Europe’s leader in transactions of exchanged traded funds (ETFs), the XTF – Deutsche Börse’s segment for ETFs – has also been pioneer in introducing actively managed trading funds back in November 2000.
More than a year after the introduction of this new type of trading funds, investors are becoming more interested in the possibilities of these vehicles.
Actively-managed trading funds were introduced by fund management company DWS, part of the Deutsche Bank group, by listing a series of their existing mutual funds on the Deutsche Börse. This initiative came only seven months that ETFs could first been bought by investors in the Frankfurt exchange.
As opposed to the traditional index-based ETFs, these actively managed trading funds do not track an index, aiming to outperform the benchmark. The funds’ portfolio composition is directly monitored by a fund manager who buys and sells securities in response to market conditions. This gives investors the opportunity to beat indices maintaining the same low fees and trading flexibility that traditional ETFs offer.
Although the vast majority of funds traded on XTF are index ETFs, the first year of life of actively managed funds has been a success and the interest in these products among fund managers and investors is increasing.
The idea behind the introduction of these funds was to create a stock exchange traded vehicle that was more effective than traditional ETFs, that not only do not beat the benchmark but are always slightly below.
The first series of actively managed trading funds launched by DWS include 11 different funds. “What we have done is that we introduced existing mutual funds on the stock exchange,” says Helge Staack, product manager at DWS in Frankfurt . Five of them follow a geographical approach investing in Germany, Europe, Asia, and internationally. The other six invest in different sectors – biotechnology, internet, pharmaceutical, new markets and gold mines.
“The demand for this product has been very good because the funds invest in smaller market segments where it is particularly important for investors to be able to react at any time they want,” Saack says.
Because these funds can be bought and sold during the day, investors can react to market developments in the afternoon and do not have to wait and invest the next day at the price determined by the depositary bank.
Also, investors gain simple and low-cost access to top funds which sometimes are difficult to access, responding more swiftly to market trends and profiting from high volatility of the markets. Since the funds are traded like equities it is also possible to set stop-loss limits.
After more than a year of trading, and according to DWS, the stock exchange turnover of the 11 funds is between €6m and €10m, which proves that investors have accepted and understand how these products work.
“So this approach has proved to be very successful,” he says. “We have received invitations from all across Europe and the US to talk about this product, so investors are interested in this type of vehicle.”
He comments that a third of the investors investing in these trading funds are institutional and the rest private, from all around the world but mainly from Germany and other European countries.
“This is a very good vehicle for institutional investors because it offers a lot of transparency,” Saack adds. “Institutions demand much more information about the product and they come to us with specific questions regarding our style and so on. Also the research intensity of institutional investors is much higher.”
As any stock exchanged related investment vehicle, the behaviour of the market has affected the performance of the funds. “These are actively managed funds but nevertheless benchmark orientated. In the last few months we have been very close to the benchmark, because of the uncertainty we have experienced.”
Thinking about the future growth of the sector, DWS is planning a marketing campaign for this year to improve the knowledge about these products among potential investors. “However this depends ultimately on the market,” Saack says. “It the market continues being down, it might not make much sense to push these vehicles in those conditions. So we may have to wait and see what happens in the next few months before we start the campaign.”
At the time we went to press, DWS actively managed trading funds are the only of their class being traded on the XTF, but more players are planning to break into this market.
Frankfurt-based DG Panagora is to list two actively managed funds on the stock exchange , pending on authorisation. One of the funds will aim to outperform the broad-based Stoxx index, and the other the MSCI World.
The firm decided to enter the XFT segment to be able to offer to the general public and to institutional investors the opportunity to participate in their strategies. Once the funds are listed, DG Panagora will also be the first company to offer actively managed funds using quantitative methods. The funds will pick stocks among around 1,000 European and 2,000 non-European companies.
With the introduction of these new two actively managed funds, and the expressed interest among other asset managers in joining the trend, the XTF will continue being leader in the trading of this type of investments.
In November last year around e2bn were traded in XTF, from which around approximately 96% was posted in index funds and 4% in actively managed funds.
“Some big names within the fund management industry have called us asking about our experience in this segment, because they are considering the possibility of starting similar strategies,” Staack says. These products could be especially attractive for foreign fund managers, who could find in the Deutsche Börse an ideal distribution channel for products.
Although, the potential of the actively-managed trading funds is there and the demand has been good, concerns about the possibility of of price disparities between the underlying assets held by the trading fund and the price at with it trades, and other issues to do with disclosure and arbitrage, have been stopping other stock exchanges following the Börse steps.
For the next few months, it is expected to see an increasing demand for this products, that will grow further as investors became more aware of the nature and the products, and new providers break into this field. However, for the time being, the percentage of actively-managed trading fund in the market for ETF’s is still very low and will remain like this probably for quite a long time.