Feb. 08, 2011
Dr. Christian Gast is the head of iShares Switzerland. We have talked with him about the future of ETFs, the adequacy of index investing for private banking clients and the challenges of the kickback-based fee system that most active funds still use to get access to private wealth management clients.
MyPrivateBanking: What is driving in your opinion the boom in exchange traded and index oriented funds?
Dr. Christian Gast: ETFs offer a very simple and at the same time very attractive value proposition. Investors are provided with the same return as the underlying market, for example the SMI. No more, but above all, no less. ETFs are easy-to-understand and transparent; the investor knows what he will get. On top of this, ETFs are flexible, because they can be traded like shares on the stock exchange and are very cost-efficient.
ETFs are ideally suited to the needs of both retail and large institutional investors. ETFs are consequently the only product in which retail clients can invest on the same terms as institutional clients. They represent a true democratisation of financial investments.
These benefits have become especially apparent in the last two or three years. The financial crisis in 2008 and 2009 resulted in reinforcing the ETF trend, to some extent, acting as a kind of catalyst and particularly highlighting the benefits of the product. At that time, the risks hidden within a complex product or what it means when an investment is no longer liquid became painfully clear. More than ever, investors wanted products that were secure, transparent, liquid and simple. ETFs offer these characteristics as does no other investment product. This explains their recent success.
We expect continued strong growth. For the current year, we believe that the global ETF market is likely to grow by 20 to 30 per cent.
MyPrivateBanking: Which role should ETFs play in the wealth management for affluent or high net worth individuals?
Dr. Christian Gast: ETFs are suitable for all investors who want to implement their investment decisions using flexible, cost-efficient products. This can be done by investors themselves or with the help of a professional wealth manager. When selecting the products, the determining factors are – as with all investment decisions – individual criteria such as the existing portfolio, the investment aim or personal risk tolerance. What is important is the contribution which the individual ETF can make to further portfolio diversification.
ETFs can therefore serve as another product to add to an existing portfolio; however, investors can also construct a complete portfolio using only ETFs. The strategy known as core satellite investing is becoming increasingly popular: this strategy uses a core portfolio of broadly diversified ETFs and is completed with typically very actively managed satellite elements. Using equity ETFs to invest in whole markets is especially suited for investors who do not have the capabilities to select individual stocks. ETFs invested across the European or global market, like for example the MSCI World, make for good basic investments. One can then include ETFs invested in individual countries or sectors. The fixed income portion of the portfolio can be covered by bond ETFs containing Pfandbriefe, government or corporate bonds.
MyPrivateBanking: What are the three most important points an affluent investor should check when investing in an ETF?
Dr. Christian Gast: Investors should ask themselves a series of questions and answer them with the help of an adviser or research the answers independently: how well does the ETF fulfil its quintessential task, i.e. how well does it match the underlying index? What costs are involved – not only the management fees, but also trading costs, in other words, what are the spreads? And how often is the fund traded? Who is behind the fund – who is it offered by, what experience do they bring with them?
MyPrivateBanking: How does iShares differentiate itself from competitors like db xtrackers, Credit Suisse, UBS ETFs and others?
Dr. Christian Gast: I think that iShares is differentiated by three key strengths. First, experience and scale: these are crucial in a market with tight margins such as the ETF market. In this market, providers need to work on a very large scale over the long term to have any chance of success. There is also, however, the question of market commitment itself. Clients want providers who they can expect to stay in the market for the long term.
Second, product philosophy: many products stray too far from the basic idea of an ETF, namely the simple and transparent replication of a market. In contrast, iShares stands for transparency, clarity and simplicity in its products.
And third, service and information: more competition means that providers need to differentiate themselves and their products and need to devote more resources to product support and customer care. Only a very few providers do this as intensively as we do. After ten years of ETF history, it is still the case that whoever successfully invests in investor education will have the competitive edge.
MyPrivateBanking: Are the broad, investable equity indices like DJ Eurostoxx50 inherently skewed towards a “buy high and sell low” because the stocks are allocated according to market capitalization (therefore, weighing a lot towards stocks that have increased in price)?
Dr. Christian Gast: If a company’s share price develops positively, the weight of this company in the index rises. The ETF will follow this upwards movement. On the other hand, the ETF naturally cannot take countermeasures, if the market corrects overvalued shares downwards. However, certainly not all active fund managers manage to do this in time or sufficiently either. Whoever has good reason to believe in the long-term superiority of equities as a form of investment will, in any case, be very well served by an ETF.
MyPrivateBanking: Is it difficult to reach out to the affluent investors, because unlike most mutual funds the sponsors of ETFs usually do not pay kickbacks to intermediaries such as banks and advisers?
Dr. Christian Gast: That is indeed a challenge. The biggest hurdles faced by ETFs in reaching retail clients are still the prevailing distribution structures. Products like ETFs, which do not pay kickbacks are at a disadvantage here. They are, however, even if only from a cost point of view, very suitable products and they will manage to assert themselves in the market. We must continue with efforts to convince investors of the product advantages such as simplicity and transparency. However, we will not pay commissions in the form of kickbacks.
There are very encouraging signs from the target group of clients who take their own decisions among the retail client sector, who for example, trade using direct banks. In many cases these clients have been looking for a replacement for certificates – and have then discovered ETFs. Furthermore, we will be seeing stronger growth in combinations of ETFs with other investment vehicles. A classic example is a fund-of-funds invested – sometimes exclusively - in ETFs.
MyPrivateBanking: Thank you very much for this interview.
Dr. Christian Gast is the head of iShares Switzerland. He has more than 14 years' experience in the Swiss asset management sector. Christian Gast had held the position of executive director at UBS Global Asset Management, where he had worked since 1999 and headed up the ETF business. Before, he had been senior portfolio manager at St. Galler Kantonalbank where he was responsible for asset management for private and institutional clients. He holds a degree in business administration from the University of Saarbrücken and gained a doctorate in banking at the University of Zurich.