ETF Summary

7/28/2019 ETF Summary

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CONCLAVE 2013


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ETF Conclave Summary..............................................................................................................................................2

Opening Remarks........................................................................................................................................................3Ms. Chitra Ramkrishna - Managing Director and CEO of NSE

Keynote Speech..........................................................................................................................................................4Ms. Deborah Fuhr - Partner and Co-Founder of ETFGI

Panel Discussion.........................................................................................................................................................6Panelists:Ms. Deborah Fuhr - Partner and Co-Founder, ETFGIMs. Hansi Mehrotra - Managing Director, India, HubbisMr. Rajnish Rastogi - Co-Head of Investments, Motilal Oswal AMCMr. Manu S Dua - India Head, Listed Derivatives & OTC Clearing - Citigroup

Moderator:Mr. Anubhav Srivastava - Head Institutions and Products, Motilal Oswal AMC

Market Outlook.............................................................................................................................................................8Mr. Raamdeo Agrawal - Chairman, Motilal Oswal AMC

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ETF Conclave SummaryThe Motilal Oswal MOSt Shares ETF Conclave 2013 was held onWednesday, 19th J une at Motilal Oswal Tower, Prabhadevi, Mumbai. The

conclave a premier industry event is envisaged by Motilal Oswal AMC as anannual event in furthering its efforts in the area of investor education. Theeffort of this conclave has been to disseminate information on ETFs' toInstitutions, Investors, and Intermediaries as well as open up discussionsacross Manufacturers, Distributors, Market makers and strategists on globaltrends in ETFs.

The Motilal Oswal MOSt Shares ETF Conclave 2013 had the following fivesegments: an introduction by Mr. Aashish Somaiyaa, followed by openingremarks by Ms. Chitra Ramakrishna post which was the keynote address byMs. Deborah Fuhr on the global trends in the use of ETFs. The keynoteaddress set the tone for the panel discussion moderated by Mr. AnubhavSrivastava discussing in depth ETF Strategies, how Indian investors canbenefit from the use of ETFs and how global investors have been usingETFs. The conclave concluded with a brief market outlook by our Chairman,Mr. Raamdeo Agrawal.

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Mr. Aashish SomaiyaaCEO, Motilal Oswal AMC

Whats Inside

Mr. Aashish Somaiyaa brings withhim rich and varied experience - withmore than 13 years in sales anddistribution, channel management,

product development andinstitutional sales from ICICIPrudential AMC and a brief stint atproject management with Bharti AXAInvestment Managers.His last assignment was with ICICIPrudential AMC, as Senior VP &Head - Retail Business where he wasresponsible for sales, distribution andproduct development of MutualFund, PMS and Real Estate offeringsthrough retail distribution, banking

and private wealth managementchannels across India and UAE.Mr. Somaiyaa holds a Bachelor ofEngineering in Polymer Science anda Masters in Management Studies inFinance from NMIMS, Mumbai.


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Ms. Deborah FuhrPartner and Co-Founder

of ETFGI

ETF is a very

democra t i c

product .

Ms. Deborah Fuhr commenced her keynote address by highlighting howawareness about ETFs have increased from the last time she was here in2009 and that recent regulatory changes will help take ETFs to the nextlevel.

Ms. Fuhr touched briefly on the basics of ETFs From classical definitions invarious geographies to how are they traded; duty of market makers and thereal liquidity. She pointed out certain key benefits amongst many such as:

n Low cost where the average annual TER globally is 0.31%

n Low minimum investment size, typically as low as one share

n Instant Diversification

n Real time entry

ETF is a very democratic product, in that the very same fund is used bypension funds, sovereign wealth funds, asset managers, insurancecompanies, financial advisors and retail investors; which in Ms. Fuhr'sseventeen years of rich experience is a claim that cannot be made by anyother investment product. Ms. Fuhr took a moment here to talk about thehistory of ETFs the first equity ETF was listed in 1990 and the first fixedincome ETF was listed in 2000, both in Canada. The first ever fixed incomeETF in the Asia Pacific region was listed in India in the year 2003.

