Francois Millet, product line manager for ETFs and Indexing at Lyxor Asset Management, the subsidiary of Societe General, has provided an exclusive view to InvestmentEurope on the manager’s expectations for the industry in the wake of the Brexit referendum.
What does Brexit mean for ETFs – either those manufactured in the UK and exported across the EU via passporting, or manufactured in the EU and passported into the UK? – eg, if the ETF is listed on an EU recognised trading exchange, this exchange has to be within the EU proper?
The UK market will continue to represent a major pool of investment managers, wealth managers and asset owners in Europe and the World. It concentrates one third of all EU assets under management and this is not likely to change anytime soon. For this reason, it will remain a key market for Lyxor.
Lyxor ETF offers solely non-UK domiciled funds (all our funds are Luxembourg and France based), as a result Brexit will raise no issue from the perspective of exporting funds to EU and listing them there.
Regarding our capacity to export our EU domiciled funds to the UK, it is too early to appreciate what will be the evolutions in the UK passporting conditions, marketing environment and LSE listing requisites. Lyxor has a solid existing platform in the UK including sales, marketing, and ETF capital markets team, and would be able to adapt.
Are ETF providers set to shift their EU headquarters from London (if currently based here) in order to better meet possible onshoring requirements post-Brexit?
Lyxor ETF is headquartered in from Paris and has a local presence in London. It is far too early to predict how our operations and those of other ETF players might be affected as this will depend on the outcome of the negotiations between the UK and the EU and on the type of partnership that the UK manages to strike with Europe.
Will Brexit impact flows to ETFs investing in UK underlying, such as FTSE 100, 250, etc?
It is true Brexit may impact flows on such underlyings, according to developments in the situation even if the calendar may spread over two years or possibly more. Although Brexit had so far no negative impact on local currency returns in GBP for UK stocks, attention of investors from the EU is turning to the GBP. A period of heightened volatility on the GBP and local currency returns may be ahead with the associated risks and opportunities.
Will a new generation of post-Brexit indices be required by the ETF industry?
First we believe that Brexit may involve a period of heightened volatility on the GBP therefore it is relevant to provide a currency hedge for non-UK investors. This is what we are doing with the launch of our FTSE 100 EUR Hedged ETF share class, and the USD Hedged version soon to follow. Second on global markets the demand for products mitigating volatility like Minimum Variance ETFs should benefit from the situation. Third given the weight of UK stocks in broad European equity indices (31%), some EU investors may be willing to use more eurozone (or Europe Ex-UK) indices plus a chosen allocation to the UK.
Will Lyxor be studying the Article 50 negotiations for any particular markers on which to base investment decisions?
Lyxor will be closely monitoring the situation. It is too early to predict how our operations might be affected as this will depend on the outcome of the negotiations between the UK and the EU and on the type of partnership that the UK manages to strike with Europe. In any case, London will remain an important center for our ETF activities.