Barclays offers the world

Just as Australian investors have been pulling money back from overseas markets, UK finance group Barclays has launched eight exchange traded funds on the ASX. ETFs have made slow progress in Australia largely because of the success of listed investment companies that offer a similarly styled product; the main operator of existing listed ETFs is the State Street group.

The timing is hardly ideal because local shares are soaring to new records, but Tim Bradbury, co-head of Barclays Global Investors’ iShares, believes Australian investors will warm to the low-cost options of buying baskets of international shares.

The interview

Michael Pascoe: Tim Bradbury, co-head of Barclay Global Investors’ iShares. I give up. What are they [iShares]?

Tim Bradbury: They’re effectively index funds that are traded on exchanges around the world, Michael, and they are managed in accordance with the underlying index chosen.

The obvious attraction here is it’s exposure to international markets at relatively low cost. Is that your main pitch?

That’s part of it. I think we all know that people are growing their allocation to offshore equities. For the intermediary investor and the direct investor it’s pretty hard so this is a way for them to get offshore exposure, local market, local time, local currency, by buying and selling on the ASX.

Well it’s the cost of international exposure that often puts direct investors off. What is your cost?

It can be. I mean these range from the S&P 500 iShare at 9 basis points up to the Emerging Market iShare at 75 basis points. So traditionally they are lower cost than a lot of the other equivalents.

Nine basis points. That’s 0.09%.

That’s right.

Which is less than you can buy an index fund for in Australia.

That’s how we would see it, yes. So that’s nine basis points to buy and hold that fund for 12 months plus there are transaction costs to get in through your broker or transactor.

In terms of running an ETF, what does an outsider need to know?

Well they need to have comfort, for Barclays is the biggest index manager in the world. We also manage a lot of other active strategies and total return funds but we started the first index fund about 30 years ago and commercialised it, so there should be a level of comfort that we know what we’re doing. But I think the attractive part to investors is we will give them the building blocks to build the portfolios that they really want.

How big is your range of choice? You’ve got eight products launching in the next week or so.

BGI currently has 139 iShares trading in the US so we’ll bring down eight of those and they are the loudest and brightest and most liquid iShares in the BGI iShares stable. They range from the biggest fund, which is about $US56 billion, down through to the small one, which is just on $US1 billion. So of that first eight, seven are greater than $US1 billion and four are greater than $US15 billion, so we’re giving people access to big pools of global liquidity.

After the international credit confidence crisis, people are perhaps a little wary of anything that’s not plain vanilla. Do they have to actually trust Barclays or are there real shares backing up the product?

Yes and yes, so yes they should trust Barclays to manage their investment and yes there are actual shares that BGI, under the iShares brand, holds and manages to back the underlying iShare. So, for example, for the iShare S&P 500, we manage the 500 underlying lines of shares that support that iShare.

Are you at a disadvantage in trying to get your product out there as long as most financial planners are on a commission, so won’t want to know about you?

I mean, what we’re about, Michael, is giving the building blocks to institutions and financial intermediaries to build the portfolios they want for their clients. We do know that those who live in a fee-for-service world tend to be early adopters for iShares and that’s been our experience in the US for the past seven years, but we do think there are trends towards fee-for-service in the local advice environment and we do think that’s promising for iShares.

While diversification is an admirable thing in a portfolio, you were also pushing foreign shares at a time when Australian shares have done so well and have outperformed. Does that make it harder?

No, and look we think that long-term asset allocation’s important. I think it’s probably fair to say that given that Australian equities have done so well in the past four years, people may have taken their eye a little bit off what the other parts of the portfolio should be doing and where they should be allocating, so we’ll be selling the story that going offshore is important. We want to make it easy, flexible and tradeable on the local exchange.

Individuals buying the iShares on the market '¦ does that put another level of responsibility on financial planners?

Well I mean iShares are fantastic shares for diversification, so we have comfort that that will help financial advisers manage their clients’ portfolios. I mean iShares are really about a couple of things. One is giving people modular building blocks to implement their own ideas about putting portfolios together – and that we do know from the past seven years around the world that “build it and they will come” does not work for iShares. So, on the back of that, we have a lot of educational backing to support those who will be using iShares for themselves and for their clients. So websites, webinars, fact sheets, iShares.com.au is a website we’ve built to meet a lot of the demand around that.

It doesn’t reflect well on a lot of other fees around the place does it?

Well I suppose what we think’s appealing to the local market, too, with a trend for fee for service, but also there’s a trend for greater transparency – who is being paid for doing what. We think that iShares will meet that demand for greater transparency and flexibility around building portfolios that people want for their long-term wealth creation.

Obviously people have to carry their own currency risk though in this process.

They do, so what we’re bringing down from New York, initially eight iShares, that will be unhedged so there will be an underlying exposure for the securities held but the currency risk is obviously unhedged.

In terms of pricing, a couple of things come up. Obviously the opening price is based on the S&P500 – where it closed last night. If though, theoretically, a major news event happens, it would influence Wall Street. How is that priced in?

If you think that about 15% of global market turnover goes through the Asia Pacific Time Zone it could be a nice tool for global pools of money to get exposure to underlying markets that are shut through Sydney on the trading day in Australia.

For the iShares that are reflecting markets that are open during our day: the Asian markets '¦ the price there is a direct correlation to what those markets are doing?

Exactly. So the iShare that is reflecting the underlying market that is opened, for example Asian'¦ A Japan iShare, for example, that will have a direct correlation to the pricing on the Sydney Exchange.