SPA Conference: Moving toward smart beta and liquidity through the use of indexing

By Emma Trincal

New York, March 10 - As they did before, participants in the SPA-2014 Annual Structured Investments Distribution Conference discussed how to boost the industry and transform its asset size from roughly $100 billion under management into a $500 billion industry. Keith Styrcula, chairman of the Structured Products Association, who organized the conference, held Monday in New York, said that industry wants to experiment a similar growth path as the exchanged-traded fund space, which has exploded to the multi-trillion size.

Half a trillion goal

"Having half a trillion in assets would be a first step towards that goal," Styrcula told Prospect News.

During a morning panel called "Structured Solutions and Indexing", industry participants talked about the use of indexing as a way to make structured products more mainstream. The theme of the so-called "convergence" - or the use of other wrappers than notes to bring derivatives-like result - was part of the same discussion.

The panel was moderated by Samson Koo, managing director at Advisors Asset Management, who said that his firm has "incorporated" certain features of structured products into 1940 Act investments, such as leverage or downside protection, combining derivatives technology with some of the main advantages of Investment Act instruments, in particular liquidity.

Exchange-traded notes were seen as the tool of choice to facilitate the convergence between structured investments and passive investing.

Chris Meek, director at State Street Global Advisers who runs the U.S. institutional sales team, said that "We're partnering with the broker-dealer community in linking structured products with our products."

A long way

While most realize the potential offered by combining structured investing with passive investing via indexes and ETFs, the general view was that progresses remained slow.

"Products used to enhance yield or guarantee principal are gaining traction, but it's been a journey because most advisers don't know structured products," said Dean Zayed, chief executive officer of Brookstone Capital Management.

"We're still a long way from getting to that $500 billion industry mark. With indexing, the sky is the limit. You have the flexibility to build products you couldn't have done a generation ago. Still, we have a long way to go to make these advancements more mainstream. It's time for our industry to embrace the new technology made possible by the combination of indexing and structured investments."

Smart beta

Many "smarter" indexes could be used instead of the S&P 500 benchmark, said Ben Fulton, chief executive of Elkhorn Investments.

"The conversation right now is about smart beta versus beta," he said.

"The S&P 500 is a great index but was it created as an investment tool or as a way to measure performance? If it's a compensation scheme, I'm not sure it's an investment scheme. On the other hand, you can generate smart beta with algorithms that use certain rules, such as weighting schemes, for instance, or different ways to reset [leverage]."

"ETFs are the weapon of choice for RIAs," said Koo.

"ETFs themselves are going through changes, incorporating derivatives elements. These different products are merging together."

Liquidity

One recurrent theme during the conference was how liquidity was a strong growth factor for the industry.

"One of the main issues is liquidity," said Fulton.

"If you offer a more transparent, more liquid product, you'll get more reverse inquiries. People will get educated. It will begin to fuel the idea. When you have bank-issued products, RIAs don't want to talk to a bank. It's different with a 1940Act product."

How products get delivered and distributed is also an important source of growth.

Fulton said that the more registered investment advisers will be familiar with the products, the more the industry will have a chance to develop.

"We think we'll see an expansion of the fee-based structured products moving from the transaction side," he said.

"It doesn't mean the transaction-based business is going to disappear. But more fee-based assets are going to mean more growth. The ETF went through a massive expansion at a time when firms almost mandated fee-based accounts; that's when you saw them moving into fee-based accounts."

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