perspectives on blending active and index products

Perspectives on blending active and index products

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Perspectives on blending active and index products

Mark OliverManaging DirectorBlackRock

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Australian AUM split by active and passiveEuropean AUM split by active and passive

Source: BlackRock, Simfund, Rainmaker Please note, the European data is for European domiciled funds but excludes AUM in Cayman Islands, British Virgin Islands and Bermuda domiciled funds.

Changing shape of usage of indexing

6

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%

2004 2006 2008 2010 Jun-12

% of AUM in ETFs % of AUM in Index Funds

% of AUM in Active Funds

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%

1997 1999 2001 2003 2005 2007 2009 2011

Active Index ETF

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(30)2070

120170220270320370420

$ Bi

llion

(230) (180) (130) (80) (30)

2070

120

$ Bi

llion

Emerging Markets Equity

Developed Markets Equity

Fixed Income

Source: BlackRock Investment Institute – ETF Research, Bloomberg. Data as at end of 2012.

Cumulative net flows in 2012: Global ETPs and Mutual Funds

ETP Flows Mutual Fund Flows

ETP Flows Mutual Fund Flows

01020304050

$ Bi

llion

ETP Flows Mutual Fund Flows

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Total assets have increased by 27% from 2011 to $1.9 trillion in 2012, reaching $2 trillion in early 2013 195 Providers worldwide – 84% of assets with top 10 providers, top 3 account for 9 of the top 10 ETPs by AUM Continued expansion of product choice and granularity

Asset growth rates & new products

Global growth of exchange traded funds

Source: BlackRock as of December 2012

Global ETP assets & number of ETPs

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Rapid growth across a diverse range of exposures

Source: BlackRock

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Client-driven Growth in index product range

Catalysts – what’s driving this change?

What is driving these changesin investment approach?

Performance of Active Funds

Business opportunity

Current investment

markets

Regulation

Costs

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Blending – Some insights

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We interviewed:

35 Multi-asset, Advisory and Discretionary institutions across EMEA

Investors with predominantly active, blended or passive portfolios

Our respondents manage

~€2.5 Trillion*

5 of the top 10 Global Private Banks**

Our approach

*Source: BlackRock, as of year end 2011**Source: Scorpio Partnership Private Banking Benchmark 2012

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Actively Active Currently focused on using active management to generate alpha and not

actively blending Indexing, where it is used, is only for cash management or as a last choice if

other alternatives are unavailable

Embracing Blending Adopting indexing for tactical or short-term exposures, or Moving towards a more comprehensive approach to blending

Agnostic Allocators Agnostic process for blending and the use of indexing Primary focus on asset allocation to deliver alpha – implementation choice often

a secondary consideration

Three identities emerge

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Which identity would you most associate yourself and your firm with today?

A. Actively Active

B. Embracing Blending

C. Agnostic Allocators

20%

47%

33%

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A. Clients

B. Costs

C. Current investment markets

D. Growth in index product range

E. Regulation

F. Business opportunity

G. Performance of active funds

Which catalyst has driven blending the most in your business / market?

13%

24%

13%

10%

5%

7%

28%

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A. Underlying market efficiency

B. Availability of alpha-generating PMs

C. Internal business structure

D. Investment horizon

E. Costs

What criterion would drive you to use indexing as opposed to active funds? 36%

8%

20%

12%

24%

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A. Developed large cap equities

B. Developed small cap equities

C. Emerging markets equities

D. Investment grade corporates

E. High yield

E. Government bonds

F. Emerging markets debt

G. Commodities

Which exposure would you see as being the most “inefficient” and therefore consider using active products for?

26%

6%

15%

3%

14%

2%

22%

13%

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There’s no single answer

I think the fact that we’ve tried to go all the way

down a very technical route and come all the

way back down to what is more a qualitativeapproach has been a bit surprising.

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Investment philosophy and client base are key

I’ve been a fund selector for so many years, and I have to believe that I can add value through selecting funds.

So, we really try to go from an agnostic standpoint, throw it all in the machine and purely from a quantitative perspective, as emotion free as physically possible, to say ‘is it possible for a fund selector to find value?’

It's not just a theoretical or academic discussion of what’s best…

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CommunicationAvailability and

structure of indexing

Blending active and index strategies does not come without challenges and obstacles

Operational challenges of using ETFs

Having an in-house manager

Changing a mind-set

Education

Selling a story

Blending isn’t easy

Advisory Revenue Model

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Over the next 2–3 years, do you expect greater use of blending in your business? A. Yes

B. No81%

19%

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The future

Future of blendingWe do think that in time, blended will be the range that we sell the most of. That combination of value for money, plus the active overlay, plus the active fund selection, that combination is the sweetspot of what everyone wants.

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