She further goes on to state that the ETF growth story has been phenomenalover the last decade as Global ETF corpus has hit at an all time record ofUS$ 2.14 trn with close to 500 product offerings, ~10,000 listings and 211

service providers on 56 exchanges. The product has seen a CAGR of 29.6%over the last ten years, growing at a rate faster than that of many otherinvestment products. As of May 2013, ETFs account for 6.4% of the globalmutual fund industry assets.

Flows into ETFs are at an all time high with net new assets of US$ 108 bn vs.US$ 81 bn this time last year. Of the total inflows, equity assets stole theshow adding US$ 94 bn of new assets. Active ETFs are a relatively newspace which saw ~US$ 5.2 bn of inflows. Ms. Fuhr pointed out that ETFs area timely barometer of what's happening in the market, a statementunderlined by outflows of ~US$ 24 bn experienced by commodity ETFswhere investors were seen taking money out of gold and silver ETFsprimarily due to high interest rates. Within Equities, a major chunk of theinflows went into North American Equity, ~US$ 62 bn followed by AsiaPacific at ~US$ 24bn. According to Ms. Fuhr, investors are seen to beinvesting more in ETFs comprising of high yield dividend stocks as opposedto high yield bonds.

Of the many questions thrown in Ms. Fuhr's direction during her visit here,one particular question that stood out due to the frequency at which it wasasked was, How do foreign investors use ETFs that invest into India? Sheaddressed this by saying that many investors don't have a foreign investorstatus for investing in different markets. However, an ETF possesses that

foreign investor status enabling any retail investor to gain exposure tohis/her preferred investment destination. Presently, there are roughly 36foreign ETFs that provide access to Indian markets. These ETFs track

Global trends in the use of ETFs

Keynote Speech

Prior to this she was the Global Heado f E T F R e s e a r c h a n dImplementation Strategy andManaging Director at BlackRock/BGIfrom Sept 2008 Oct 2011. Sheworked at Morgan Stanley in Londonfrom 1997 2008 as ManagingDirector and head of the InvestmentStrategy team. An MBA from the J LKellogg Graduate School ofManagement, NorthwesternUniversity, and a Bachelor of Sciencedegree from the University ofConnecticut , Ms. Fuhr is on theEditorial Board of the J ournal ofIndexes (USA) and J ournal ofIndexes Europe, the Advisory Boardfor The J ournal of Index Investing,investment panel of experts forPortfolio Adviser, FTSE ICB AdvisoryCommittee, and the InternationalAdvisory Committee (IAC) for theEgyptian Stock Exchange, as well asthe University Of Connecticut SchoolOf Business International AdvisoryBoard.


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benchmarks ranging from MSCI, S&P to custom benchmarks provided byWisdom Tree. These benchmarks could either be market capitalizationweighted or be enhanced benchmarks for e.g. fundamentally weighted(smart beta) which essentially try and generate better performance vis--vis

the traditionally constructed indices. Ms. Fuhr highlights that certaininvestors are seen to be moving some money out of emerging marketswhich has impacted the corpus of foreign domiciled India dedicated ETFs.However, many investors still maintain their India exposure and the assetsize under this particular class is over US$ 5 bn as of May, 2013.

Ms. Fuhr states that one must keep in mind certain factors while selecting anETF a) Type of exposure, time horizon, b) benchmark, c) structure, d)costs, e) performance, f) liquidity, listings, size, g) regulation and tax.

According to her, what drove the growth of the ETFs initially was theacceptance of ETFs by Institutional investors as a trading product. ETFs

graduated from being a market access product providing exposure todifficult to reach markets to an investment product as investors expandedthe asset classes, geographies they invest in. Many investors now holdETFs for longer than they did earlier which is a sign of their growingconfidence in ETFs.

The results of a recent study by Greenwich Associates show that whileinstitutional investors continue to find several ways to use ETFs to satisfyinvestment strategy needs, investors' need for passive exposures as part ofcore/satellite portfolio models has emerged as a key driver of ETF demandamong institutions.

In fact, institutions participating in the study cited passive exposure in thecore as the most common ETF application. A majority of insurancecompanies (72%) and institutional funds (67%) using ETFs employ theseproducts as a passive component of their core portfolios. Some of theseinstitutions likely to keep ETFs in their core holdings as part of a longer-termstrategy, while others may find it useful to employ ETFs for tactical shiftswithin their core exposures.

