March 9, 2014 8:09 am

LGIM considers ETF launch

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Legal & General Investment Management, whose index funds already account for 4 per cent of the UK stock market, is considering the launch of an exchange traded fund operation.

LGIM last week revealed surprise net outflows of £500m by external investors from its index business in 2013, even as investors continue to embrace passive investment and LGIM reported strong net inflows of £9.3bn overall.

Ali Toutounchi, managing director of index funds at L&G, attributed the outflow to de-risking by defined benefit pension funds, which are increasingly selling their equity holdings in order to transition to liability-driven investment or a buyout with an insurance company.

“We have experienced some large UK DB outflows from passive equity funds in 2013,” L&G admitted in its annual results statement. Its “solutions” business saw net inflows of £3.4bn from external clients.

Mr Toutounchi did not believe an ETF operation would attract large pension funds, which can access passive portfolios more cheaply, but said ETFs would strengthen LGIM’s offering to other investors.

“It would give us access to a totally different market, fund managers, hedge funds, traders. We are not catering for these people at all,” he said. “[ETFs] are also a global wrapper, which opens up access to an even bigger market. Thirdly, it makes access to the retail market so much easier.

“We are making an assessment of the opportunities to see if we want to get in or not.”

The global element of an ETF platform would play into LGIM’s push to internationalise its largely UK business. This move generated record net inflows of £15.7bn from non-UK investors last year, even as UK investors withdrew a net £6.4bn.

LGIM currently runs one commodity ETF in conjunction with Source, which has assets of $200m and was only launched because Ucits funds cannot invest directly in single commodity futures.

LGIM is grappling with changing dynamics in the UK pension market, where DB pension schemes are maturing but defined contribution assets are growing fast, albeit from a low base.

Mr Toutounchi, said LGIM, which saw its UK DC assets rise 22 per cent to £31bn in 2013, now had a 30 per cent share in the sector. However, he said it could take up to 15 years for the DC market to surpass the assets of DB pension funds.

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