want income or accumulation? Does your client need daily or intra day liquidity? INDEX When to use indexing Investors should conduct due diligence on index managers and understand their investment methodology, for example physically replicating ETFs, derivative replicating ETFs or accumulation vs. income generating index funds. YES Are the cost implications in linewith expected net return target? YES ACTIVE Investors should conduct due diligence on active managers and understand their investment methodology Products should be reviewed on a periodic basis to identify any gaps or deviations from the original strategy. 6 08/10/2012 Implementing Core / Satellite Strategies Core - passively managed vehicles, such as ETFs or traditional index pooled funds lend themselves ideally to the core component of an investment portfolio due to four main reasons: • Broad diversification by closely mirroring asset class benchmarks Active Strategy 3 ETFs/ Index Funds Active Strategy 1 St t • Consistent performance relative to a benchmark • Low costs • Improved risk management Active Strategy 2 Satellites - are typically more specialised investments which serve as active tools to deliver additional returns (alpha). ETF satellites have a number of advantages: Portfolio • Precise exposure to a wide range of discrete market sectors, specific styles or market capitalisations indices. ETF Satellite ETF Satellite • Exposure to selected market segments at low costs • Eliminating security selection or manager selection risk ETF Satellite Total Expense Ratio vs. Total Cost of Ownership p FOR PROFESSIONAL INVESTORS ONLY – FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 7 08/10/2012 Total Cost of Ownership Passive Market Growth = More Passive Providers New Providers = More Competition New Providers More Competition = Lower TERs = More Competition Lower TER = Lower Total Costs Total Cost of Ownership The true cost of owning an ETF • Total Cost of Ownership: – Is NOT just TER. – Can be broken down into both internal as well as external factors factors. Internal factors Physical replicating funds Derivative replicating funds External factors • Total Expense Ratio (TER). • Rebalancing costs. • Trading spreads. • Securities lending revenue. • Total Expense Ratio (TER). + • Creation/redemption. • Brokerage fees. = Total Cost of Ownership • Tax. • Swap spread. • Securities lending revenue. • BlackRock believes Total Cost of Ownership is an accurate measure of investing in an ETF. 8 08/10/2012 TER vs. TCO Case Study: Top 5 European FTSE 100 ETFs TCO = Tracking Difference + Trading Cost 80 80 70 70 60 60 50 40 40 35 30 30 30 30 20 10 Basis Points (bps) Basis Points (bps) Total Expense Ratio 76 68 52 48 50 40 40 35 30 29 30 30 30 ETF 4 ETF 5 20 10 0 0 ETF 1 ETF 2 ETF 3 ETF 4 TER ETF 5 ETF 1 ETF 2 ETF 3 TER TCO TER can sometimes be misleading when gauging TCO Source: BlackRock, Bloomberg. Data as at end of March 2012. The BlackRock Difference FOR PROFESSIONAL INVESTORS ONLY – FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 9 08/10/2012 Indexing of BlackRock Seeks to deliver performance of chosen index through risk th h rigorous i i k management Holds index constituents at their index weights or a p representative sample to minimise tracking errors Efficient building blocks in an asset allocation strategy Low cost access to market returns Intelligent Portfolio Management Coordinated global trading platform and securities lending relationships Consistent exposure to a chosen market Index Funds vs. ETFs ETFs Index Funds Costs TER, creation/redemption fees, brokerage Management fees, creation/redemption commissions fees, and other costs (Admin etc.) Pricing g Real-time,, intradayy on exchange g Accessibility On exchange, OTC OTC Transparency Yes, typically daily disclosure of fund holdings Monthly holdings Minimum trade size 1 share Typically big, but may be smaller for retail funds End of dayy Additional risk / operational ease Tracking difference, and possible counterparty risk Minor, counterparty risk if SL is executed Expiration maturity No No Availability for lending Yes, both inside and unit lending Yes,, inside of the funds Liquidity provided Generally multiple dealers With Fund Provider Short positions possible Yes No 10 08/10/2012 Indexing in practice Index replication methodology Countries Sectors Stratified Sampling Countries Sectors Full replication Size Size Use Case Use Case • AUM is sufficient • AUM not sufficient to fully replicate • Markets fully investable • Not fully investable markets, illiquid assets Product Universe Investors can expand their portfolios beyond traditional investments Equity Developed Emerging Equity income Regional Size/Style/Yield Corporate Inflation-Linked Emerging Markets High Yield Currency C hedged Fixed Income Government Other Property Alternatives Commodities Asia Global Water Precious Metals UK Global Forestry Europe Clean Energy US Infrastructure Developed Markets 11 08/10/2012 The BlackRock Difference Superior index tracking outcomes are best achieved through a disciplined & pragmatic approach focused on managing return, risk and cost Return R t • Performance as planned with value added portfolio management • Designing and building flexible i t t investment solutions Risk Ri k • Carefully controlling investment and operational risk processes • Market leading portfolio & risk managementt systems Cost C t • Minimising market trades through internal market place – ‘crossing’ • Global trading platform and h ensure research market trading costs are low 12 08/10/2012 Appendix Asset Class Fund UK Equity Fixed Income AMC (%) 0.15 FTSE 100 0.15 UK Mid-Cap 0 15 0.15 Europe ex UK 0.15 Japan 0.15 Pacific ex Japan 0.15 North America 0.15 US 0.15 Emerging Markets 0.20 Global Property 0.20 UK Gilts All Stocks 0.15 Corp Bond 1-10 Yr 0.15 Corp Bond 0.15 Overseas Corp Bond 0.15 Overseas Gov Bond 0.15 Index-Linked Gilt 0.15 Disclaimers 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 2000. Important information is contained in the relevant prospectus, the simplified prospectus and other documents, copies of which can be obtained by calling 0845 357 7000, from your broker or financial adviser, by writing to BlackRock Advisors (UK) Limited, iShares Business Development, Murray House, 1 Royal Mint Court, London EC3N 4HH. 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 iShares may not be suitable for all investors. BlackRock Advisors (UK) 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 g In addition,, investing g in emerging g g markets involves certain risks and levels and bases of,, and reliefs from,, taxation can change. special considerations not typically associated with investing in other markets. Index disclaimers 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. 'iShares' is a registered trademark of BlackRock Institutional Trust Company, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. © 2010 BlackRock Advisors (UK) Limited. Registered Company No. 00796793. All rights reserved. Calls may be monitored or recorded. 13 08/10/2012 Disclaimer 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 Services Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. 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 g guaranteed. Changes g in the rates of exchange g between currencies may y cause the value of investments to g 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 FSA 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 f d we will fund, ill nott provide id notice ti off any changes h to t our personnel,l structure, t t policies, li i process, objectives bj ti or, without ith t lilimitation, it ti any other th 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 June 25, 2011. • © 2012 BlackRock. Starting at 15:15... Beaumaris [C2] Conwy [C2] In here... How to deliver H t d li effective, acceptable and non egregious tax planning solutions Tony Wickenden, Technical Connection How to make the H t k th most from using platforms to deliver client value in your business Simon Olive, AXA Wealth How to identify, H t id tif understand and appropriately react to risk How to get the H t t th H How to create t t best from the compelling personal finance online content media Chepstow [C2] Cardiff [C2] Graeme Abell & Julian Mince, M&G Jeff Prestridge, Mail on Sunday Pete Matthew CFPCM, Jacksons Wealth Management Please note that places are limited in the Chepstow & Cardiff rooms. Refreshments are available outside the conference rooms. 14