The use of ETFs for several other purposes is becoming significant as well.For example, 43% of study participants say they employ ETFs for portfoliocompletion, indicating that many institutions now see ETFs as a way to

ensure complete portfolio diversification by minimizing benchmark risk whilemaintaining alpha objectives. One in five institutions using ETFs is alsoemploying the funds as part of hedging strategies.

ETFs remain effective tools for tactical portfolio functions 70% ofinstitutional ETF users employ ETFs for tactical portfolio adjustments.

Ms. Fuhr concluded by saying that she is positive on ETFs and has beenever since she started talking about it in 1997. Based on a recent study byBCG, passive ETFs, both equity and fixed income, are slated to grow at arate of 15-20% p.a. over the next five years and the asset size of ETFsglobally is expected to double over the next four years, currently at US$ 2.14

trn. The future for ETFs is most definitely bright and with the advent ofregulatory and tax changes, ETFs will witness investments by variouscategories of investors which will help propel it to the next level.

Asset s ize of

ETFs gl oba l l y is

expec ted t o

doub le over t he

next four

years

Keynote Speech

Ms. Deborah FuhrPartner and Co-Founder

of ETFGI


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Panel Discussion

6

PanelistsMs. Deborah Fuhr,

Mr. Manu Dua,Mr. Rajnish Rastogi

& Ms. Hansi Mehrotra

Moderator

Mr. Anubhav Srivastava

Making MOSt of ETFs

The panel discussion kicked off with a question to on What isthe importance of Asset Allocation for Private Clients/ Wealth ManagementClients; Why would an Investor or Advisor Consider ETF as an investmentAvenue?

Ms. Mehrotra responded by saying that there are two parts to assetallocation i.e. Strategic & Tactical. Most investors realize that a bulk of thevalue add or alpha comes from 'Strategic Asset Allocation' which isessentially selecting a range of asset classes and assigning them certainweights. She was of the view that ETFs are most useful when it comes to'Tactical Asset Allocation' and that a lot of the Institutional Investors wereusing ETFs for this purpose, something Financial Advisors can look at too.

Mr. Srivastava directed his next question towards Mr. Dua How can orhow should Institutions use ETFs? Mr. Dua responded by saying that theyat Citi are great believers in ETFs as a way forward not only on the

Institutional front but also on the Retail and Private Banking front. On theinstitutional front, they try to use ETFs in an innovative way especially whenthey are designing new products for e.g. Quant trading strategies. Mr. Duabelieves that most of the strategies that were earlier bundled with PortfolioManaging Schemes or Collective Investment Schemes are now beingbundled with ETFs in an easier manner. And that's where the beauty of theproduct lies. It is simple, easy to understand, exchange traded, available toall category of investors and various strategies whether beta neutral or lowvolatility can be built around it. He believes ETFs on the institutional fronthelp bridge a big gap which earlier was difficult to fill. Also, he thinks thatETFs are a great product for Asset Allocation as they come with a certain

degree of dynamism. Mr. Srivastava in his follow up question to Mr. Duaasked about the validity of ETFs as a trading product for Institutions. Mr. Duaresponded by saying that for any product to be a trading product it needs tohave a certain mass of liquidity. Referring us back to Ms. Chitra's commentsabout the need for arbitrageurs and liquidity providers and the steps takenby the Government to reduce STT and paving way for different class ofinvestors such as Pension Funds and Insurance companies to invest inETFs, Mr. Dua believes that once this critical mass is achieved and with thepresence of an already vibrant futures market, participation from the tradingcommunity will pick up which will further enhance liquidity.

Mr. Srivastava's next question was for Ms. Deborah Fuhr Concept ofliquidity in ETFs sparking debate amongst investors, could you help throwsome light on this? She responded by saying that liquidity in US for exampleis a lot different from liquidity in Europe in that all trades in the US have to bereported and about 28-30% of all actively traded securities are ETFs. Thechallenge with liquidity is mostly with trades in Europe. As per regulations,ETF trades in Europe don't have to be reported on exchanges. And so inreality, only a third of the ETF trades are reported and the other two thirdstake place over-the-counter. This is what makes the investors believe thatETFs don't trade at all. Therefore, in essence the liquidity of the ETF is theliquidity of the underlying security held.

