In five and a half years, London-based Source has become the fifth-largest ETF provider in Europe. It's now establishing a U.S. presence amid an intensely competitive market dominated by three fund giants: BlackRock's iShares, Vanguard and State Street Global Advisors.
Money Management Executive sat down with Peter Thompson, president of Source, at the Morningstar ETF Conference in Chicago this month to talk about Source's plans to grow in the U.S. through investor partnerships, as well as to learn more about their marketing strategy and future initiatives.
You've just launched in the U.S. Tell us what the markets can expect.
We launched our first ETF, the Eurostoxx 50 ETF on Sept. 23. It's a straightforward fund based on the most liquid index and benchmark of choice in Europe. When we dove into the product spectrum here we found this particular benchmark to be under represented. It's broad and liquid, and the choice for Europeans when they buy and sell Europe. We also found American investors paying more than European investors. So we're listing this fund at 16 basis points, which compared to similar funds, is much lower. This is one of a few differentiators we hope to bring to market: price efficiency.
Given your experience in Europe, what can a fund provider take as some of the key differences between that market and this market?
The market in Europe is a good 10 years behind the U.S., in terms of where ETFs are as a product, as a concept and where they sit in the investment dialogue. Europe's becoming a bigger market, but is still a quarter of the size of the U.S. in terms of assets. You're almost on $2 trillion in the U.S., and we're on about $400 billion. But then again, Europe is fragmented by countries, regulators, currencies and languages. In many ways, it's much simpler in the U.S. market to distribute a fund, because there is one regulator, one currency and one general language. In Europe, we have to print marketing materials in five different languages and work with nine different regulators.
Anything that you've learned from Europe that you've been able to employ here, that has changed our strategy, or helped you?
We'll compete with similar firms here that we compete with in Europe. The U.S. market is crowded but we know how to differentiate ourselves. Source began as a joint venture between my old employer, Goldman Sachs, and Morgan Stanley with the goal being a better way to address the market - to create an independent third party issuer that was not beholden, or controlled by, any one shareholder.
Goldman or Morgan and Warburg are your shareholders; they don't have other exposure in the ETF provider space?
Correct. This is their first exposure to ETFs. We focus on one thing, ETFs. After five and a half years in Europe, we're now the fifth largest ETF provider with nearly $20 billion in AUM, 85 products and nearly 70 people. Coming into the U.S. market is a natural extension of our growth. As you know, we are coming to the biggest market in the world and our shareholders are in the US. They are intimately involved in the ETF business here
What's your expectation for one to three years from now?
I would estimate 25 to 30 ETFs.
In one to three years, you hope to have a couple of dozen funds?
Yes, depending on demand. We'll be working with partners here that you know, but not necessarily just our historical partners. One thing we've been very good at doing is presenting the market with an alternative as an issuer.
We're very simple and easy to partner with because we only do one thing - create ETFs to meet investors' needs. One place we've been able to thrive is in offering an alternative to organizations that may want to launch an ETF, but may not have had the means. We are a world class, institutional organization, backed by large financial institutions with a proven track record of partnering with organizations.
We've seen ETF providers that have rolled out funds, during or following periods of market turmoil, and asset flows really shrink. Many funds that were launched with a lot of expectation eventually closed. How do you avoid that fate?
Well, you can't avoid having funds that aren't successful. That is the nature of the beast. My message on that would be a pretty simple one; we're building a global business. And we're here to stay.
What we'll see in the three dozen would be a broad selection of specialized funds?
I'd say for now, we'll have a comprehensive offering: as it relates to areas of investment geographically; as it relates to asset class; as it relates to passive, smart beta, and active. Active is an area we know very well. And we like it.
How would you define what's behind your marketing strategy?
We've always been able to deliver a quality message with an institutional look and feel. We are institutional in brand and institutional with the partners we have.
So we will market and distribute institutional quality products; whether that relates to our brand, our message, the people we hire and the organizations we partner with. It's a long term strategy and the natural next step in our evolution to be in this market.