Invesco’s head of ETF EMEA Gary Buxton speaks to James Baxter-Derrington about plans for growing its ETF offering, the tussle between core and innovation products, and what the future holds for ETFs.
Invesco completed its acquisition of Source in 2017, and with it came around $22bn of assets and its chief operating officer, Gary Buxton, now head of ETF EMEA for the firm.
Two years on and AUM has nearly doubled: “We should end the year at about $45bn in terms of our European assets,” says Buxton, “and we expect to double that in the next four or five years.
“If the market grows as we expect, achieving that sort of number is our minimum expectation”.
He attributes this to various contributing factors, from new products and record inflows to the continually expanding ETF market.
“In the past 18 months we have launched about 35 products,” says Buxton, “but our real aim is to be able to compete wholesale with the top three players: BlackRock, Deutsche Bank and UBS.”
Of the 35 launches, he notes there are three ranges in particular that have been strong performers for Invesco: the US Treasury Bond range, the alternative income range including Invesco Variable Rate Preferred Shares UCITS ETF and Invesco AT1 Capital Bond UCITS ETF, and in ESG, the Quantitative Strategies ESG Global Equity Multi-Factor UCITS ETF.
“We have launched about 20 products in the fixed income space since the end of 2017 and will have another 15 products in the next year.”
Invesco’s ETF arm has seen an estimated net inflow year-to-date of €7.1bn ($7.9bn), which puts it third this year behind iShares and UBS, according to data from Morningstar, which Buxton describes as a record year.
Despite recent closures, the European ETF market continues to grow, reaching a record high of €809.2bn ($895.9bn) in assets under management according to Lipper from Refinitiv.
In four years’ time, Buxton sees this figure growing to $1.6trn, particularly as institutional investors begin to broach the market.
“Those who are not traditional users of ETFs – UK pension funds, for example – are starting to investigate ETFs because they see the growth and they see the market becoming much bigger.”
These institutional investors are also starting to target the ESG ETF market – which saw €1.9bn ($2.1bn) net inflows in October – another record month for inflows, according to figures from Lyxor’s Money Monitor. However, the growth they would bring is still stymied by the size of the market, says Buxton.
“The issue with institutional clients is there is just not enough scale to buy ESG products.
“Insurance companies are willing to allocate hundreds of millions to ESG ranges, but nobody yet has that large ESG footprint.
“This is an opportunity for us to compete well versus the old incumbents, because there is a rotation towards ESG and we are all starting at more or less the same time.”
Source to Invesco
Source was founded in 2008 as an ETF company aiming to help banks such as Goldman Sachs, J.P. Morgan and Morgan Stanley hoping to enter the ETF space.
“I was actually the first employee of Source,” says Buxton. “At the time, there was a growth of synthetic ETF providers, such as Lyxor and Deutsche, coming out of banks competing directly with iShares and we were really the banks’ first participation into that sort of mix.
“Then Warburg Pincus became our lead shareholder in mid-2014 and we became focused on trying to achieve solidarity.
“We did not [active solidarity] and nobody has really been able to achieve that. The exit plan was then to look for more long-term strategic shareholders, and that was really Invesco.”
At the time, there was a range of over 100 different firms listed as potential buyers for Source.
“I used to say it was asset managers through to Chinese shoe manufacturers – it was quite a wide list.”
Invesco completed their acquisition of Source in 2017 and have continued to grow ever since.
They have recently expanded, hiring Ambrice Miller from iShares as new head of UK insurance within the ETF business. This adds to the spate of hiring this year as the overall numbers within the ETF business now stands about 10% higher, according to Buxton.
“We have had significant growth and we are really in the top tier of competitors now,” Buxton explains.
“We have taken market share from Vanguard in equities and we have taken market share from BlackRock in fixed income, both of which we intend to keep doing.
“We now present a credible alternative to the incumbents.”
Core versus innovation
“We think of the world in two buckets”, says Buxton, “One is core, which is really building block content, and the other is innovation.”
For Invesco, that core bucket includes the S&P 500 and US Treasuries, although Buxton sees ESG on its way into the core bucket.