Ms. Mehrotra

ETFs are m ost

use fu l w hen i t

comes to

Tac t i ca l Asset

Al locat ion

Ms. Mehrotra

L iqu id i t y of the

ETF is t he

l iqu id i ty o f the

under ly ing

secur i t y he ld

Ms . Fuhr


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Panel Discussion

7

PanelistsMs. Deborah Fuhr,

Mr. Manu Dua,Mr. Rajnish Rastogi

& Ms. Hansi Mehrotra

Moderator

Mr. Anubhav Srivastava

Mr. Srivastava then turned his attention to Mr. Rajnish Rastogi by askingHow are ETFs managed? Is there any counter-party risk? Mr. Rastogiresponded by saying that ETFs in India are just like mutual funds and all theunderlying shares that an ETF invests in is held by an underlying Trust.

Froman ownership perspective, there is no risk that the investor has on theAMC issuing these ETF units. As the AMC trades with the exchange, there isno counter-party risk the firm takes on. Also, when it comes to securitieslending and borrowing, the AMC deals with the clearing corporation of theexchange where again there is no counter-party risk

Mr. Srivastava summarized the discussion by concluding that differentinvestors would use ETFs' differently. For Institutions the key factor was lowcost and they would house the most customized portfolios. Private Bankingand Wealth Management investors would either use a technology platformor have their advisors construct bespoke allocation using ETFs'. The retail

client needs shrink wrapped goal oriented products or access productsmanufactured by institutions with ETF underlying..

ETFs are a great

product fo r Asset

Al locat ion as

they come w i th a

cer t a in degree of

dynamism Mr. Dua


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Market Outlook

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Mr. Agrawal affirmed that the recent regulatory changes were encouragingfor ETFs and that once institutional investments start rolling in ETFparticipation from retail investors and financial advisors will follow. He furtherwent on to say that ETFs are a robust product and if one were to invest Rs.

100 in the Indian capital markets, half of it should be allocated towards wellmanaged ETFs and the other half towards actively managed funds. Hebelieves that 60-65% of the assets in the broad market indices are of veryhigh quality which should encourage investments into ETFs tracking theseindices. Going forward he expects a variety of ETFs to be launched andasserts that it is just a matter of time before people start looking at ETFs veryseriously.

As far as the market outlook is concerned, Mr. Agrawal believes that timingthe market is not an ideal approach and that he never got it right andprobably nobody else did too. He believes Current Account Deficit (CAD) is a

big worry and can move the profitability of Indian Corporates, a fundamentalchange that will be brought about after a long time, impacting the earningprofile of Indian companies. Export-oriented companies, with thedevaluation of rupee, will be re-written in the market while import-substitution oriented companies likely to suffer. All trade-able industrialproducts will become far more competitive in the days to come. Likely to seelower inflation and lower interest rates in the near future. FII buying iscomplex and something that is hard to figure out. He believes that Electionswill be a complete game changer for the markets and that by September/October this year, one will be able to figure which way the wind is blowing,whether UPA or NDA. Monsoon is another positive. He expects heavy

weight reforms to take place soon and concluded by saying that markets willsurprise on the upside and that investor money will most likely move backinto Equities in the near future.

Mr. Raamdeo AgrawalChairman,

Motilal Oswal AMC

Tim ing the

m arke t i s not

an idea l

approach

Mr. Agrawal is also the co-founder ofMotilal Oswal Securities Ltd alongwith Mr. Motilal Oswal.Mr. Agrawal is an Associate ofInstitute of Chartered Accountant ofIndia. He is a member of the NationalCommittee on Capital Markets of theConfederation of Indian Industry. Hehas been authoring the annualMotilal Oswal Wealth Creation Studysince its inception in 1996. He hasalso featured on 'Wizards of DalalStreet on CNBC TV 18'. In 1986, hewrote the book Corporate NumbersGame, along with co-author Mr. RamK Piparia.


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