RESHAPING RETAIL FUND DISTRIBUTION

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Index Funds

EVOLUTION OF EUROPEAN DOMICILED INDEX FUNDS

FIGURE 13

Index funds are also in a good shape. In the US, according to the Investment Company Institute (ICI) 35 , in 2013, 372 index funds managed total net assets of $1.7tr with investors adding $114bn in net new cash flow to these funds in the same year. In addition, according to Lipper 36 , from 2009-2014, investors drove more than $1tr into passively managed equity funds while just $363bn landed in actively managed equity funds. With regards to Europe, European index funds’ AuM stood at €144bn in 2009, but reached €373bn by 2014 with the num- ber of funds soaring from 505 to 803 in that time period (see figure 13). With regards to index funds, asset managers should stream- line their value offering as these products have proved to have a lower expense ratio, greater control of the risk exposures in a portfolio and more appealing tax advantages compared to actively managed funds. According to ETFGI, the total European ETFs’ AuM amounts to $12bn with TER of between 10 and 20 basis points (0.1-0.2%), while the TER on actively managed funds is 75 basis points before trading costs 37 . The level of fees is set to further decrease – the main players in this market (State Street, Black- Rock and Vanguard) have recently announced their intention to cut them even more in order to gain market shares 38 . Having expanded far beyond their initial function of tracking large liquid indices in developed markets, ETFs now hold over $2.8tr of assets globally39. With regards to Europe, the total number of European domiciled ETFs jumped to 1,424 in 2014 with a total AuM of €345bn (see figure 14). On a global basis, the ETFs market is set to grow at 6% per year until 2020. Insti- tutional investors are widely expected to be the primary global growth driver with insurance companies, pension funds and hedge funds projected to be significant sources of demand 40 . However, retail investors will increasingly obtain more market share as the low cost and liquidity of ETFs have made them a favourite tool among investors and advisors. 35 ICI, 2014 Investment Company Fact Book, 2014 36 Lipper, 2014 Quick Guide to Open-End Fund Expenses, 2014 37 Financial Times, Democratising finance: How passive funds changed investing, January 2015 38 Reuter, State Street cuts fees on 41 ETFs as price competition heats up, February 2015 39 BlackRock, ETP Landscape: Industry Highlights, January 2015 40 PwC, ETF 2020, Preparing for a new horizon, 2014 ETFs

Source: PwC Market Research Centre based on Lipper

AUM (EUR bn)

Number of funds

100 150 200 250 300 500 350 400 450

0 100 200 300 400 500 600 900 800

803

756

704

661

373.0

556

505

303.0

1 17 24

51 19 16 1

239.0

202.0

17 41

186.9

41 15 14 1

1 17 14 30

17 25 10 144.0

273

216

180

131

0 50

125

2009 2010 2011 2012 2013 2014

Other

Germany

France

Luxembourg Ireland

Total trackers funds

Source:PwC,MarketResearchCentrebasedonLipper

EVOLUTION OF EUROPEAN DOMICILED ETFS

FIGURE 14

Source: PwC Market Research Centre based on Lipper

AUM (EUR bn)

Number of ETFs

100 150 200 250 300 400 350

1.000 1.200 1.600 1.400

1.424 345

1.293 1.243

1.161

269.0

962

184

233.3

0 200 400 600 800

196.7

716

191.2

126

148.4

0 50

18 30 32

12 24 35

16 43

35 20

39 18

27 18