“ESG is always at the front of mind in every meeting, from retail to insurance companies to sovereigns.
“There are different flavours of what ESG is, from pure environmental to governance, and a big part of the focus as a passive manager is governance and voting.
“That is the number one topic for passive investors, whether it is ETF or index funds – being able to articulate a robust voting policy.”
Buxton says a common problem surrounding ESG is the lack of any unified language or benchmark (although the Investment Association have recently taken a step to resolving this) and this is particularly noticeable in ETFs.
“We create products with MSCI in ESG. We will also create with S&P and they will have different definitions of what ESG means.
“Over time, we may end up with versions of ESG products on the same benchmark.
“Even basic language is hard, people use different terms for the same topic, which is not helpful. The equity universe is probably five years ahead of where we are in fixed income and is stabilising around two or three key themes.
“Fixed income still has some work to do.”
There is some heritage to the innovation bucket at Invesco, largely through the acquisitions of Power Shares and Source.
“We [Source] were known as big innovation providers. We have always done those product ranges. We have good structuring skill sets in all of the asset types, so that fits pretty well for us, but we have to compete in core.”
When it comes to deciding which products are available in those buckets, Buxton describes the process as “agnostic” aiming instead to provide “the best content for the client”.
A good example of Invesco’s innovation bucket is the recent launch of a blockchain ETF, which is “not as crypto as people first think”, says Buxton.
“Most people think it is instantly crypto, whereas in reality it is much closer to using sophisticated ledger technology to maximise existing businesses.
“The best example of last quarter was Carrefour, the French supermarket chain. They said their revenue was up 9% due to blockchain implementation, and we expect to see more of that in the next two to three years.
“They show how blockchain can be used as a more traditional method to improve efficiency, which has nothing to do with crypto.”
Buxton also sees this growth spreading across the corporate space.
“We expect the index that we have, which is basically how much revenue companies attribute to the use of blockchain, to grow effectively. What is a 30-to-50 company index at the moment will hopefully be in the hundreds in the next two years.”
Blockchain does still have an integral role in cryptocurrency and Buxton sees the ETF format as an interesting access point to crypto assets, but points to custody as the “number one stumbling block”.
He also says that they believe the next 18 months will see an institutional custody model that enables access “not dissimilar to what we have as gold products”.
The fund was launched in partnership with Elwood Asset Management, and while there is no plan for future partnerships, Buxton notes it was Elwood’s “market leading knowledge” that gave rise to this joint venture.
“The digital asset space is moving so quickly, and they are much closer to it than we are.”
With blockchain still a confusing asset to understand for many, Invesco utilised their relationship with Cambridge Judge Business School, to help potential clients understand a complex topic, one with “big simple parts”.
A recent topic of conversation in ETFs has been the so-called price war, which Buxton believes is more nuanced in Europe.
“In the US, Vanguard has been very successful with that pitch. The reality is, in Europe, we talk more about performance and pricing.
“This leads us back to something like the S&P, where our synthetic S&P is outperforming the Vanguard product by [approximately 27-30] basis points.”
Data from Morningstar also notes that it is the cheapest S&P 500 ETF with an ongoing charge of 0.05%, which also benefits from tax advantages due to its synthetic nature.
“That is the great thing about the ETF universe – people will compete. The reality is, for the last five years clients have got to a level of granularity of performance and price.
“Do I think the product pricing is going to fall further? No, I think things have really levelled out.”
Just over a year ago, Invesco took a decision to unify its offering, removing the names from the companies it acquired to create “one investor with a broad range of strategies”.
“We dropped Source, Power Shares, Guggenheim, Oppenheimer and, on the mutual fund side, Perpetual.
“It has taken a while to get traction, but I think it is now starting to work. Having a unified brand makes it much easier for us to articulate our product sets.
He adds: “There was definitely brand confusion – certain parts of our product universe were very well known. Our gold product, SGLD, which was Source gold is very well known, sectors was Source sectors.
“It takes time for people to get used to a new branding, but I do not think it has damaged us in terms of growth or flow.
“It was short-term pain for longer term gain.”