While Barclays Global Investors of San Francisco is hoping its iShares exchange-traded funds will grow far beyond their current $4 billion in assets under management, the firm does not expect that to happen overnight.
Making investors comfortable with exchange-traded funds is a slow process, said Lee Kranefuss, chief executive officer of Barclays individual investor business. It involves explaining how the product works, its benefits and its role in a portfolio, he said.
Exchange-traded funds, including iShares, are index funds that are bought and sold like common stock over exchanges and sold through financial intermediaries.
Potential customers may need to hear about exchange-traded funds for quite some time or make multiple inquiries before deciding to invest in one, Kranefuss said.
"The decision to invest in this instrument is as far off as you can get from a packaged-goods product, which can entice a consumer with something as small and mundane as a newspaper coupon," said John Roberts, director of marketing for iShares.
"Investing in a financial product, particularly this financial product, is entirely different," Roberts said. "This is why we have a responsibility to introduce a multi-phase, mass-communication effort consisting of TV, newspapers, magazines, direct mail, the Internet, educational seminars and our call centers - all going way beyond a 30-second commercial or print ad."
A critical part of Barclays' sales campaign is distribution and customer service, Kranefuss said. The shareholder service company can be perceived as the voice and persona of Barclays' iShares, he said.
In late June, Barclays selected SEI Investments of Oaks, Pa. to handle distribution for its 56 iShares. Barclays selected SEI because its call center representatives are capable of explaining these and other complex products and have considerable experience in dealing with the professional market, Kranefuss said.
Because exchange-traded funds are new and not yet widely understood, SEI formed a dedicated call center team of 17 people to handle iShares, said Nick Filippo, senior vice president of mutual fund services at SEI.
Barclays also decided to hire SEI because it wanted an outside distribution specialist to handle the impact of the $12 million iShares advertising campaign begun in June, Kranefuss said. That campaign has generated tremendous phone traffic, Kranefuss said. (MFMN 6/5/00)
One of the foremost challenges that SEI, Barclays' in-house marketers and its advertising agency (Saatchi & Saatchi of New York) all share is conveying the benefits of exchange-traded funds, Roberts said.
These benefits include the fact that they are traded throughout the day and, therefore, give an investor liquidity that traditional mutual funds do not have, Roberts said.
Also, exchange-traded funds do not incur internal capital gains taxes because they are passively managed, Roberts said. Exchange-traded funds also can maintain a lower cash position than typical mutual funds because when an investor wants to redeem his exchange-traded fund shares, it is the responsibility of the stock exchange specialist to find a buyer for those shares, Roberts said.
Investors can also avoid capital gains taxes in exchange-traded funds because when they redeem them, they have the option of converting their iShares to stocks, Roberts said.
Further, because exchange-traded funds are baskets of stocks, they have much lower fees than traditional funds, Roberts said. Also, like index funds, exchange-traded funds allow investors "to buy a truly diversified exposure to a category in small increments," Roberts said.
"As you can see, explaining all of this is kind of a challenge, so it has to be handled in a layered approach, of which SEI is certainly an important part," Roberts said.
SEI is also keeping records of investors' questions and feedback and reporting that to Barclays, said Filippo of SEI.
The introduction of iShares is unusual in that SEI, Barclays and Saatchi & Saatchi are working together, Filippo said.